NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview. Agilent Technologies, Inc. ("we", "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow.
New Segment Structure. In the first quarter of fiscal year 2022, we announced a change in organizational structure designed to enable our growth strategies and strengthen our focus on customers. Our chemistries and supplies business and our remarketed instruments business moved from our Agilent CrossLab business segment to our life sciences and applied markets business segment. We also moved BioTek's service revenue and related cost of sales from our life sciences and applied markets business segment to our Agilent CrossLab business segment. Following this reorganization, we continue to have three business segments (life sciences and applied markets, diagnostics and genomics and Agilent CrossLab), each of which continues to comprise a reportable segment. We began reporting under this new structure with the Quarterly Report on Form 10-Q for the period ended January 31, 2022. Historical financial segment information has been recast to conform to this new presentation in our financial statements and accompanying notes. There was no change to our diagnostics and genomics business segment.
Basis of Presentation. The accompanying consolidated financial statements have been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and are in conformity with U.S. generally accepted accounting principles ("GAAP"). Our fiscal year end is October 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Principles of Consolidation. The consolidated financial statements include the accounts of the company and our wholly- and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, valuation of goodwill and purchased intangible assets, inventory valuation, retirement and post-retirement plan assumptions and accounting for income taxes.
Risks and Uncertainties. We are subject to risks common to companies in the analytical instrument industry, such as global economic and financial market conditions, fluctuations in foreign currency exchange rates and fluctuations in customer demand, among others.
Both our domestic and international operations have been and continue to be affected by the ongoing global pandemic of a novel strain of coronavirus (“COVID-19”) and the resulting volatility and uncertainty it has caused in the U.S. and international markets. The global supply chain and logistics pressures, high inflation, and COVID-related shutdowns in China have made it more challenging for companies to manage operations. We cannot provide any assurances that any prolonged material disruptions in the supply chain will not have a material impact on our consolidated financial statements. As of October 31, 2022, our consolidated financial statements have not been materially impacted.
Revenue Recognition. 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 Accounting Standard Codification Topic 606, Revenue from Contracts with Customers, (“ASC 606’’). See also Note 3, "Revenue" for additional information on revenue recognition.
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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. For products that transfer control over time, revenue is recognized as the performance obligation is satisfied. Product over time revenue is assessed against the following criteria: the performance creates an asset that the customer controls as the asset is created; the asset has no alternative use; and we have an enforceable right to payment. 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. Standalone 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 relates to lease arrangements. Standalone lease arrangements are outside the scope of ASC 606 and are therefore accounted for in accordance with ASC 842, Leases beginning in 2020 and ASC 840, Leases for prior periods. Each of these contracts is evaluated as a lease arrangement, either as an operating lease or a sales-type finance lease using the current lease classification guidance.
Deferred Revenue. Contract liabilities (deferred revenue) primarily relate to multiple element arrangements for which billing has occurred but transfer of control of all elements (performance obligations) to the customer has either partially or not occurred at the balance sheet date. This includes cash received from customers for products and related installation and services in advance of the transfer of control. Contract liabilities are classified as either in current liabilities in deferred revenue or long-term in other long-term liabilities in the consolidated balance sheet based on the timing of when we expect to complete our performance obligation.
Sales Taxes. Sales taxes collected from customers and remitted to governmental authorities are not included in our revenue.
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Shipping and Handling Costs. Our shipping and handling costs charged to customers are included in net revenue, and the associated expense is recorded in cost of products for all periods presented.
Research and Development. Costs related to research, design and development of our products are charged to research and development expense as they are incurred.
Advertising. Advertising costs are generally expensed as incurred and amounted to $66 million in 2022, $63 million in 2021 and $48 million in 2020.
Taxes on Income. Income tax expense or benefit is based on income or loss before taxes. Deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. See Note 5, "Income Taxes" for more information.
Net Income Per Share. Basic net income per share is computed by dividing net income - the numerator - by the weighted average number of common shares outstanding - the denominator - during the period excluding the dilutive effect of stock options and other employee stock plans. Diluted net income per share gives effect to all potential common shares outstanding during the period unless the effect is anti-dilutive. The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense are assumed proceeds to be used to repurchase hypothetical shares. See Note 6, "Net Income Per Share".
Cash, Cash Equivalents and Short-Term Investments. We classify investments as cash equivalents if their original or remaining maturity is three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair value.
As of October 31, 2022, approximately $1,028 million of our cash and cash equivalents is held outside of the U.S. by our foreign subsidiaries. Our cash and cash equivalents mainly consist of short-term deposits held at major global financial institutions, institutional money market funds, and similar short duration instruments with original maturities of 90 days or less. We continuously monitor the creditworthiness of the financial institutions and institutional money market funds in which we invest our funds.
We classify equity investments as short-term investments based on their nature and our intent and ability to exit within a year or less. As of October 31, 2022, we had no short-term investments.
Restricted Cash and Restricted Cash Equivalents. Restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. A reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheet follows:
| | | | | | | | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) | | |
Cash and cash equivalents | $ | 1,053 | | | $ | 1,484 | | | $ | 1,441 | |
Restricted cash included in other assets | 3 | | | 6 | | | 6 | |
Total cash, cash equivalents and restricted cash | $ | 1,056 | | | $ | 1,490 | | | $ | 1,447 | |
Accounts Receivable, net. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Such accounts receivable have been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on customer specific experience and the aging of such receivables, among other factors. The allowance for doubtful accounts as of October 31, 2022 and 2021 was not material. We do not have any off-balance-sheet credit exposure related to our customers. Accounts receivable are also recorded net of estimated product returns which are not material.
Concentration of Credit Risk. Financial instruments that potentially subject Agilent to significant concentration of credit risk include money market fund investments, equity investments with readily determinable fair value securities, time deposits and demand deposit balances. These investments are categorized as cash and cash equivalents or short-term investments. In
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addition, Agilent has credit risk from derivative financial instruments used in hedging activities and accounts receivable. We invest in a variety of financial instruments and limit the amount of credit exposure with any one financial institution. We have a comprehensive credit policy in place and credit exposure is monitored on an ongoing basis.
Credit risk with respect to our accounts receivable is diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies. Credit evaluations are performed on customers requiring credit over a certain amount, and we sell the majority of our products through our direct sales force. Credit risk is mitigated through collateral such as letter of credit, bank guarantees or payment terms like cash in advance. No single customer accounted for more than 10 percent of accounts receivable as of October 31, 2022, or 2021.
Inventory. Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of market value. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated excess and obsolete inventory based on estimates about future demand. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Our excess inventory review process includes analysis of sales forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory.
Property, Plant and Equipment. Property, plant and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized; maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from our general ledger, and the resulting gain or loss is reflected in the consolidated statement of operations. Buildings and improvements are depreciated over the lesser of their useful lives or the remaining term of the lease and machinery and equipment over 3 years to 10 years. We use the straight-line method to depreciate assets.
Capitalized Software. We capitalize certain internal and external costs incurred to acquire or create internal use software. Capitalized software is included in property, plant and equipment and is depreciated over 3 years to 5 years once development is complete.
Leases. We determine whether an arrangement is, or contains, a lease at inception. Prior to November 1, 2019, for leases where we are the lessee, we accounted for operating lease payments by charging them to expense as incurred. At the beginning of fiscal 2020, the company adopted new lease accounting guidance issued by the Financial Accounting Standards Board ("FASB"). The most significant change requires lessees to record the present value of operating lease payments as right-of-use ("ROU") assets and lease liabilities on the consolidated balance sheet. Where we are the lessee, ROU assets represent the company’s right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments based on the present value of lease payments over the lease term. Classification of operating lease liabilities as either current or non-current is based on the expected timing of payments due under our obligations. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term and at an amount equal to the lease payments in a similar economic environment. In order to determine the appropriate incremental borrowing rates, we have used a number of factors including the company's credit rating, the lease term and the currency swap rate. The ROU asset also consists of any lease incentives received. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. Lease expense for operating leases with an initial term of more than twelve months is recognized on a straight-line basis over the lease term as an operating expense. We have lease agreements which require payments for lease and non-lease components. We have elected to account for these payments as a single lease component.
A portion of our revenue relates to lease arrangements where Agilent is the lessor. Standalone lease arrangements are outside the scope of Accounting Standard Codification ("ASC") Topic 606, Revenue Contracts with Customers, and are therefore accounted for in accordance with ASC Topic 842, Leases. Each of these contracts is evaluated as a lease arrangement, either as an operating lease or a sales-type finance lease using the current lease classification guidance. In a lease arrangement that is a multiple-element arrangement that contains equipment leases and the supply of consumables, the revenue associated with the instrument rental is treated under the lease accounting standard ASC 842, whereas the revenue associated with the consumables, the non-lease component, is recognized in accordance with the ASC 606 revenue standard.
See also Note 9, "Leases" for additional information about our leases.
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Acquisitions. Agilent accounts for the acquisition of a business using the acquisition method of accounting, and we allocate the fair value of the purchase price to the tangible assets acquired, liabilities assumed, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess value of the cost of an acquired business over the fair value of the assets acquired and liabilities assumed is recognized as goodwill. The fair value of IPR&D is initially capitalized as an intangible asset with an indefinite life. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized to costs of revenues over the asset’s estimated useful life.
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 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.
Goodwill and Purchased Intangible Assets. We assess our goodwill and purchased intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 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 quantitative 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, then we are required to perform a quantitative impairment test on goodwill to identify and measure the amount of a goodwill impairment loss to be recognized. A goodwill impairment loss, if any, is measured as the amount by which a reporting unit's carrying value, including goodwill, exceeds its fair value, not to exceed the carrying amount of goodwill. 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 2022, 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 quantitative test for goodwill impairment of the three reporting units as of November 1, 2021, due to the change in our segment structure. As of November 1, 2021, there was no impairment of goodwill. We also performed a qualitative test for goodwill impairment of the three reporting units as of September 30, 2022, our annual impairment test date. 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, 2022, 2021 and 2020.
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. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible asset to Agilent's consolidated statement of operations in the period it is abandoned.
Agilent's indefinite-lived intangible assets are IPR&D intangible assets. The accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the
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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, 2022. Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair values of these indefinite-lived intangible assets are greater than their respective carrying values. Each quarter we review the events and circumstances to determine if impairment of indefinite-lived intangible assets is indicated. During the year ended October 31, 2022 and 2021 there were no impairments of indefinite-lived intangible assets. During the year ended October 31, 2020, we recorded an impairment of in-process research and development of $90 million related to the shutdown of our sequencer development program in our diagnostics and genomics segment.
Impairment of Long-Lived Assets. We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. During the year ended October 31, 2022, there were no impairments of other long-lived assets or intangible assets. During the year ended October 31, 2021, we recorded an impairment charge of long-lived assets of $2 million. During the year ended October 31, 2020 we recorded an impairment charge of long-lived assets including indefinite-lived in-process research and development of $98 million related to the shutdown of our sequencer development program in our diagnostics and genomics segment.
Variable Interest Entities. We make a determination upon entering into an arrangement whether an entity in which we have made an investment is considered a Variable Interest Entity (“VIE”). We evaluate our investments in privately held companies on an ongoing basis. We have determined that as of October 31, 2022 and 2021, there were no VIEs required to be consolidated in our consolidated financial statements because we do not have a controlling financial interest in any of the VIEs in which we have invested nor are we the primary beneficiary. We account for these investments under either the equity method or as equity investments without readily determinable fair value, depending on the circumstances. We periodically reassess whether we are the primary beneficiary of a VIE. The reassessment process considers whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have become VIEs and vice-versa, based on changes in facts and circumstances including changes in contractual arrangements and capital structure.
As of October 31, 2022 and 2021, the total carrying value of investments and loans in privately held companies considered as VIEs was $87 million and $76 million respectively. The maximum exposure is equal to the carrying value because we do not have future funding commitments. The investments are included on the long-term investments line and the loans on the other current assets and other assets lines (depending upon tenure of loan) on the consolidated balance sheet.
Investments. Equity investments without readily determinable fair value consist of non-marketable equity securities (typically investments in privately-held companies). These investments are accounted for using the measurement alternative at cost, and we adjust for impairments and observable price changes (orderly transactions for the identical or a similar security from the same issuer) included in net income as and when it occurs. Equity investments with readily determinable fair value consist of marketable equity securities which were reclassified from non-marketable equity securities following the commencement of public market trading of the issuers and are reported at fair value, with gains or losses resulting from changes in fair value included in net income. There are no equity investments with readily determinable fair value at October 31, 2022 and $91 million at October 31, 2021. Other investments with readily determinable fair value consist of shares we own in a special fund and are reported at fair value, with gains or losses resulting from changes in fair value included in net income. Trading securities, which are comprised of mutual funds, bonds and other similar instruments and deferred compensation liabilities are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Equity method investments are reported at the amount of the company’s initial investment and adjusted each period for the company’s share of the investee’s income or loss and dividend paid. There are no equity method investments as of October 31, 2022 and 2021. The company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable.
Fair Value of Financial Instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of short-term and long-term equity investments which are readily determinable, and which are not accounted under the equity method are reported at fair value using quoted market prices for those securities
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when available with gains and losses included in net income. The fair value of long-term equity investments which are not readily determinable, and which are not accounted under the equity method are reported at cost with adjustments for observable changes in prices or impairments included in net income. As of October 31, 2022, the fair value of the term loans approximates its carrying value, and the fair value of our senior notes was $1,754 million with a carrying value of $2,133 million. This compares to the fair value of our senior notes of $2,806 million with a carrying value of $2,729 million as of October 31, 2021. The change in the fair value compared to carrying value in the year ended October 31, 2022, is primarily due to increased market interest rates. The fair value was calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 12, "Fair Value Measurements" for additional information on the fair value of financial instruments.
Warranty. Our standard warranty terms typically extend for one year from the date of delivery. We accrue for standard warranty costs based on historical trends in warranty charges. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost over the period. Estimated warranty charges are recorded within cost of products at the time products are sold. See Note 15, "Guarantees".
Employee Compensation and Benefits. Amounts owed to employees, such as accrued salary, bonuses and vacation benefits are accounted for within employee compensation and benefits. The total amount of accrued vacation benefit was $123 million and $129 million as of October 31, 2022, and 2021, respectively.
Retirement and Post-Retirement Plans. Substantially all of our employees are covered under various defined benefit and/or defined contribution retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S. employees. Assumptions used to determine the benefit obligations and the expense for these plans are derived annually. See Note 14, “Retirement plans and post-retirement pension plans” for additional information.
Retirement of Treasury Shares. Upon the formal retirement of treasury shares, we deduct the par value of the retired treasury shares from common stock and allocate the excess of cost over par as a deduction to additional paid-in capital, based on the pro-rata portion of additional paid-in-capital, and the remaining excess as a deduction to retained earnings. All retired treasury shares revert to the status of authorized but unissued shares.
Share-Based Compensation. For the years ended 2022, 2021 and 2020, we accounted for share-based awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our Employee Stock Purchase Plan ("ESPP") and performance share awards under Agilent Technologies, Inc. Long-Term Performance Program ("LTPP") using the estimated grant date fair value method of accounting. Under the fair value method, we recorded compensation expense for all share-based awards of $126 million in 2022, $111 million in 2021 and $84 million in 2020. See Note 4, "Share-based Compensation" for additional information.
Derivative Instruments. Agilent is exposed to global foreign currency exchange rate and interest rate risks in the normal course of business. We enter into foreign exchange hedging contracts, primarily forward contracts, interest rate swaps and interest rate locks to manage financial exposures resulting from changes in foreign currency exchange rates and interest rates. In the vast majority of cases, these contracts are designated at inception as hedges of the related foreign currency or interest exposures. Foreign currency exposures include committed and anticipated revenue and expense transactions and assets and liabilities that are denominated in currencies other than the functional currency of the subsidiary. Interest rate exposures are associated with the company's fixed-rate debt. To qualify for hedge accounting, contracts must reduce the foreign currency exchange rate and interest rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies. Foreign exchange hedging contracts generally mature within twelve months, interest rate swaps mature at the same time as the maturity of the debt and interest rate locks mature at the same time as the issuance of debt. In order to manage foreign currency exposures in a few limited jurisdictions, we may enter into foreign exchange contracts that do not qualify for hedge accounting. In such circumstances, the local foreign currency exposure is offset by contracts owned by the parent company. We do not use derivative financial instruments for trading or speculative purposes.
All derivatives are recognized on the balance sheet at their fair values. For derivative instruments that are designated and qualify as a cash flow hedge, changes in the value of the effective portion of the derivative instrument are recognized in accumulated comprehensive income (loss), a component of stockholders' equity. For derivative instruments that are designated and qualify as a net investment hedge, changes in the value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income (loss) - translation adjustment. Amounts associated with cash flow hedges are
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reclassified and recognized in income when either the forecasted transaction occurs or it becomes probable the forecasted transaction will not occur. Derivatives not designated as hedging instruments are recorded on the balance sheet at their fair value and changes in the fair values are recorded in the income statement in the current period. Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet. Changes in the fair value of the ineffective portion of derivative instruments are recognized in earnings in the current period. The impact of the ineffectiveness measurement in 2022, 2021 and 2020 was not material. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the hedged or economically hedged item, primarily in operating activities.
Foreign Currency Translation. We translate and remeasure balance sheet and income statement items into U.S. dollars. For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated into U.S. dollars using current exchange rates at the balance sheet date; revenue and expenses are translated using monthly exchange rates which approximate to average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive income (loss) in stockholders' equity.
For those subsidiaries that operate in a U.S. dollar functional environment, foreign currency assets and liabilities are remeasured into U.S. dollars at current exchange rates except for non-monetary assets and capital accounts which are remeasured at historical exchange rates. Revenue and expenses are generally remeasured at monthly exchange rates which approximate average exchange rates in effect during each period. Gains or losses from foreign currency remeasurement are included in consolidated net income. Net gains or losses resulting from foreign currency transactions, including hedging gains and losses, are reported in other income (expense), net and were $6 million loss for 2022, $4 million loss for 2021 and $4 million loss for 2020.
2. NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In January 2020, accounting guidance was issued that clarifies the accounting guidance for equity method investments, joint ventures, and derivatives and hedging. The guidance clarifies the interaction between different sections of the accounting guidance that could be applicable and helps clarify which guidance should be applied in certain situations which increases relevance and comparability of financial statement information. On November 1, 2021, we adopted this guidance which did not have a material impact on our consolidated financial statements and disclosures.
In October 2021, the FASB issued an update to improve the accounting for acquired revenue contracts with customers in a business combination. The amendments require an acquirer to use the guidance in ASC 606, Revenue from Contracts with Customers, rather than using fair value, when recognizing and measuring contract assets and contract liabilities related to customer contracts assumed in a business combination. On November 1, 2021 we early adopted this guidance which did not have a material impact on our consolidated financial statements and disclosures.
New Accounting Pronouncements Not Yet Adopted
In November 2021, the FASB issued updates to increase the transparency in the annual disclosure requirements relating to government assistance received by business entities in Topic 832, Government Assistance. The guidance requires certain disclosures about transactions with a government that are accounted for by applying a grant or contribution model. These amendments are effective for us beginning November 1, 2022, and for interim periods within that year. We do not expect that the adoption of this standard will have a material impact on our consolidated financial statements and disclosures.
Other amendments to GAAP in the U.S. that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. REVENUE
The following table presents the company’s total revenue and segment revenue disaggregated by geographical region:
| | | | | | | | | | | | | | | | | | | | | | | |
| Life Sciences and Applied Markets | | Agilent CrossLab | | Diagnostics and Genomics | | Total |
| (in millions) |
Year Ended October 31, 2022: | | | | | | | |
Americas | $ | 1,331 | | | $ | 567 | | | $ | 784 | | | $ | 2,682 | |
Europe | 907 | | | 382 | | | 410 | | | 1,699 | |
Asia Pacific | 1,769 | | | 503 | | | 195 | | | 2,467 | |
Total | $ | 4,007 | | | $ | 1,452 | | | $ | 1,389 | | | $ | 6,848 | |
| | | | | | | |
Year Ended October 31, 2021: | | | | | | | |
Americas | $ | 1,199 | | | $ | 510 | | | $ | 695 | | | $ | 2,404 | |
Europe | 893 | | | 378 | | | 417 | | | 1,688 | |
Asia Pacific | 1,571 | | | 472 | | | 184 | | | 2,227 | |
Total | $ | 3,663 | | | $ | 1,360 | | | $ | 1,296 | | | $ | 6,319 | |
| | | | | | | |
Year Ended October 31, 2020: | | | | | | | |
Americas | $ | 1,002 | | | $ | 449 | | | $ | 517 | | | $ | 1,968 | |
Europe | 746 | | | 326 | | | 371 | | | 1,443 | |
Asia Pacific | 1,367 | | | 402 | | | 159 | | | 1,928 | |
Total | $ | 3,115 | | | $ | 1,177 | | | $ | 1,047 | | | $ | 5,339 | |
The following table presents the company’s total revenue disaggregated by end markets and by revenue type:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended October 31, |
| | 2022 | | 2021 | | 2020 |
| (in millions) |
Revenue by End Markets | | | | | | |
Pharmaceutical and Biopharmaceutical | | $ | 2,515 | | | 2,224 | | | $ | 1,754 | |
Chemicals and Advanced Materials | | 1,521 | | | 1,328 | | | 1,154 | |
Diagnostics and Clinical | | 963 | | | 938 | | | 787 | |
Food | | 617 | | | 601 | | | 517 | |
Academia and Government | | 576 | | | 576 | | | 526 | |
Environmental and Forensics | | 656 | | | 652 | | | 601 | |
Total | | $ | 6,848 | | | $ | 6,319 | | | $ | 5,339 | |
| | | | | | |
Revenue by Type | | | | | | |
Instrumentation | | $ | 2,907 | | | 2,657 | | | $ | 2,249 | |
Non-instrumentation and other | | 3,941 | | | 3,662 | | | 3,090 | |
Total | | $ | 6,848 | | | $ | 6,319 | | | $ | 5,339 | |
Revenue by region is based on the ship to location of the customer. Revenue by end market is determined by the market indicator of the customer and by customer type. Instrumentation revenue includes sales from instruments, remarketed instruments and third-party products. Non-instrumentation and other revenue include sales from contract and per incident services, our companion diagnostics and our nucleic acid solutions businesses as well as sales from spare parts, consumables, reagents, vacuum pumps, subscriptions, software licenses and associated services.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract Balances
Contract Assets
Contract assets (unbilled accounts receivable) primarily relate to the company's right to consideration for work completed but not billed at the reporting date. The unbilled receivables are reclassified to trade receivables when billed to customers. Contract assets are generally classified as current assets and are included in "Accounts receivable, net" in the consolidated balance sheet. The balances of contract assets as of October 31, 2022 and 2021, were $275 million and $197 million, respectively.
Contract Liabilities
The following table provides information about contract liabilities (deferred revenue) and the significant changes in the balances during the years ended October 31, 2021 and 2022:
| | | | | | | | |
| | Contract Liabilities |
| | (in millions) |
| | |
Ending balance as of October 31, 2020 | | $ | 446 | |
| | |
Net revenue deferred in the period | | 406 | |
Revenue recognized that was included in the contract liability balance at the beginning of the period | | (359) | |
Change in deferrals from customer cash advances, net of revenue recognized | | 24 | |
| | |
Currency translation and other adjustments | | 2 | |
Ending balance as of October 31, 2021 | | $ | 519 | |
Net revenue deferred in the period | | 437 | |
Revenue recognized that was included in the contract liability balance at the beginning of the period | | (372) | |
Change in deferrals from customer cash advances, net of revenue recognized | | 11 | |
| | |
Currency translation and other adjustments | | (38) | |
Ending balance as of October 31, 2022 | | $ | 557 | |
Contract liabilities primarily relate to multiple element arrangements for which billing has occurred but transfer of control of all elements to the customer has either partially or not occurred at the balance sheet date. This includes cash received from customers for products and related installation and services in advance of the transfer of control. Contract liabilities are classified as either current in deferred revenue or long-term in other long-term liabilities in the consolidated balance sheet based on the timing of when we expect to complete our performance obligation.
Contract Costs
Incremental costs of obtaining a contract with a customer are recognized as an asset if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. The changes in total capitalized costs to obtain a contract were immaterial during the years ended October 31, 2022 and 2021 and are included in other current and long-term assets on the consolidated balance sheet. We have applied the practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include the company's internal sales force compensation program, as we have determined that annual compensation is commensurate with annual sales activities.
Transaction Price Allocated to the Remaining Performance Obligations
We have applied the practical expedient in ASC 606-10-50-14 and have not disclosed information about transaction price allocated to remaining performance obligations that have original expected durations of one year or less.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated revenue expected to be recognized for remaining performance obligations that have an original term of more than one year, as of October 31, 2022, was $357 million, the majority of which is expected to be recognized over the next 12 months. Remaining performance obligations primarily include extended warranty, customer manufacturing contracts, and software maintenance contracts and revenue associated with lease arrangements.
4. SHARE-BASED COMPENSATION
Agilent accounts for share-based awards in accordance with the provisions of the accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including restricted stock units, employee stock options, employee stock purchases made under our employee stock purchase plan and performance share awards granted to selected members of our senior management under the long-term performance plan ("LTPP") based on estimated fair values.
Description of Share-Based Plans
Employee Stock Purchase Plan. Effective May 1, 2020, we adopted the 2020 Employee Stock Purchase Plan ("ESPP") which replaced our previous Employee Stock Purchase Plan. The ESPP allows eligible employees to contribute up to 10 percent of their base compensation to purchase shares of our common stock at 85 percent of the closing market price at purchase date. There are 31 million shares authorized for issuance in connection with the ESPP.
Under our ESPP, employees purchased 469,701 shares for $54 million in 2022, 462,237 shares for $46 million in 2021 and 628,644 shares for $41 million in 2020. As of October 31, 2022, the number of shares of common stock authorized and available for issuance under our ESPP was 24,859,446. This excludes the number of shares of common stock to be issued to participants in consideration of the aggregate participant contributions totaling $27 million as of October 31, 2022.
Incentive Compensation Plans. On November 15, 2017 and March 21, 2018, the Board of Directors and the stockholders, respectively, approved the Agilent Technologies, Inc. 2018 Stock Plan (the "2018 Plan") which amends, including renaming and extending the term of, the Agilent Technologies, Inc. 2009 Stock Plan (the "2009 Plan"). The 2018 Plan provides for the grant of awards in the form of stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), performance shares and performance units with performance-based conditions on vesting or exercisability, and cash awards. The 2018 Plan has a term of ten years. As of October 31, 2022, 21,496,468 shares were available for future awards under the 2018 Plan.
Stock Options. In fiscal year 2021, we resumed granting stock options. Stock options granted under the 2018 Plan may be either "incentive stock options", as defined in Section 422 of the Internal Revenue Code, or non-statutory. Options generally vest at a rate of 25 percent per year over a period of four years from the date of grant with a maximum contractual term of ten years. The exercise price for stock options is generally not less than 100 percent of the fair market value of our common stock on the date the stock award is granted. We issue new shares of common stock when employee stock options are exercised.
Performance Shares. We have two LTPP performance stock award programs, which are administered under the 2018 Stock Plan, for our executive officers and other key employees. Participants in our LTPP Total Stockholders’ Return (“TSR”) and LTPP Earnings Per Share (“EPS”) programs are entitled to receive shares of the company's stock after the end of a three-year period, if specified performance targets for the programs are met. The LTPP-TSR awards are generally designed to meet the criteria of a performance award with the performance metrics and peer group comparison based on the TSR set at the beginning of the performance period. The LTPP-EPS awards are based on the company’s EPS performance over a three-year period. The performance targets for the LTPP-EPS for year 2 and year 3 of the performance period are set in the first quarter of year 2 and year 3, respectively. All LTPP awards are subject to a one-year post-vest holding period. The final LTPP award may vary from zero to 200 percent of the target award. The maximum contractual term for awards under the LTPP program is three years. We consider the dilutive impact of these programs in our diluted net income per share calculation only to the extent that the performance conditions are expected to be met.
Restricted Stock Units. We also issue restricted stock units under our share-based plans. The estimated fair value of the restricted stock unit awards granted under the Stock Plans is determined based on the market price of Agilent's common stock on the date of grant adjusted for expected dividend yield. Restricted stock units generally vest, with some exceptions, at a rate of 25 percent per year over a period of four years from the date of grant. All restricted stock units granted to our executives after November 1, 2015, are subject to a one-year post-vest holding period.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impact of Share-based Compensation Awards
We have recognized compensation expense based on the estimated grant date fair value method under the authoritative guidance. For all share-based awards we have recognized compensation expense using a straight-line amortization method. As the guidance requires that share-based compensation expense should be based on awards that are ultimately expected to vest, estimated share-based compensation has been reduced for estimated forfeitures.
The impact on our results for share-based compensation was as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Cost of products and services | $ | 30 | | | $ | 26 | | | $ | 21 | |
Research and development | 14 | | | 12 | | | 9 | |
Selling, general and administrative | 82 | | | 73 | | | 54 | |
Total share-based compensation expense | $ | 126 | | | $ | 111 | | | $ | 84 | |
At October 31, 2022 and 2021, no share-based compensation was capitalized within inventory.
Valuation Assumptions
The fair value of share-based awards for our employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTPP (TSR) were valued using a Monte Carlo simulation model. The Monte Carlo simulation fair value model requires the use of highly subjective and complex assumptions, including the price volatility of the underlying stock. For the volatility of our LTPP (TSR) grants, we used our own historical stock price volatility.
The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the price at purchase and uses the purchase date to establish the fair market value.
We use historical volatility to estimate the expected stock price volatility assumption for employee stock option awards. In reaching the conclusion, we have considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. In estimating the expected life of our options granted, we considered the historical option exercise behavior of our executives, which we believe is representative of future behavior.
The estimated fair value of restricted stock units and LTPP (EPS) awards is determined based on the market price of our common stock on the date of grant adjusted for expected dividend yield. The compensation cost for LTPP (EPS) reflects the cost of awards that are probable to vest at the end of the performance period.
All LTPP awards granted to our senior management employees have a one-year post-vest holding restriction. The estimated discount associated with post-vest holding restrictions is calculated using the Finnerty model. The model calculates the potential lost value if the employees were able to sell the shares during the lack of marketability period, instead of being required to hold the shares. The model used the same historical stock price volatility and dividend yield assumption used for the Monte Carlo simulation model and an expected dividend yield to compute the discount.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following assumptions were used to estimate the fair value of awards granted.
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
Stock Option Plan: | | | | | |
Weighted average risk-free interest rate | 1.5% | | 0.5% | | — |
Dividend yield | 0.5% | | 0.7% | | — |
Weighted average volatility | 26% | | 26% | | — |
Expected life | 5.5 years | | 5.5 years | | — |
LTPP: | | | | | |
Volatility of Agilent shares | 29% | | 30% | | 23% |
Volatility of selected peer-company shares | 23%-81% | | 24%-57% | | 15%-44% |
Pair-wise correlation with selected peers | 41% | | 45% | | 29% |
| | | | | |
Post-vest restriction discount for all executive awards | 6.5% | | 6.8% | | 5.3% |
Share-Based Payment Award Activity
Employee Stock Options
The following table summarizes employee stock option award activity of our employees and directors for 2022.
| | | | | | | | | | | |
| Options Outstanding | | Weighted Average Exercise Price |
| (in thousands) | | |
Outstanding at October 31, 2021 | 943 | | | $ | 69 | |
Granted | 279 | | | $ | 158 | |
Exercised | (108) | | | $ | 38 | |
Cancelled | (17) | | | $ | 130 | |
Outstanding at October 31, 2022 | 1,097 | | | $ | 94 | |
The options outstanding and exercisable for equity share-based payment awards at October 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Options Outstanding | | Options Exercisable |
Range of Exercise Prices | Number Outstanding | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Number Exercisable | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| (in thousands) | | (in years) | | | | (in thousands) | | (in thousands) | | (in years) | | | | (in thousands) |
| | | | | | | | | | | | | | | |
$25.00 - $40.00 | 69 | | | 1.0 | | $ | 38 | | | $ | 6,958 | | | 69 | | | 1.0 | | $ | 38 | | | $ | 6,958 | |
$40.01 - $50.00 | 386 | | | 2.0 | | $ | 41 | | | 37,556 | | | 386 | | | 2.0 | | $ | 41 | | | 37,556 | |
$100.00- $110.00 | 325 | | | 8.0 | | $ | 110 | | | 9,254 | | | 90 | | | 8.0 | | $ | 110 | | | 2,555 | |
$110.01 - $150.00 | 65 | | | 8.9 | | $ | 128 | | | 687 | | | 9 | | | 8.5 | | $ | 127 | | | 99 | |
$150.01 & Over | 252 | | | 9.0 | | $ | 161 | | | — | | | 6 | | | 9.0 | | $ | 159 | | | — | |
| 1,097 | | | 5.8 | | $ | 94 | | | $ | 54,455 | | | 560 | | | 3.1 | | $ | 54 | | | $ | 47,168 | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the company's closing stock price of $138.35 at October 31, 2022, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date. The total number of in-the-money awards exercisable at October 31, 2022 was approximately 0.6 million.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the aggregate intrinsic value of options exercised in 2022, 2021 and 2020 and the fair value of options granted in 2022:
| | | | | | | | | | | | | | | | | |
| Aggregate Intrinsic Value | | Weighted Average Exercise Price | | Per Share Value Using Black-Scholes Model |
| (in thousands) | | | | |
Options exercised in fiscal 2020 | $ | 30,481 | | | $ | 34 | | | |
Options exercised in fiscal 2021 | $ | 34,305 | | | $ | 33 | | | |
Black Scholes per share value of options granted during fiscal 2021 | | | | | $ | 26 | |
Options exercised in fiscal 2022 | $ | 10,765 | | | $ | 38 | | | |
Black Scholes per share value of options granted during fiscal 2022 | | | | | $ | 39 | |
As of October 31, 2022, the unrecognized share-based compensation cost for outstanding stock option awards, net of expected forfeitures, was $8 million. The amount of cash received from the exercise of share-based awards granted was $58 million in 2022, $55 million in 2021 and $60 million in 2020.
Non-Vested Awards
The following table summarizes non-vested award activity in 2022 primarily for our LTPP and restricted stock unit awards.
| | | | | | | | | | | |
| Shares | | Weighted Average Grant Price |
| (in thousands) | | |
Non-vested at October 31, 2021 | 2,519 | | | $ | 88 | |
Granted | 696 | | | $ | 155 | |
Vested | (1,189) | | | $ | 75 | |
Forfeited | (112) | | | $ | 114 | |
Change in LTPP shares in the year due to exceeding performance targets | 189 | | | $ | 65 | |
Non-vested at October 31, 2022 | 2,103 | | | $ | 114 | |
As of October 31, 2022, the unrecognized share-based compensation cost for non-vested restricted stock awards net of expected forfeitures was approximately $115 million which is expected to be amortized over a weighted average period of 2.1 years. The total fair value of restricted stock awards vested was $89 million for 2022, $84 million for 2021 and $85 million for 2020.
5. INCOME TAXES
The domestic and foreign components of income before taxes are:
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
U.S. operations | $ | 858 | | | $ | 876 | | | $ | 54 | |
Non-U.S. operations | 646 | | | 484 | | | 788 | |
Total income before taxes | $ | 1,504 | | | $ | 1,360 | | | $ | 842 | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes is comprised of:
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
U.S. federal taxes: | | | | | |
Current | $ | 173 | | | $ | 122 | | | $ | 5 | |
Deferred | (28) | | | (1) | | | 4 | |
Non-U.S. taxes: | | | | | |
Current | 47 | | | (3) | | | 84 | |
Deferred | 35 | | | 14 | | | 24 | |
State taxes, net of federal benefit: | | | | | |
Current | 22 | | | 17 | | | 5 | |
Deferred | 1 | | | 1 | | | 1 | |
Total provision for income taxes | $ | 250 | | | $ | 150 | | | $ | 123 | |
The differences between the U.S. federal statutory income tax rate and our effective tax rate are:
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Profit before tax times statutory rate | $ | 316 | | | $ | 286 | | | $ | 177 | |
State income taxes, net of federal benefit | 23 | | | 18 | | | 6 | |
Non-U.S. income taxed at different rates | (18) | | | 5 | | | (37) | |
Change in unrecognized tax benefits | (6) | | | (84) | | | (8) | |
Foreign-derived intangible income deduction | (46) | | | (35) | | | (9) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Excess tax benefits from stock-based compensation | (19) | | | (29) | | | (18) | |
Other, net | — | | | (11) | | | 12 | |
Provision (benefit) for income taxes | $ | 250 | | | $ | 150 | | | $ | 123 | |
Effective tax rate | 16.6 | % | | 11.0 | % | | 14.6 | % |
For 2022, our income tax expense was $250 million with an effective tax rate of 16.6 percent. For the year ended October 31, 2022, our effective tax rate and the resulting provision for income taxes were impacted by the tax benefit of $46 million related to foreign-derived intangible income.
For 2021, our income tax expense was $150 million with an effective tax rate of 11 percent. For the year ended October 31, 2021, our effective tax rate and the resulting provision for income taxes were impacted by the discrete benefit of $93 million related to the release of tax reserves in various jurisdictions due to audit settlements and the expiration of statutes of limitations. The income taxes for the year ended October 31, 2021 also include the excess tax benefits from stock-based compensation of $29 million.
For 2020, our income tax expense was $123 million with an effective tax rate of 14.6 percent. For the year ended October 31, 2020, our effective tax rate and the resulting provision for income taxes were impacted by foreign income taxed at lower rates.
We have negotiated a tax holiday in Singapore. The tax holiday provides a lower rate of taxation on certain classes of income and requires various thresholds of investments and employment or specific types of income. In December 2018, the tax holiday in Singapore was renegotiated and extended through 2027. As a result of the incentive, the impact of the tax holiday decreased income taxes by $53 million, $35 million, and $71 million in 2022, 2021, and 2020, respectively. The benefit of the tax holiday on net income per share (diluted) was approximately $0.18, $0.11, and $0.23 in 2022, 2021 and 2020, respectively.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The significant components of deferred tax assets and deferred tax liabilities included on the consolidated balance sheet are:
| | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 |
| (in millions) |
Deferred Tax Assets | | | |
| | | |
Intangibles | $ | 62 | | | $ | 72 | |
| | | |
| | | |
| | | |
| | | |
Employee benefits, other than retirement | 45 | | | 43 | |
Net operating loss, capital loss, and credit carryforwards | 157 | | | 191 | |
| | | |
| | | |
Share-based compensation | 23 | | | 22 | |
| | | |
Lease obligations | 29 | | | 30 | |
Other | 58 | | | 42 | |
Deferred tax assets | $ | 374 | | | $ | 400 | |
Tax valuation allowance | (115) | | | (120) | |
Deferred tax assets, net of valuation allowance | $ | 259 | | | $ | 280 | |
| | | |
Deferred Tax Liabilities | | | |
| | | |
| | | |
Property, plant and equipment | $ | (11) | | | $ | (11) | |
| | | |
Pension benefits and retiree medical benefits | (24) | | | (8) | |
| | | |
Right-of-use asset | (29) | | | (29) | |
Other | (7) | | | (26) | |
Deferred tax liabilities | $ | (71) | | | $ | (74) | |
Net deferred tax assets (liabilities) | $ | 188 | | | $ | 206 | |
Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. As of October 31, 2022, we continued to maintain a valuation allowance of $115 million until sufficient positive evidence exists to support reversal. The valuation allowance is primarily related to deferred tax assets for the states of California and Colorado, along with the net operating losses in the Netherlands and capital losses in Australia.
At October 31, 2022, we had federal, state and foreign net operating loss carryforwards of approximately $6 million, $207 million and $384 million, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal and state net operating loss carryforwards will begin to expire in 2023. If not utilized, $3 million of the foreign net operating loss carryforwards will begin to expire in 2023. The remaining $381 million of the foreign net operating losses carry forward indefinitely. At October 31, 2022, we had foreign capital loss carryforwards of $108 million. The foreign capital losses carry forward indefinitely. At October 31, 2022, we had state tax credit carryforwards of approximately $87 million. The state tax credits carry forward indefinitely.
The breakdown between long-term deferred tax assets and deferred tax liabilities was as follows:
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
| (in millions) |
Long-term deferred tax assets (included within other assets) | $ | 246 | | | $ | 309 | |
Long-term deferred tax liabilities (included within other long-term liabilities) | (58) | | | (103) | |
Total | $ | 188 | | | $ | 206 | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The breakdown between current and long-term income tax assets and liabilities, excluding deferred tax assets and liabilities, was as follows:
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
| (in millions) |
Current income tax assets (included within other current assets) | $ | 87 | | | $ | 66 | |
Long-term income tax assets (included within other assets) | 11 | | | 6 | |
Current income tax liabilities (included within other accrued liabilities) | (51) | | | (47) | |
Long-term income tax liabilities (included within other long-term liabilities) | (216) | | | (241) | |
Total | $ | (169) | | | $ | (216) | |
Uncertain Tax Positions
The aggregate changes in the balances of our gross unrecognized tax benefits including all federal, state and foreign tax jurisdictions are as follows:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Balance, beginning of year | $ | 133 | | | $ | 195 | | | $ | 206 | |
| | | | | |
Additions for tax positions related to the current year | 5 | | | 6 | | | 6 | |
Additions for tax positions from prior years | — | | | 4 | | | — | |
Reductions for tax positions from prior years | (9) | | | — | | | — | |
Settlements with taxing authorities | — | | | (30) | | | — | |
Statute of limitations expirations | (6) | | | (42) | | | (17) | |
Balance, end of year | $ | 123 | | | $ | 133 | | | $ | 195 | |
As of October 31, 2022, we had $144 million of unrecognized tax benefits, including interest and penalties of which $121 million, if recognized, would affect our effective tax rate. However, approximately $23 million of the unrecognized tax benefits were related to state income tax positions that, if recognized, would be in the form of a deferred tax asset that would likely not affect our effective tax rate due to a valuation allowance.
We recognized tax benefit of $2 million in 2022, tax benefit of $19 million in 2021, and tax expense of $8 million in 2020, for interest and penalties related to unrecognized tax benefits. Interest and penalties accrued as of October 31, 2022 and 2021 were $21 million and $26 million, respectively.
In the U.S., tax years remain open back to the year 2018 for federal income tax purposes and for significant states. In other major jurisdictions where we conduct business, the tax years generally remain open back to the year 2012.
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.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented below.
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Numerator: | | | | | |
Net income | $ | 1,254 | | | $ | 1,210 | | | $ | 719 | |
Denominators: | | | | | |
Basic weighted average shares | 299 | | | 304 | | | 309 | |
Potential common shares — stock options and other employee stock plans | 1 | | | 3 | | | 3 | |
Diluted weighted average shares | 300 | | | 307 | | | 312 | |
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards.
We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. In addition, we exclude from the calculation of diluted earnings per share, stock options, ESPP, LTPP and restricted stock awards whose combined exercise price and unamortized fair value collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive.
In 2022, 2021 and 2020, we issued share-based awards of approximately 1.4 million, 2.1 million and 2.4 million, respectively. For the years ended 2022, 2021 and 2020, the impacts of the anti-dilutive potential common shares that were excluded from the calculation of diluted earnings per share were not material.
7. INVENTORY
Inventory as of October 31, 2022 and 2021 consisted of the following:
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
| (in millions) |
Finished goods | $ | 555 | | | $ | 463 | |
Purchased parts and fabricated assemblies | 483 | | | 367 | |
Inventory | $ | 1,038 | | | $ | 830 | |
Inventory-related excess and obsolescence charges of $24 million were recorded in cost of products in 2022, $29 million in 2021 and $28 million in 2020. We record excess and obsolete inventory charges for both inventory on our site as well as inventory at our contract manufacturers and suppliers where we have non-cancelable purchase commitments.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment as of October 31, 2022 and 2021, consisted of the following:
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
| (in millions) |
Land | $ | 59 | | | $ | 61 | |
Buildings and leasehold improvements | 1,255 | | | 1,147 | |
Machinery and equipment | 674 | | | 638 | |
Software | 260 | | | 221 | |
Total property, plant and equipment | 2,248 | | | 2,067 | |
Accumulated depreciation and amortization | (1,148) | | | (1,122) | |
Property, plant and equipment, net | $ | 1,100 | | | $ | 945 | |
There were no asset impairments in 2022. During 2021 and 2020 we recorded asset impairments of $2 million and $6 million, respectively. In 2020 asset impairments related to the shutdown of our sequencer development program. Depreciation expenses were $120 million in 2022, $122 million in 2021 and $119 million in 2020. In 2022 and 2021 we retired approximately $48 million and $35 million, respectively, of assets, the majority of which were fully depreciated and no longer in use.
9. LEASES
As a lessee, we have various non-cancelable operating lease agreements for office space, warehouses, distribution centers, research and development facilities, manufacturing and production locations as well as vehicles, personal computers and other equipment. Our real estate leases have remaining lease terms of one to thirty years, which represent the non-cancelable periods of the leases and include extension options that we determined are reasonably certain to be exercised. We exclude options that are not reasonably certain to be exercised from our lease terms, ranging from six months to twenty years. Our lease payments consist primarily of fixed rental payments for the right to use the underlying leased assets over the lease terms. We often receive incentives from our landlords, such as rent abatement periods, which effectively reduce the total lease payments owed for these leases. Vehicle, personal computer and other equipment operating leases have terms between three and five years.
The components of lease cost for operating leases were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended October 31, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
Operating lease cost | | $ | 59 | | | $ | 59 | | | $ | 60 | |
Short-term lease cost | | 2 | | | 2 | | | 1 | |
Variable lease cost (a) | | 15 | | | 14 | | | 14 | |
Sublease income | | (14) | | | (13) | | | (14) | |
Total lease cost | | $ | 62 | | | 62 | | | 61 | |
(a) Variable lease cost includes cancelable leases, non-fixed maintenance costs and non-recoverable transaction taxes.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended October 31, |
| | 2022 | | 2021 | | 2020 |
| | (in millions) |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flow from operating leases | | $ | 53 | | | $ | 57 | | | $ | 59 | |
Non-cash right of use assets obtained in exchange for operating lease obligations | | $ | 38 | | | $ | 53 | | | $ | 37 | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | October 31, |
| | Financial Statement Line Item | | 2022 | | 2021 |
| | | | (in millions, except lease term and discount rate) |
Assets: | | | | | | |
Operating lease: | | | | | | |
Right of use asset | | Other assets | | $ | 150 | | | $ | 178 | |
| | | | | | |
Liabilities: | | | | | | |
Current | | | | | | |
Operating lease liabilities | | Other accrued liabilities | | $ | 51 | | | $ | 52 | |
Long-term | | | | | | |
Operating lease liabilities | | Other long-term liabilities | | $ | 101 | | | $ | 130 | |
| | | | | | |
Weighted average remaining lease term (in years) | | | | | | |
Operating leases | | | | 7.4 years | | 7.6 years |
| | | | | | |
Weighted average discount rate | | | | | | |
Operating leases | | | | 2.4 | % | | 1.9 | % |
Future minimum rents payable as of October 31, 2022 under non-cancelable leases with initial terms exceeding one year reconcile to lease liabilities included in the consolidated balance sheet as follows:
| | | | | | | | | | | |
| | Operating Leases | |
| | (in millions) | |
2023 | | $ | 53 | | |
2024 | | 36 | | |
2025 | | 20 | | |
2026 | | 11 | | |
2027 | | 7 | | |
Thereafter | | 40 | | |
Total undiscounted future minimum lease payments | | $ | 167 | | |
Less: amount of lease payments representing interest | | (15) | | |
Present value of future minimum lease payments | | $ | 152 | | |
Less: current liabilities | | (51) | | |
Long-term lease liabilities | | $ | 101 | | |
As of October 31, 2022, we had no additional significant operating or finance leases that had not yet commenced.
As a lessor, we have contracts for equipment leased to customers primarily in connection with our diagnostics business which include both operating-type lease and sales-type finance lease arrangements. We account for the non-lease component under the revenue recognition ASC 606 guidance and the lease component under the leasing ASC 842 guidance. Equipment lease revenue for operating lease agreements is recognized as visualization kits and reagents are shipped over the life of the lease. The cost of customer leased equipment is recorded within property, plant and equipment, and is netted in the consolidated balance sheet with depreciation over the equipment’s estimated useful life. For an arrangement that has been classified as a sales-type lease, revenue is recognized when the transfer of control of the underlying leased asset has occurred and the net investment lease recorded which is calculated at the present value of the remaining lease payments due from the lessee.
Revenue allocated to the lease income for both sales-type finance lease and operating lease rental arrangements represents less than one percent of total net revenue in the years ended October 31, 2022, 2021 and 2020, respectively.
As of October 31, 2022, the original cost and net book value of operating leased assets were $29 million and $4 million, respectively. As of October 31, 2022, lease receivables related to sales-type leases were $38 million. As of October 31, 2021,
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the original cost and net book value of operating leased assets were $38 million and $7 million, respectively. As of October 31, 2021, lease receivables related to sales-type leases were $48 million.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents goodwill balances and the movements for each of our reportable segments during the years ended October 31, 2021 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Life Sciences and Applied Markets | | Diagnostics and Genomics | | Agilent CrossLab | | Total |
| (in millions) |
Goodwill as of October 31, 2020 | $ | 1,738 | | | $ | 1,599 | | | $ | 265 | | | $ | 3,602 | |
Foreign currency translation impact | 5 | | | — | | | 3 | | | 8 | |
Goodwill arising from acquisitions and adjustments | — | | | 365 | | | — | | | 365 | |
Goodwill as of October 31, 2021 | $ | 1,743 | | | $ | 1,964 | | | $ | 268 | | | $ | 3,975 | |
Foreign currency translation impact | (19) | | | (11) | | | (12) | | | (42) | |
Goodwill arising from acquisitions and adjustments | 19 | | | — | | | — | | | 19 | |
Goodwill as of October 31, 2022 | $ | 1,743 | | | $ | 1,953 | | | $ | 256 | | | $ | 3,952 | |
| | | | | | | |
In the first quarter of fiscal year 2022, we reorganized our operating segments and moved our chemistries and supplies business and our remarketed instruments business from our Agilent CrossLab business segment to our life sciences and applied markets business segment. As a result, we reassigned approximately $307 million of goodwill from our Agilent Crosslab business segment to our life sciences and applied markets business segment using the relative fair value allocation approach. In addition, we moved service revenue and cost of sales related to the previous acquisition of BioTek from our life sciences and applied markets business segment to our Agilent CrossLab business segment. As a result, we reassigned approximately $10 million of goodwill from our life sciences and applied markets segment to our Agilent Crosslab business segment using the relative fair value allocation approach. Goodwill balances as of October 31, 2020, have been recast to conform to this new presentation. There were no changes to our reporting units due to this reorganization. In addition, we performed a goodwill impairment test, and the results of the analysis indicated that the fair values for all three of our reporting units were in excess of their carrying values by substantial amounts; therefore, no impairment was indicated.
As of September 30, 2022, our annual impairment test date, we assessed goodwill for triggering events and circumstances, and determined no impairment of goodwill was indicated for our reporting units.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The component parts of other intangible assets at October 31, 2021 and 2022 are shown in the table below:
| | | | | | | | | | | | | | | | | |
| Other Intangible Assets |
| Gross Carrying Amount | | Accumulated Amortization | | Net Book Value |
| (in millions) |
As of October 31, 2021: | | | | | |
Purchased technology | $ | 1,742 | | | $ | 972 | | | $ | 770 | |
Backlog | 8 | | | 3 | | | 5 | |
Trademark/Tradename | 196 | | | 133 | | | 63 | |
Customer relationships | 357 | | | 228 | | | 129 | |
Third-party technology and licenses | 11 | | | 8 | | | 3 | |
Total amortizable intangible assets | $ | 2,314 | | | $ | 1,344 | | | $ | 970 | |
In-Process R&D | 11 | | | — | | | 11 | |
Total | $ | 2,325 | | | $ | 1,344 | | | $ | 981 | |
As of October 31, 2022: | | | | | |
Purchased technology | $ | 1,733 | | | $ | 1,068 | | | $ | 665 | |
Backlog | 8 | | | 8 | | | — | |
Trademark/Tradename | 196 | | | 148 | | | 48 | |
Customer relationships | 180 | | | 105 | | | 75 | |
Third-party technology and licenses | 32 | | | 9 | | | 23 | |
Total amortizable intangible assets | $ | 2,149 | | | $ | 1,338 | | | $ | 811 | |
In-Process R&D | 10 | | | — | | | 10 | |
Total | $ | 2,159 | | | $ | 1,338 | | | $ | 821 | |
| | | | | |
In 2022, we acquired Polymer Standards Service GmbH (PSS), a provider of solutions in the field of polymer characterization for $41 million. During fiscal year 2022, we recorded additions to goodwill of $19 million and additions to other intangible assets of $35 million related to the acquisition of PSS and advanced artificial intelligence technology. During the year other intangible assets decreased $3 million due to the impact of foreign currency translation.
In 2021, we acquired privately-owned Resolution Bioscience, Inc., a biotechnology company focused on the development and commercialization of next-generation sequencing-based ("NGS") precision oncology solutions, for $561 million cash plus potential future contingent payments of up to $145 million upon the achievement of certain milestones. See also Note 12, "Fair Value Measurements" for additional information. During fiscal year 2021, we recorded additions to goodwill of $365 million and additions to other intangible assets of $343 million related to this acquisition. During the year, other intangible assets increased $2 million due to the impact of foreign currency translation.
In general, for United States federal tax purposes, goodwill from asset purchases is amortizable; however, any goodwill created as part of a stock acquisition is not deductible.
There were no impairments of indefinite-lived intangible assets during fiscal years 2022 and 2021. During fiscal year 2020, we recorded an impairment of in-process research and development of $90 million in research and development expenses in the consolidated statement of operations which was related to the shutdown of our sequencer development program in our diagnostics and genomics segment. During fiscal years 2022, 2021 and 2020, there were no impairments of finite-lived intangible assets recorded. During 2022, we also wrote-off the gross carrying amounts of $184 million and the related accumulated amortization of fully amortized intangible assets which were no longer being used.
Amortization expense of intangible assets was $192 million in 2022, $195 million in 2021, and $186 million in 2020.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future amortization expense related to existing finite-lived purchased intangible assets associated with business combinations for the next five fiscal years and thereafter is estimated below:
| | | | | |
Estimated future amortization expense: | |
| (in millions) |
2023 | $ | 145 | |
2024 | $ | 126 | |
2025 | $ | 102 | |
2026 | $ | 72 | |
2027 | $ | 71 | |
Thereafter | $ | 295 | |
11. INVESTMENTS
The following table summarizes the company's equity investments as of October 31, 2022 and 2021 (net book value):
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
| (in millions) |
Short-Term | | | |
Equity investments - with readily determinable fair value | $ | — | | | 91 | |
| | | |
Long-Term | | | |
Equity investments - without readily determinable fair value | $ | 141 | | | $ | 120 | |
Equity investments - with readily determinable fair value | 23 | | | 31 | |
Trading securities | 31 | | | 34 | |
| | | |
Total long-term investments | $ | 195 | | | $ | 185 | |
Equity investments without readily determinable fair value (RDFV) consist of non-marketable equity securities issued by private companies. These investments are accounted for using the measurement alternative at cost adjusting for impairments and observable price changes (orderly transactions for the identical or a similar security from the same issuer). The adjustments are included in net income in the period in which they occur. Equity investments with RDFV consist of marketable equity securities which are publicly traded and are reported at fair value, with gains or losses resulting from changes in fair value included in net income. Other investments with RDFV consist of shares we own in a special fund and are reported at fair value, with gains or losses resulting from changes in fair value included in net income.
Trading securities, which are comprised of mutual funds, bonds and other similar instruments, other investments and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income.
Our investments without RDFV and marketable equity securities with RDFV are subject to periodic impairment review. The impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of the investment.
Gains and losses reflected in other income (expense), net for our equity investments with RDFV and equity investments without RDFV are summarized below:
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| ( in millions) |
| | | | | |
Net gain (loss) recognized during the period on equity securities | $ | (67) | | | $ | 98 | | | $ | 27 | |
Less: Net gain on equity securities sold during the period | 11 | | | 6 | | | — | |
Unrealized gain (loss) on equity securities held as of the end of the period | $ | (78) | | | $ | 92 | | | $ | 27 | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains on our equity securities without RDFV were $6 million, $17 million and $27 million in 2022, 2021 and 2020, respectively.
In 2022, net unrealized losses on our trading securities were $7 million. In 2021 and 2020, net unrealized gains on our trading securities were $8 million and $2 million, respectively.
There were no impairments of investments in 2022, 2021 and 2020.
12. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1 — applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 — applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
Level 3 — applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2022 Using |
| October 31, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in millions) |
Assets: | | | | | | | |
Short-term | | | | | | | |
Cash equivalents (money market funds) | $ | 492 | | | $ | 492 | | | $ | — | | | $ | — | |
Derivative instruments (foreign exchange contracts) | 31 | | | — | | | 31 | | | — | |
| | | | | | | |
Long-term | | | | | | | |
Trading securities | 31 | | | 31 | | | — | | | — | |
Other investments | 23 | | | — | | | 23 | | | — | |
| | | | | | | |
Total assets measured at fair value | $ | 577 | | | $ | 523 | | | $ | 54 | | | $ | — | |
Liabilities: | | | | | | | |
Short-term | | | | | | | |
Derivative instruments (foreign exchange contracts) | $ | 5 | | | $ | — | | | $ | 5 | | | $ | — | |
Contingent consideration | 66 | | | — | | | — | | | 66 | |
Long-term | | | | | | | |
Deferred compensation liability | 31 | | | — | | | 31 | | | — | |
Contingent consideration | 1 | | | — | | | — | | | 1 | |
Total liabilities measured at fair value | $ | 103 | | | $ | — | | | $ | 36 | | | $ | 67 | |
Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2021 Using |
| October 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in millions) |
Assets: | | | | | | | |
Short-term | | | | | | | |
Cash equivalents (money market funds) | $ | 919 | | | $ | 919 | | | $ | — | | | $ | — | |
Derivative instruments (foreign exchange contracts) | 9 | | | — | | | 9 | | | — | |
Short-term investments - Equity securities with RDFV | 91 | | | 83 | | | 8 | | | — | |
Long-term | | | | | | | |
Trading securities | 34 | | | 34 | | | — | | | — | |
Other investments | 31 | | | — | | | 31 | | | — | |
| | | | | | | |
Total assets measured at fair value | $ | 1,084 | | | $ | 1,036 | | | $ | 48 | | | $ | — | |
Liabilities: | | | | | | | |
Short-term | | | | | | | |
Derivative instruments (foreign exchange contracts) | $ | 5 | | | $ | — | | | $ | 5 | | | $ | — | |
Contingent consideration | 62 | | | — | | | — | | | 62 | |
Long-term | | | | | | | |
Deferred compensation liability | 34 | | | — | | | 34 | | | — | |
Contingent consideration | 27 | | | — | | | — | | | 27 | |
Total liabilities measured at fair value | $ | 128 | | | $ | — | | | $ | 39 | | | $ | 89 | |
Our money market funds and trading securities are generally valued using quoted market prices and therefore are classified within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred compensation liability is classified as level 2 because, although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.
Short-term investments - equity securities with readily determinable fair value ("RDFV") are shares in marketable equity securities which are classified as Level 1 in the fair value hierarchy as they are measured based on quotes in active markets. Equity securities with RDFV also includes potential shares received from an equity investment in a company that went public and can vest under certain stock performance circumstances. These have been classified as Level 2 because the fair value was calculated using the Monte Carlo simulation method in which quoted market price and other observable inputs are used.
Trading securities, which are comprised of mutual funds, bonds and other similar instruments, other investments and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive income (loss) within stockholders' equity. Realized gains and losses from the sale of these instruments are recorded in net income.
Other investments represent shares we own in a special fund that targets underlying investments of approximately 40 percent in debt securities and 60 percent in equity securities. These shares have been classified as level 2 because, although the shares of the fund are not traded on any active stock exchange, each of the individual underlying securities are or can be derived from and hence we have a readily determinable value for the underlying securities, from which we are able to determine the fair market value for the special fund itself.
Contingent Consideration. The fair value of the contingent consideration liability relates to milestone payments in connection with the acquisition of advanced artificial intelligence technology in February 2022 and the acquisition of Resolution Bioscience in April 2021.
Resolution Bioscience. The fair value of the potential future milestone payments, which is set to certain revenue and technical targets, was based on (i) the probability of achieving the relevant revenue targets and technical milestones and (ii) the timing of achieving such milestones, which are significant unobservable inputs, and has been classified as Level 3. We used the Monte Carlo simulation approach to estimate the fair value of the revenue component. The fair value of the revenue component was zero at October 31, 2022. The probability-weighted expected return method was used to estimate the fair value of the technical target component. Assumptions used in the calculations include probability of success, duration of the earn-out and discount rate. A change in any of these unobservable inputs can significantly change the fair value of the contingent consideration. As of October 31, 2022, the expected maximum earn-out period for the contingent payments does not exceed 2.2 years and potential future payments will not exceed $145 million.
The contingent consideration liability is our only Level 3 asset or liability. A summary of the Level 3 activity follows:
| | | | | | | | |
| | Contingent Consideration |
| | (in millions) |
Balance at October 31, 2020 | | $ | — | |
Additions to contingent consideration (including measurement period adjustment) | | 110 | |
| | |
Change in fair value (included within selling, general and administrative expenses) | | (21) | |
Balance at October 31, 2021 | | $ | 89 | |
Additions to contingent consideration | | 3 | |
| | |
Change in fair value (included within selling, general and administrative expenses) | | (25) | |
Balance at October 31, 2022 | | 67 |
The fair value of the contingent consideration liability as of October 31, 2022 was estimated to be $67 million of which $66 million was recorded in other accrued liabilities and $1 million was recorded in other long-term liabilities on the consolidated balance sheet. The net decrease in the fair value of the contingent consideration was primarily driven by a change in the probability of achieving the relevant revenue targets.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-Lived Assets
For assets measured at fair value on a non-recurring basis, the following table summarizes the impairments included in net income for the years ended October 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Long-lived assets held and used | $ | — | | | $ | 2 | | | $ | 98 | |
Long-lived assets held for sale | $ | — | | | $ | — | | | $ | — | |
For the year ended October 31, 2022, there were no impairments of long-lived assets held and used. For the year ended October 31, 2021, long-lived assets held and used with a carrying value of $2 million were written down to their fair value of zero, resulting in an impairment of $2 million. For the year ended October 31, 2020, long-lived assets held and used, including indefinite lived in-process research and development intangible assets, with a carrying amount of $98 million were written down to their fair value of zero, resulting in an impairment charge of $98 million related to the shutdown of our sequencer development program and other assets in our diagnostics and genomics segment.
There were no impairments of long-lived assets held for sale in 2022, 2021 and 2020.
Fair values for the impaired long-lived assets during 2020 were measured using level 3 inputs. To determine the fair value of long-lived assets in 2020, we used the income approach based on projected discounted cash flows expected to be generated by the long-lived assets over the remaining useful life.
Non-Marketable Equity Securities
For the years ended October 31, 2022, 2021 and 2020, there were no impairments in non-marketable securities without readily determinable fair value.
For the years ended October 31, 2022, 2021 and 2020, unrealized gains of $6 million, $17 million and $27 million respectively, were included in net income as an adjustment to the carrying value of non-marketable equity securities without readily determinable fair value based on an observable market transaction.
As of October 31, 2022, the cumulative net gain (loss) on our non-marketable equity securities without readily determinable fair values was comprised of a $35 million gain and no losses, and the carrying amount was $141 million. As of October 31, 2021, the cumulative net gain (loss) on our non-marketable equity securities without readily determinable fair values was comprised of a $29 million gain and no losses, and the carrying amount was $120 million.
Fair values for the non-marketable securities included in long-term investments on the consolidated balance sheet were measured using Level 3 inputs because they are primarily equity stock issued by private companies without quoted market prices. To estimate the fair value of our non-marketable securities, we use the measurement alternative to record these investments at cost and adjust for impairments and observable price changes (orderly transactions for the identical or a similar security from the same issuer) as and when they occur.
13. DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of our risk management strategy, we use derivative instruments, primarily forward contracts and purchased options to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance and are assessed for effectiveness against the underlying exposure every reporting period. For open contracts as of October 31, 2022, changes in the time value of the foreign exchange contract are excluded from the assessment of hedge effectiveness and are recognized in cost of sales over the life of the foreign exchange contract. The changes in fair value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income (loss). Amounts associated with cash flow hedges are reclassified to cost of sales in the consolidated statement of operations when the forecasted transaction occurs. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive income (loss) will be reclassified to other income (expense), net in the current period. Changes in the fair value of the ineffective portion of derivative instruments are recognized in other income (expense), net in the consolidated statement of operations in the current period. We record the premium paid (time value) of an option on the date of purchase as an asset. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in cost of sales over the life of the option contract. For the years ended October 31, 2022, 2021 and 2020, ineffectiveness and gains and losses recognized in other income (expense), net due to de-designation of cash flow hedge contracts were not significant.
In February 2016, Agilent executed three forward-starting pay fixed/receive variable interest rate swaps for the notional amount of $300 million in connection with future interest payments to be made on our 2026 senior notes issued on September 15, 2016. These derivative instruments were designated and qualified as cash flow hedges under the criteria prescribed in the authoritative guidance. The swap arrangements were terminated on September 15, 2016 with a payment of $10 million, and we recognized this as a deferred loss in accumulated other comprehensive income (loss) 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, 2022 was $4 million.
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 16, 2019. We designated the treasury lock as a cash flow hedge. The treasury lock contracts were terminated on September 6, 2019 and we recognized a deferred loss of $6 million in accumulated other comprehensive income (loss) 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, 2022 was $4 million.
Net Investment Hedges
We enter into foreign exchange contracts to hedge net investments in foreign operations to mitigate the risk of adverse movements in exchange rates. These foreign exchange contracts are carried at fair value and are designated and qualify as net investment hedges under the criteria prescribed in the authoritative guidance. Changes in fair value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income (loss)- translation adjustment and are assessed for effectiveness against the underlying exposure every reporting period. If the company’s net investment changes during the year, the hedge relationship will be assessed and de-designated if the hedge notional amount is outside of prescribed tolerance with a gain/loss reclassified from other comprehensive income (loss) to other income (expense) in the current period. For the year ended October 31, 2022, ineffectiveness and the resultant effect of any gains or losses recognized in other income (expense) due to de-designation of the hedge contracts were not significant.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative instruments are recognized in other income (expense), net in the consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions which are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
A number of our derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on our corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of October 31, 2022, was $1 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of October 31, 2022.
There were 270 foreign exchange forward contracts open as of October 31, 2022, and designated as cash flow hedges. There were 190 foreign exchange forward contracts open as of October 31, 2022, not designated as hedging instruments. There were 3 foreign exchange forward contracts open as of October 31, 2022, and designated as a net investment hedge.
The aggregated notional amounts by currency and designation as of October 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Derivatives Designated as Cash Flow Hedges
| | Derivatives Designated as Net Investment Hedges | | Derivatives Not Designated as Hedging Instruments |
| | Forward Contracts USD | | Forward Contracts USD | | Forward Contracts USD |
Currency | | Buy/(Sell) | | Buy/(Sell) | | Buy/(Sell) |
| | (in millions) |
Euro | | $ | (78) | | | $ | (10) | | | $ | (18) | |
British Pound | | (66) | | | — | | | 13 | |
Canadian Dollar | | (55) | | | — | | | (17) | |
| | | | | | |
| | | | | | |
Japanese Yen | | (93) | | | — | | | (42) | |
Danish Krone | | — | | | — | | | 25 | |
Korean Won | | (90) | | | — | | | (10) | |
Singapore Dollar | | 19 | | | — | | | 24 | |
Swiss Franc | | — | | | — | | | (13) | |
Chinese Yuan Renminbi | | (87) | | | — | | | (100) | |
| | | | | | |
| | | | | | |
Taiwan Dollar | | — | | | — | | | (16) | |
India Rupee | | — | | | — | | | (11) | |
| | | | | | |
| | | | | | |
Other | | 4 | | | — | | | 3 | |
| | $ | (446) | | | $ | (10) | | | $ | (162) | |
Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet in accordance with the authoritative guidance.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The gross fair values and balance sheet location of derivative instruments held in the consolidated balance sheet as of October 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fair Values of Derivative Instruments |
Asset Derivatives | | Liability Derivatives |
| | Fair Value | | | | Fair Value |
Balance Sheet Location | | October 31, 2022 | | October 31, 2021 | | Balance Sheet Location | | October 31, 2022 | | October 31, 2021 |
(in millions) |
Derivatives designated as hedging instruments: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Cash flow hedges | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | | | |
Other current assets | | $ | 23 | | | $ | 6 | | | Other accrued liabilities | | $ | 2 | | | $ | 2 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | | | |
Other current assets | | $ | 8 | | | $ | 3 | | | Other accrued liabilities | | $ | 3 | | | $ | 3 | |
Total derivatives | | $ | 31 | | | $ | 9 | | | | | $ | 5 | | | $ | 5 | |
The effects of derivative instruments for foreign exchange contracts designated as hedging instruments and not designated as hedging instruments in our consolidated statement of operations were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Derivatives designated as hedging instruments: | | | | | |
| | | | | |
| | | | | |
| | | | | |
Cash flow hedges | | | | | |
Foreign exchange contracts: | | | | | |
| | | | | |
Loss reclassified from accumulated other comprehensive income (loss) into interest expense | $ | (2) | | | $ | (1) | | | $ | (1) | |
Gain (loss) recognized in accumulated other comprehensive income (loss) | $ | 56 | | | $ | 2 | | | $ | (12) | |
Gain (loss) reclassified from accumulated other comprehensive income (loss) into cost of sales | $ | 36 | | | $ | (16) | | | $ | (1) | |
| | | | | |
| | | | | |
Gain on time value of forward contracts recorded in cost of sales | $ | — | | | $ | — | | | $ | 2 | |
Net investment hedges | | | | | |
Foreign exchange contracts: | | | | | |
Gain (loss) recognized in accumulated other comprehensive income (loss) - translation adjustment | $ | 5 | | | $ | 1 | | | $ | (5) | |
Gain on time value of forward contracts recorded in other income (expense) | — | | | 1 | | | — | |
| | | | | |
Derivatives not designated as hedging instruments: | | | | | |
Gain (loss) recognized in other income (expense), net | $ | 10 | | | $ | — | | | $ | (1) | |
At October 31, 2022 the total amount of existing net gain that is expected to be reclassified from accumulated other comprehensive income (loss) is $24 million. Within the next twelve months it is estimated that $20 million of gain included within the net amount of accumulated other comprehensive income (loss) will be reclassified to cost of sales in respect of cash flow hedges.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS
General. Substantially all of our employees are covered under various defined benefit and/or defined contribution retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S. employees.
Agilent provides defined benefits to U.S. employees who meet eligibility criteria under the Agilent Technologies, Inc. Retirement Plan (the "RP").
Effective November 1, 2014, Agilent’s U.S. RP was closed to new entrants including new employees, new transfers to the U.S. payroll and rehires. As of April 30, 2016, benefits under the RP were frozen. Any pension benefit earned in the U.S. Plans through April 30, 2016, remained fully vested and is payable on termination, retirement, death, or permanent disability, based on an eligible participant’s years of credited service, age and other criteria. There are no additional benefit accruals after April 30, 2016.
For eligible service through October 31, 1993, the benefit payable under the Agilent Retirement Plan is reduced by any amounts due to the eligible employee under the Agilent defined contribution Deferred Profit-Sharing Plan (the "DPSP"), which was closed to new participants as of November 1993.
As of October 31, 2022 and 2021, the fair value of plan assets of the DPSP was $93 million and $136 million, respectively. Note that the projected benefit obligation for the DPSP equals the fair value of plan assets.
Agilent also maintains a Supplemental Benefits Retirement Plan ("SBRP") in the U.S., which is a supplemental unfunded non-qualified defined benefit plan to provide benefits that would be provided under the RP but for limitations imposed by the Internal Revenue Code. The RP and the SBRP comprise the "U.S. Plans" in the tables below.
Eligible employees outside the U.S. generally receive retirement benefits under various retirement plans based upon factors such as years of service and/or employee compensation levels. Eligibility is generally determined in accordance with local statutory requirements.
Post-Retirement Medical Benefit Plans. In addition to receiving retirement benefits, Agilent U.S. employees who meet eligibility requirements as of their termination date may participate in the Agilent Technologies, Inc. Health Plan for Retirees. As of January 1, 2020, the Health Plan for Retirees is comprised solely of insured pre-65 HMOs as the self-funded Pre-Medicare Medical Plan was eliminated effective December 31, 2019. The Health Plan for Retirees was closed to new retiree entrants after December 31, 2020.
If eligible, a retiree may receive a fixed amount (different fixed amounts for different groups) under the Retiree Medical Account (“RMA”) or a fixed monthly amount under the Agilent Reimbursement Arrangement (“ARA”).
Any new employee hired on or after November 1, 2014, will not be eligible to participate in the post-retirement medical benefit plans upon retiring.
401(k) Defined Contribution Plan. Eligible Agilent U.S. employees may participate in the Agilent Technologies, Inc. 401(k) Plan. We match contributions to employees up to a maximum of 6 percent of an employee's annual eligible compensation. Effective May 1, 2016 until April 30, 2022, we provided an additional transitional company contribution for certain eligible employees equal to 3 percent, 4 percent or 5 percent of an employee's annual eligible compensation due to the RP benefits being frozen. The maximum employee contribution to the 401(k) Plan is 50 percent of an employee's annual eligible compensation, subject to regulatory limitations. The 401(k) Plan employer expense included in income from operations was $46 million in 2022, $43 million in 2021 and $41 million in 2020.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Components of Net periodic cost. The service cost component is recorded in cost of sales and operating expenses in the consolidated statement of operations. All other cost components are recorded in other income (expense), net in the consolidated statement of operations. The company uses alternate methods of amortization as allowed by the authoritative guidance which amortizes the actuarial gains and losses on a consistent basis for the years presented. For U.S. Plans, gains and losses are amortized over the average future lifetime of participants using the corridor method. For most Non-U.S. Plans and U.S. Post-Retirement Benefit Plans, gains and losses are amortized using a separate layer for each year's gains and losses.
For the years ended October 31, 2022, 2021 and 2020, components of net periodic benefit cost and other amounts recognized in other comprehensive income were comprised of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pensions | | U.S. Post-Retirement Benefit Plans |
| U.S. Plans | | Non-U.S. Plans | |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| (in millions) |
Net periodic benefit cost (benefit) | | | | | | | | | | | | | | | | | |
Service cost — benefits earned during the period | $ | — | | | $ | — | | | $ | — | | | $ | 22 | | | $ | 22 | | | $ | 24 | | | $ | 1 | | | $ | 1 | | | $ | 1 | |
Interest cost on benefit obligation | 14 | | | 14 | | | 15 | | | 9 | | | 8 | | | 8 | | | 2 | | | 2 | | | 3 | |
Expected return on plan assets | (27) | | | (29) | | | (28) | | | (43) | | | (49) | | | (47) | | | (6) | | | (6) | | | (7) | |
Amortization of net actuarial (gain) loss | — | | | 4 | | | 3 | | | 25 | | | 53 | | | 49 | | | (2) | | | 4 | | | 4 | |
Amortization of prior service benefit | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | | | (7) | |
Total periodic benefit cost (benefit) | $ | (13) | | | $ | (11) | | | $ | (10) | | | $ | 13 | | | $ | 34 | | | $ | 34 | | | $ | (6) | | | $ | — | | | $ | (6) | |
Settlement loss | $ | 4 | | | $ | 1 | | | $ | 4 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss | | | | | | | | | | | | | | | | | |
Net actuarial (gain) loss | $ | 16 | | | $ | (92) | | | $ | 26 | | | $ | (83) | | | $ | (114) | | | $ | 20 | | | $ | 15 | | | $ | (30) | | | $ | 5 | |
Amortization of net actuarial (gain) loss | — | | | (4) | | | (3) | | | (25) | | | (53) | | | (49) | | | 2 | | | (4) | | | (4) | |
| | | | | | | | | | | | | | | | | |
Amortization of prior service benefit | — | | | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | | | 7 | |
Loss due to settlement | (4) | | | (1) | | | (4) | | | — | | | — | | | — | | | — | | | — | | | — | |
Foreign currency | — | | | — | | | — | | | 11 | | | 5 | | | 10 | | | — | | | — | | | — | |
Total recognized in other comprehensive (income) loss | $ | 12 | | | $ | (97) | | | $ | 19 | | | $ | (97) | | | $ | (162) | | | $ | (19) | | | $ | 18 | | | $ | (33) | | | $ | 8 | |
Total recognized in net periodic benefit cost (benefit) and other comprehensive (income) loss | $ | 3 | | | $ | (107) | | | $ | 13 | | | $ | (84) | | | $ | (128) | | | $ | 15 | | | $ | 12 | | | $ | (33) | | | $ | 2 | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Funded Status. As of October 31, 2022 and 2021, the funded status of the defined benefit and post-retirement benefit plans was:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Defined Benefit Plans | | Non-U.S. Defined Benefit Plans | | U.S. Post-Retirement Benefit Plans |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| (in millions) |
Change in fair value of plan assets: | | | | | | | | | | | |
Fair value — beginning of year | $ | 551 | | | $ | 439 | | | $ | 1,093 | | | $ | 945 | | | $ | 116 | | | $ | 93 | |
Actual return on plan assets | (122) | | | 138 | | | (147) | | | 160 | | | (26) | | | 28 | |
Employer contributions | — | | | — | | | 17 | | | 19 | | | — | | | — | |
Participants' contributions | — | | | — | | | 1 | | | 1 | | | — | | | — | |
Benefits paid | (10) | | | (8) | | | (35) | | | (31) | | | (5) | | | (5) | |
Settlements | (23) | | | (18) | | | — | | | — | | | — | | | — | |
Currency impact | — | | | — | | | (181) | | | (1) | | | — | | | — | |
Fair value — end of year | $ | 396 | | | $ | 551 | | | $ | 748 | | | $ | 1,093 | | | $ | 85 | | | $ | 116 | |
Change in benefit obligation: | | | | | | | | | | | |
Benefit obligation — beginning of year | $ | 512 | | | $ | 510 | | | $ | 1,100 | | | $ | 1,094 | | | $ | 84 | | | $ | 94 | |
Service cost | — | | | — | | | 22 | | | 22 | | | 1 | | | 1 | |
Interest cost | 14 | | | 14 | | | 9 | | | 8 | | | 2 | | | 2 | |
Participants' contributions | — | | | — | | | 1 | | | 1 | | | — | | | — | |
| | | | | | | | | | | |
Actuarial (gain) loss | (133) | | | 15 | | | (262) | | | 2 | | | (17) | | | (8) | |
Benefits paid | (10) | | | (8) | | | (35) | | | (31) | | | (5) | | | (5) | |
| | | | | | | | | | | |
Settlements | (26) | | | (19) | | | — | | | — | | | — | | | — | |
Currency impact | — | | | — | | | (170) | | | 4 | | | — | | | — | |
Benefit obligation — end of year | $ | 357 | | | $ | 512 | | | $ | 665 | | | $ | 1,100 | | | $ | 65 | | | $ | 84 | |
Overfunded (underfunded) status of PBO | $ | 39 | | | $ | 39 | | | $ | 83 | | | $ | (7) | | | $ | 20 | | | $ | 32 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts recognized in the consolidated balance sheet consist of: | | | | | | | | | | | |
Other assets | $ | 42 | | | $ | 46 | | | $ | 140 | | | $ | 160 | | | $ | 20 | | | $ | 32 | |
Employee compensation and benefits | (1) | | | (1) | | | — | | | — | | | — | | | — | |
Retirement and post-retirement benefits | (2) | | | (6) | | | (57) | | | (167) | | | — | | | — | |
Total net asset (liability) | $ | 39 | | | $ | 39 | | | $ | 83 | | | $ | (7) | | | $ | 20 | | | $ | 32 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amounts Recognized in Accumulated Other Comprehensive Income (Loss): | | | | | | | | | | | |
Actuarial (gains) losses | $ | 48 | | | $ | 36 | | | $ | 52 | | | $ | 149 | | | $ | (6) | | | $ | (23) | |
Prior service costs (benefits) | — | | | — | | | — | | | — | | | (3) | | | (4) | |
Total | $ | 48 | | | $ | 36 | | | $ | 52 | | | $ | 149 | | | $ | (9) | | | $ | (27) | |
The actuarial gains and losses related to the change in plan obligations were a total of $412 million net gain for 2022 and $9 million net loss for 2021. The actuarial net gain that arose in 2022 was primarily due to increases in discount rates and changes in other financial and demographic assumptions partially offset by losses due to plan experience. The actuarial net loss that arose in 2021 was primarily due to changes in financial and demographic assumptions and losses due to plan experience offset by increases in discount rates.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Policies and Strategies as of October 31, 2022. In the U.S., target asset allocations for our retirement and post-retirement benefit plans were approximately 50 percent to equities and approximately 50 percent to fixed income investments. Our DPSP target asset allocation is approximately 60 percent to equities and approximately 40 percent to fixed income investments. Approximately 1 percent of the retirement and post-retirement plans consists of limited partnerships. The general investment objective for all our plan assets is to obtain the optimum rate of investment return on the total investment portfolio consistent with the assumption of a reasonable level of risk. Specific investment objectives for the plans' portfolios are to: maintain and enhance the purchasing power of the plans' assets; achieve investment returns consistent with the level of risk being taken; and earn performance rates of return in accordance with the benchmarks adopted for each asset class. Outside the U.S., our target asset allocation ranges from 15 percent to 60 percent to equities, from 30 percent to 80 percent to fixed income investments, from zero to 25 percent to real estate and from zero to 55 percent to annuity contracts, depending on the plan. All plans' assets are broadly diversified. Due to fluctuations in equity and bond markets, our actual allocations of plan assets at October 31, 2022, may 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. Real estate securities include holdings of managed investment funds which invest primarily in the equity instruments of real estate investment trusts and other similar real estate investments. Other investments include a group trust consisting primarily of private equity partnerships. Portions of the cash and cash equivalent, equity, and fixed income investments are held in commingled funds that are valued using Net Asset Value (“NAV”) as the practical expedient. In addition, some of the investments valued using NAV as the practical expedient may have limits on their redemption to weekly or monthly and/or may require prior written notice specified by each fund. In December 2021, we entered into an insurance buy-in contract for a portion of benefit obligations under the U.K. defined benefit plan which was funded from existing pension plan assets with no adjustment made to the benefit obligations. It has been classified as an “Annuity Contract” since the insurance buy-in contract is similar to an annuity contract. It matches cash flows with future benefit payments for listed pensioners as of the contract date with the obligation remaining with the plan. This contract is issued by a third-party insurance company with no affiliation to us.
Fair Value. The measurement of the fair value of pension and post-retirement plan assets uses the valuation methodologies and the inputs as described in Note 12, "Fair Value Measurements".
Cash and Cash Equivalents - Cash and cash equivalents consist of short-term investment funds. The funds also invest in short-term domestic fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities and quality. Some of our cash and cash equivalents are held in commingled funds. Other cash and cash equivalents are generally classified as Level 2 investments.
Equity - Some equity securities consisting of common and preferred stock that are not traded on an active market are valued at quoted prices reported by investment dealers based on the underlying terms of the security and comparison to similar securities traded on an active market; these are classified as Level 2 investments. Securities which have quoted prices in active markets are classified as Level 1 investments.
Fixed Income - Some of the fixed income securities are not actively traded and are valued at quoted prices based on the terms of the security and comparison to similar securities traded on an active market; these are classified as Level 2 investments. Securities which have quoted prices in active markets are classified as Level 1 investments.
Real Estate - Real estate securities include holdings of managed investment funds which invest primarily in the equity instruments of real estate investment trust and other similar real estate investments. Since the existing securities have quoted prices in active markets, it has been classified as level 1 and grouped with equity.
Annuity Contract – This consists of the U.K. insurance buy-in contract. Since it is valued on an insurer pricing basis, which reflects the purchase price adjusted for changes in discount rates and other actuarial assumptions which approximates fair value, it has been classified as level 3.
Other Investments - Other investments also include partnership investments where, due to their private nature, pricing inputs are not readily observable. Asset valuations are developed by the general partners that manage the partnerships. These valuations are based on proprietary appraisals, application of public market multiples to private company cash flows, utilization of market transactions that provide valuation information for comparable companies and other methods. Holdings of limited partnerships are classified as Level 3.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Agilent has adopted the accounting guidance related to the presentation of certain investments using the NAV practical expedient. The accounting guidance exempts investments using this practical expedient from categorization within the fair value hierarchy.
The following tables present the fair value of U.S. Defined Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of October 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2022 Using | | |
| October 31, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Not Subject to Leveling (1) |
| (in millions) |
Cash and Cash Equivalents | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | |
Equity | 194 | | | 49 | | | — | | | — | | | 145 | |
Fixed Income | 199 | | | — | | | — | | | — | | | 199 | |
Other Investments | 2 | | | — | | | — | | | 2 | | | — | |
Total assets measured at fair value | $ | 396 | | | $ | 49 | | | $ | — | | | $ | 2 | | | $ | 345 | |
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2021 Using | | |
| October 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Not Subject to Leveling (1) |
| (in millions) |
Cash and Cash Equivalents | $ | 2 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | |
Equity | 276 | | | 62 | | | — | | | — | | | 214 | |
Fixed Income | 271 | | | 2 | | | — | | | — | | | 269 | |
Other Investments | 2 | | | — | | | — | | | 2 | | | — | |
Total assets measured at fair value | $ | 551 | | | $ | 64 | | | $ | — | | | $ | 2 | | | $ | 485 | |
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
For U.S. Defined Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during 2022 and 2021:
| | | | | | | | | | | |
| Years Ended October 31. |
| 2022 | | 2021 |
Balance, beginning of year | $ | 2 | | | $ | 2 | |
Realized gains/(losses) | — | | | 1 | |
Unrealized gains/(losses) | — | | | — | |
Purchases, sales, issuances, and settlements | — | | | (1) | |
Transfers in (out) | — | | | — | |
Balance, end of year | $ | 2 | | | $ | 2 | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the fair value of U.S. Post-Retirement Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of October 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2022 Using | | |
| October 31, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Not Subject to Leveling (1) |
| (in millions) |
Cash and Cash Equivalents | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Equity | 42 | | | 10 | | | — | | | — | | | 32 | |
Fixed Income | 42 | | | — | | | — | | | — | | | 42 | |
Other Investments | 1 | | | — | | | — | | | 1 | | | — | |
Total assets measured at fair value | $ | 85 | | | $ | 10 | | | $ | — | | | $ | 1 | | | $ | 74 | |
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2021 Using | | |
| October 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Not Subject to Leveling (1) |
| (in millions) |
Cash and Cash Equivalents | $ | 3 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3 | |
Equity | 55 | | | 13 | | | — | | | — | | | 42 | |
Fixed Income | 57 | | | — | | | — | | | — | | | 57 | |
Other Investments | 1 | | | — | | | — | | | 1 | | | — | |
Total assets measured at fair value | $ | 116 | | | $ | 13 | | | $ | — | | | $ | 1 | | | $ | 102 | |
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
For U.S. Post-Retirement Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during 2022 and 2021:
| | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 |
Balance, beginning of year | $ | 1 | | | $ | 1 | |
Realized gains/(losses) | — | | | 1 | |
Unrealized gains/(losses) | — | | | — | |
Purchases, sales, issuances, and settlements | — | | | (1) | |
Transfers in (out) | — | | | — | |
Balance, end of year | $ | 1 | | | $ | 1 | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the fair value of non-U.S. Defined Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of October 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2022 Using | | |
| October 31, 2022 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Not Subject to Leveling (1) |
| (in millions) |
Cash and Cash Equivalents | $ | 22 | | | $ | — | | | $ | 22 | | | $ | — | | | $ | — | |
Equity | 360 | | | 264 | | | — | | | — | | | 96 | |
Fixed Income | 274 | | | 83 | | | 98 | | | — | | | 93 | |
Annuity Contract | 92 | | | — | | | — | | | 92 | | | — | |
Total assets measured at fair value | $ | 748 | | | $ | 347 | | | $ | 120 | | | $ | 92 | | | $ | 189 | |
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2021 Using | | |
| October 31, 2021 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Not Subject to Leveling (1)(2) |
| (in millions) | | |
Cash and Cash Equivalents | $ | 25 | | | $ | — | | | $ | 24 | | | $ | — | | | $ | 1 | |
Equity | 543 | | | 380 | | | 12 | | | — | | | 151 | |
Fixed Income | 525 | | | 151 | | | 242 | | | — | | | 132 | |
| | | | | | | | | |
Total assets measured at fair value | $ | 1,093 | | | $ | 531 | | | $ | 278 | | | $ | — | | | $ | 284 | |
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
(2) Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications have no effect on the previously reported financial statements and other notes to the financial statements.
For non-U.S. Defined Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during 2022 and 2021:
| | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 |
Balance, beginning of year | $ | — | | | $ | — | |
Realized gains/(losses) | — | | | — | |
Unrealized gains/(losses) | (39) | | | — | |
Purchases, sales, issuances, and settlements | (5) | | | — | |
Transfers in (out) | 159 | | | — | |
Currency impact | (23) | | | — | |
Balance, end of year | $ | 92 | | | $ | — | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents the combined projected benefit obligation ("PBO"), accumulated benefit obligation ("ABO") and fair value of plan assets, grouping plans using comparisons of the PBO and ABO relative to the plan assets as of October 31, 2022 or 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Benefit Obligation | | | | Benefit Obligation | | |
| Fair Value of Plan Assets | | Fair Value of Plan Assets |
| PBO | | PBO | |
| (in millions) |
U.S. defined benefit plans where PBO exceeds the fair value of plan assets | $ | 3 | | | $ | — | | | $ | 7 | | | $ | — | |
U.S. defined benefit plans where fair value of plan assets exceeds PBO | 354 | | | 396 | | | 505 | | | 551 | |
Total | $ | 357 | | | $ | 396 | | | $ | 512 | | | $ | 551 | |
| | | | | | | |
Non-U.S. defined benefit plans where PBO exceeds the fair value of plan assets | $ | 172 | | | $ | 114 | | | $ | 691 | | | $ | 524 | |
Non-U.S. defined benefit plans where fair value of plan assets exceeds PBO | 493 | | | 634 | | | 409 | | | 569 | |
Total | $ | 665 | | | $ | 748 | | | $ | 1,100 | | | $ | 1,093 | |
| | | | | | | |
| ABO | | | | ABO | | |
U.S. defined benefit plans where ABO exceeds the fair value of plan assets | $ | 3 | | | $ | — | | | $ | 7 | | | $ | — | |
U.S. defined benefit plans where the fair value of plan assets exceeds ABO | 354 | | | 396 | | | 505 | | | 551 | |
Total | $ | 357 | | | $ | 396 | | | $ | 512 | | | $ | 551 | |
| | | | | | | |
Non-U.S. defined benefit plans where ABO exceeds the fair value of plan assets | $ | 167 | | | $ | 114 | | | $ | 668 | | | $ | 524 | |
Non-U.S. defined benefit plans where fair value of plan assets exceeds ABO | 485 | | | 634 | | | 400 | | | 569 | |
Total | $ | 652 | | | $ | 748 | | | $ | 1,068 | | | $ | 1,093 | |
Contributions and Estimated Future Benefit Payments. During fiscal year 2023, we expect to make no contributions to the U.S. defined benefit plans and the Post-Retirement Medical Plans. We expect to contribute $16 million to plans outside the U.S. The following table presents expected future benefit payments for the next 10 years:
| | | | | | | | | | | | | | | | | |
| U.S. Defined Benefit Plans | | Non-U.S. Defined Benefit Plans | | U.S. Post-Retirement Benefit Plans |
| (in millions) |
2023 | $ | 31 | | | $ | 32 | | | $ | 6 | |
2024 | $ | 34 | | | $ | 33 | | | $ | 6 | |
2025 | $ | 32 | | | $ | 34 | | | $ | 7 | |
2026 | $ | 32 | | | $ | 34 | | | $ | 7 | |
2027 | $ | 32 | | | $ | 35 | | | $ | 7 | |
2028 - 2032 | $ | 142 | | | $ | 187 | | | $ | 34 | |
Assumptions. The assumptions used to determine the benefit obligations and net periodic cost (benefit) for our defined benefit and post-retirement benefit plans are presented in the tables below. The expected long-term return on assets below represents an estimate of long-term returns on investment portfolios consisting of a mixture of equities, fixed income and alternative investments in proportion to the asset allocations of each of our plans. We consider long-term rates of return, which are weighted based on the asset classes (both historical and forecasted) in which we expect our pension and post-retirement funds to be invested. Discount rates reflect the current rate at which pension and post-retirement obligations could be settled based on the measurement dates of the plans - October 31. The U.S. discount rates at October 31, 2022 and 2021, were
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
determined based on the results of matching expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. The non-U.S. rates were generally based on published rates for high-quality corporate bonds. The range of assumptions that were used for the non-U.S. defined benefit plans reflects the different economic environments within various countries.
Assumptions used to calculate the net periodic cost (benefit) in each year were as follows:
| | | | | | | | | | | | | | | | | |
| For years ended October 31, |
| 2022 | | 2021 | | 2020 |
U.S. defined benefit plans: | | | | | |
Discount rate | 2.75% | | 2.75% | | 3.25% |
Expected long-term return on assets | 5.00% | | 7.00% | | 7.00% |
Non-U.S. defined benefit plans: | | | | | |
Discount rate | 0.29-1.76% | | 0.07-1.54% | | 0.22-1.81% |
Average increase in compensation levels | 2.00-3.50% | | 2.00-3.00% | | 2.25-3.00% |
Expected long-term return on assets | 2.75-5.50% | | 4.00-5.50% | | 4.00-5.75% |
Interest crediting rate for cash balance plans | 0.30-0.50% | | 0.10-0.50% | | 0.00-0.75% |
U.S. post-retirement benefits plans: | | | | | |
Discount rate | 2.75% | | 2.50% | | 3.00% |
Expected long-term return on assets | 5.00% | | 7.00% | | 7.00% |
Current medical cost trend rate | 6.00% | | 6.25% | | 6.25% |
Ultimate medical cost trend rate | 4.50% | | 4.50% | | 4.50% |
Medical cost trend rate decreases to ultimate rate in year | 2027 | | 2029 | | 2029 |
Assumptions used to calculate the benefit obligation were as follows:
| | | | | | | | | | | |
| As of the Years Ending October 31, |
| 2022 | | 2021 |
U.S. defined benefit plans: | | | |
Discount rate | 6.00% | | 2.75% |
Non-U.S. defined benefit plans: | | | |
Discount rate | 1.50-4.77% | | 0.29-1.76% |
Average increase in compensation levels | 2.00-3.25% | | 2.00-3.50% |
Interest crediting rate for cash balance plans | 0.50-2.10% | | 0.30-0.50% |
U.S. post-retirement benefits plans: | | | |
Discount rate | 6.00% | | 2.75% |
Current medical cost trend rate | 7.00% | | 6.00% |
Ultimate medical cost trend rate | 4.75% | | 4.50% |
Medical cost trend rate decreases to ultimate rate in year | 2029 | | 2027 |
15. GUARANTEES
Standard Warranty
We accrue for standard warranty costs based on historical trends in actual warranty charges over the past 12 months. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost over the period. The standard warranty accrual balances are held in other accrued and other long-term liabilities on our consolidated balance sheet. Our standard warranty terms typically extend to one year from the date of delivery, depending on the product.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the standard warranty accrual activity is shown in the table below.
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
| (in millions) |
Standard warranty accrual, beginning balance | $ | 30 | | | $ | 32 | |
Accruals for warranties including change in estimates | 50 | | | 52 | |
Settlements made during the period | (50) | | | (54) | |
Standard warranty accrual, ending balance | $ | 30 | | | $ | 30 | |
| | | | | | | | | | | |
Accruals for warranties due within one year | $ | 30 | | | $ | 29 | |
Accruals for warranties due after one year | — | | | 1 | |
Standard warranty accrual, ending balance | $ | 30 | | | $ | 30 | |
Bank Guarantees
Guarantees consist primarily of outstanding standby letters of credit and bank guarantees and were approximately $37 million and $46 million as of October 31, 2022 and 2021, respectively. A standby letter of credit is a guarantee of payment issued by a bank on behalf of us that is used as payment of last resort should we fail to fulfill a contractual commitment with a third party. A bank guarantee is a promise from a bank or other lending institution that if we default on a loan, the bank will cover the loss.
Indemnifications in Connection with Transactions
In connection with various divestitures, acquisitions, spin-offs and other transactions, we have agreed to indemnify certain parties, their affiliates and/or other related parties against certain damages and expenses that might occur in the future. These indemnifications may cover a variety of liabilities, including, but not limited to, employee, tax, environmental, intellectual property, litigation and other liabilities related to the business conducted prior to the date of the transaction. In our opinion, the fair value of these indemnification obligations was not material as of October 31, 2022.
Indemnifications to Officers and Directors
Our corporate bylaws require that we indemnify our officers and directors, as well as those who act as directors and officers of other entities at our request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to Agilent and such other entities, including service with respect to employee benefit plans. In addition, we have entered into separate indemnification agreements with each director and each board-appointed officer of Agilent which provide for indemnification of these directors and officers under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in the bylaws and the indemnification agreements. We purchase standard insurance to cover claims or a portion of the claims made against our directors and officers. Since a maximum obligation is not explicitly stated in our bylaws or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not made payments related to these obligations, and the fair value for these indemnification obligations was not material as of October 31, 2022.
Other Indemnifications
As is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of our products and services, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
undiscovered liabilities, additional product liability or environmental obligations. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability was not material as of October 31, 2022.
In connection with the sale of several of our businesses, we have agreed to indemnify the buyers of such businesses, their respective affiliates and other related parties against certain damages that they might incur in the future. The continuing indemnifications primarily cover damages relating to liabilities of the businesses that Agilent retained and did not transfer to the buyers, as well as other specified items. In our opinion, the fair value of these indemnification obligations was not material as of October 31, 2022.
16. COMMITMENTS AND CONTINGENCIES
Other Purchase Commitments. Typically, we can cancel contracts with professional services suppliers without penalties. For those contracts that are not cancelable without penalties, there are termination fees and costs or commitments for continued spending that we are obligated to pay to a supplier under each contract's termination period before such contract can be cancelled. Our contractual obligations with these suppliers under "other purchase commitments" were approximately $139 million.
Contingencies: We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, intellectual property, commercial, real estate, environmental and employment matters, which arise in the ordinary course of business. There are no matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial condition, results of operations or cash flows.
17. SHORT-TERM DEBT
Credit Facilities
On March 13, 2019, we entered into a credit agreement with a group of financial institutions which, as amended, provides for a $1 billion five-year unsecured credit facility that will expire on March 13, 2024, and incremental term loan facilities in an aggregate amount of up to $500 million. On April 21, 2021, we entered into an incremental assumption agreement, pursuant to which the aggregate amount available for borrowing under the revolving credit facility was increased to $1.35 billion and the aggregate amount available for incremental facilities was refreshed to remain at $500 million.
As of both October 31, 2022 and 2021, we had no borrowings outstanding under the credit facility and we had no borrowings outstanding under the incremental facilities. We were in compliance with the covenants for the credit facility during the year ended October 31, 2022.
Commercial Paper
Under our U.S. commercial paper program, we may issue and sell unsecured, short-term promissory notes in the aggregate principal amount not to exceed $1.35 billion with up to 397-day maturities. At any point in time, the company intends to maintain available commitments under its revolving credit facility in an amount at least equal to the amount of the commercial paper notes outstanding. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The proceeds from issuances under the program may be used for general corporate purposes. As of October 31, 2022, we had borrowings of $35 million outstanding under our U.S. commercial paper program and had a weighted average annual interest rate of 3.54 percent. As of October 31, 2021, we had no borrowings outstanding under the U.S. commercial paper program.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. LONG-TERM DEBT
Term Loan Facility
On April 15, 2022, we entered into a term loan agreement with a group of financial institutions, which provided for a $600 million delayed draw term loan that will mature on April 15, 2025. As of October 31, 2022, we had $600 million borrowings outstanding under the term loan facility and had a weighted average interest rate of 3.98 percent. Loans under the term loan agreement bear interest, at our option, either at: (i) the alternate base rate, as defined in the term loan agreement, plus the applicable margin for such loans or (ii) adjusted term SOFR, as defined in the term loan agreement, plus the applicable margin for such loans. The term loan agreement contains customary representations and warranties as well as customary affirmative and negative covenants. We were in compliance with the covenants for the term loan during the year ended October 31, 2022.
Senior Notes
The following table summarizes the company's long-term senior notes:
| | | | | | | | | | | | | | | | | | | |
| October 31, 2022 | | October 31, 2021 |
| Amortized Principal | | | | | | Amortized Principal | | | | |
| (in millions) |
2023 Senior Notes | $ | — | | | | | | | $ | 599 | | | | | |
2026 Senior Notes | 299 | | | | | | | 298 | | | | | |
2029 Senior Notes | 495 | | | | | | | 494 | | | | | |
2030 Senior Notes | 496 | | | | | | | 496 | | | | | |
2031 Senior Notes | 843 | | | | | | | 842 | | | | | |
Total Senior Notes | $ | 2,133 | | | | | | | $ | 2,729 | | | | | |
2023 Senior Notes
On June 21, 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 would have matured on July 15, 2023 with a fixed interest rate of 3.875% per annum. We paid interest semi-annually on January 15th and July 15th of each year and payments commenced January 15, 2014.
On May 4, 2022, we used the proceeds from the term loan facility and repaid the $600 million outstanding aggregate principal amount of our 2023 senior notes. The total redemption price of approximately $609 million was computed in accordance with the terms of the 2023 senior notes as the present value of the remaining scheduled payments of principal and unpaid interest on the notes being redeemed. In May 2022, we recorded a loss on extinguishment of debt of $9 million in other income (expense), net in the consolidated statement of operations. In addition, $7 million of accrued interest, up to but not including the applicable redemption date, was paid.
2026 Senior Notes
On September 22, 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 3.05% 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 (loss) 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, 2022 was $4 million.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2029 Senior Notes
On September 16, 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 commenced 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 16, 2019. We designated the treasury lock as a cash flow hedge. 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, 2022 was $4 million.
2030 Senior Notes
On June 4, 2020, we issued an aggregate principal amount of $500 million in senior notes ("2030 senior notes"). The 2030 senior notes were issued at 99.812% of their principal amount. The 2030 senior notes will mature on June 4, 2030, and bear interest at a fixed rate of 2.10% per annum. The interest is payable semi-annually on June 4th and December 4th of each year and payments commenced on December 4, 2020.
2031 Senior Notes
On March 12, 2021, we issued an aggregate principal amount of $850 million in senior notes ("2031 senior notes"). The 2031 senior notes were issued at 99.822% of their principal amount. The 2031 senior notes will mature on March 12, 2031, and bear interest at a fixed rate of 2.30% per annum. The interest is payable semi-annually on March 12th and September 12th of each year and payments commenced on September 12, 2021.
All outstanding senior notes listed above are unsecured and rank equally in right of payment with all of Agilent's other senior unsecured indebtedness.
19. STOCKHOLDERS' EQUITY
Stock Repurchase Program
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, 2020, we repurchased and retired 5.2 million shares for $469 million under this authorization. During the year ended October 31, 2021, we repurchased and retired 3.1 million shares for $365 million under this authorization. Effective February 18, 2021, the 2019 repurchase program was terminated and replaced by the new share repurchase program. The remaining authorization under the 2019 repurchase plan of $193 million expired on February 18, 2021.
On February 16, 2021 we announced that our board of directors had approved a new share repurchase program (the "2021 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 2021 repurchase program authorizes the purchase of up to $2.0 billion of our common stock at the company's discretion and has no fixed termination date. The 2021 repurchase program which became effective on February 18, 2021, replaced and terminated the 2019 repurchase program on that date. The 2021 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, 2021, we repurchased and retired 3.0 million shares for $423 million under this authorization. During the year ended October 31, 2022, we repurchased and retired 8.4 million shares for $1,139 million under this authorization. As of October 31, 2022, we had remaining authorization to repurchase up to approximately $438 million of our common stock under the 2021 repurchase program.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Dividends on Shares of Common Stock
During the year ended October 31, 2022, cash dividends of $0.840 per share, or $250 million were declared and paid on the company's outstanding common stock. During the year ended October 31, 2021, cash dividends of $0.776 per share, or $236 million were declared and paid on the company's outstanding common stock. During the year ended October 31, 2020, cash dividends of $0.720 per share, or $222 million were declared and paid on the company's outstanding common stock.
On November 16, 2022, we declared a quarterly dividend of $0.225 per share of common stock, or approximately $66 million which will be paid on January 25, 2023, to shareholders of record as of the close of business on January 3, 2023. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of our accumulated other comprehensive income (loss) as of October 31, 2022 and 2021, net of tax effect:
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
| (in millions) |
| | | |
Foreign currency translation, net of tax (expense) benefit of $4 and $(8) | $ | (335) | | | (185) | |
Unrealized losses (including prior service benefit) on defined benefit plans, net of tax benefit of $71 and $80 | (32) | | | (100) | |
Unrealized gains (losses) on derivative instruments, net of tax (expense) benefit of $(4) and $1 | 20 | | | 3 | |
Total accumulated other comprehensive loss | $ | (347) | | | $ | (282) | |
Changes in accumulated other comprehensive income (loss) by component and related tax effects for the years ended October 31, 2022 and 2021 were as follows:
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Net defined benefit pension cost and post retirement plan costs | | | | |
| | | | Foreign currency translation | | Prior service credits | | Actuarial Losses | | Unrealized gains (losses) on derivatives | | Total |
| | | | (in millions) |
As of October 31, 2020 | | | | $ | (194) | | | $ | 125 | | | $ | (442) | | | $ | (11) | | | $ | (522) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other comprehensive income before reclassifications | | | | 11 | | | — | | | 228 | | | 2 | | | 241 | |
| | | | | | | | | | | | |
Amounts reclassified out of accumulated other comprehensive income (loss) | | | | — | | | (1) | | | 64 | | | 17 | | | 80 | |
| | | | | | | | | | | | |
Tax expense | | | | (2) | | | — | | | (74) | | | (5) | | | (81) | |
| | | | | | | | | | | | |
Other comprehensive income (loss) | | | | 9 | | | (1) | | | 218 | | | 14 | | | 240 | |
| | | | | | | | | | | | |
As of October 31, 2021 | | | | $ | (185) | | | $ | 124 | | | $ | (224) | | | $ | 3 | | | $ | (282) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | | | | (162) | | | — | | | 50 | | | 56 | | | (56) | |
| | | | | | | | | | | | |
Amounts reclassified out of accumulated other comprehensive income (loss) | | | | — | | | (1) | | | 28 | | | (34) | | | (7) | |
| | | | | | | | | | | | |
Tax (expense) benefit | | | | 12 | | | — | | | (9) | | | (5) | | | (2) | |
| | | | | | | | | | | | |
Other comprehensive income (loss) | | | | (150) | | | (1) | | | 69 | | | 17 | | | (65) | |
| | | | | | | | | | | | |
As of October 31, 2022 | | | | $ | (335) | | | $ | 123 | | | $ | (155) | | | $ | 20 | | | $ | (347) | |
| | | | | | | | | | | | |
Reclassifications out of accumulated other comprehensive income (loss) for the years ended October 31, 2022 and 2021 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Income components | | Amounts Reclassified from Other Comprehensive Income | | Affected line item in statement of operations |
| | 2022 | | 2021 | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Unrealized gains (losses) on derivatives | | $ | 36 | | | $ | (16) | | | Cost of products |
Unrealized gains (losses) on derivatives | | (2) | | | (1) | | | Interest expense |
| | 34 | | | (17) | | | Total before income tax |
| | (8) | | | 4 | | | (Provision) benefit for income tax |
| | 26 | | | (13) | | | Total net of income tax |
Net defined benefit pension cost and post retirement plan costs: | | | | | | |
| | | | | | |
Actuarial net loss | | (28) | | | (64) | | | Other (income) expense |
Prior service benefit | | 1 | | | 1 | | | Other (income) expense |
| | (27) | | | (63) | | | Total before income tax |
| | 7 | | | 15 | | | Benefit for income tax |
| | (20) | | | (48) | | | Total net of income tax |
| | | | | | |
Total reclassifications for the period | | $ | 6 | | | $ | (61) | | | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amounts in parentheses indicate reductions to income and increases to other comprehensive income.
Reclassifications of prior service benefit and actuarial net loss in respect of retirement plans and post retirement pension plans are included in the computation of net periodic cost (see Note 14, "Retirement Plans and Post Retirement Pension Plans").
20. SEGMENT INFORMATION
Description of Segments. We are a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow.
In the first quarter of fiscal year 2022, we announced a change in organizational structure designed to enable our growth strategies and strengthen our focus on customers. Our chemistries and supplies business and our remarketed instruments business moved from our Agilent CrossLab business segment to our life sciences and applied markets business segment. We also moved BioTek's service revenue and related cost of sales from our life sciences and applied markets business segment to our Agilent CrossLab business segment. The historical financial segment information has been recast to conform to this new presentation. There was no change to our diagnostics and genomics business segment.
Following this reorganization, we continue to have three business segments comprised of life sciences and applied markets, diagnostics and genomics and Agilent CrossLab, each of which continues to comprise a reportable segment. The three operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and services and manufacturing are considered in determining the formation of these operating segments.
A description of our three reportable segments is as follows:
Our life sciences and applied markets business provides application-focused solutions that include instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular 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. Our consumables portfolio 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 to supplies. Key product categories in consumables include GC and LC columns, sample preparation products, custom chemistries, and a large selection of laboratory instrument supplies.
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 is a contract and development manufacturing organization that provides services related to and the production of synthesized oligonucleotides under pharmaceutical good manufacturing practices ("GMP") conditions for use as API in a 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 tissue and liquid-based 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 provides clinical flow cytometry reagents for routine cancer diagnostics. This business also provides bulk antibodies as raw materials and
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
associated assay development services to IVD manufacturers, biotechnology and pharmaceutical companies. 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 including NGS, utilized in clinical and life science research applications.
The Agilent CrossLab business spans the entire lab with its extensive services portfolio, which is designed to improve customer outcomes. The majority of the portfolio is vendor neutral, meaning we can serve and supply customers regardless of their instrument purchase choices. The services portfolio include repairs, parts, maintenance, installations, training, compliance support, software as a service, asset management, consulting and various other custom services to support the customers' laboratory operations. Custom services are tailored to meet the specific application needs of various industries and to keep instruments fully operational and compliant with the respective industry requirements.
A significant portion of the segments' expenses arises from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include legal, accounting, tax, real estate, insurance services, information technology services, treasury, order administration, other corporate infrastructure expenses, costs of centralized research and development and joint sales and marketing. Charges are allocated to the segments, and the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. In addition, we do not allocate asset impairments, amortization of acquisition-related intangible assets, change in the fair value of acquisition-related contingent consideration, acquisition and integration costs, transformational initiatives expenses, acceleration of share-based compensation expense related to workforce reduction, business exit and divestiture costs, special compliance costs and certain other charges to the operating margin for each segment because management does not include this information in its measurement of the performance of the operating segments. Transformational initiatives include expenses associated with targeted cost reduction activities such as manufacturing transfers, site consolidations, legal entity and other business reorganizations, in-sourcing or outsourcing of activities.
The following tables reflect the results of our reportable segments under our management reporting system. The performance of each segment is measured based on several metrics, including segment income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.
The profitability of each of the segments is measured after excluding items such as asset impairment charges, transformational initiatives, acquisition and integration costs, non-cash amortization of intangible assets related to business combinations, interest income, interest expense, and other items as noted in the reconciliations below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Life Sciences and Applied Markets | | Diagnostics and Genomics | | Agilent CrossLab | | Total Segments |
| (in millions) |
Year Ended October 31, 2022: | | | | | | | |
Total net revenue | $ | 4,007 | | | $ | 1,389 | | | $ | 1,452 | | | $ | 6,848 | |
Income from operations | $ | 1,186 | | | $ | 301 | | | $ | 370 | | | $ | 1,857 | |
Depreciation expense | $ | 59 | | | $ | 39 | | | $ | 22 | | | $ | 120 | |
Share-based compensation expense (1) | $ | 69 | | | $ | 25 | | | $ | 26 | | | $ | 120 | |
Year Ended October 31, 2021: | | | | | | | |
Total net revenue | $ | 3,663 | | | $ | 1,296 | | | $ | 1,360 | | | $ | 6,319 | |
Income from operations | $ | 1,017 | | | $ | 273 | | | $ | 323 | | | $ | 1,613 | |
Depreciation expense | $ | 60 | | | $ | 39 | | | $ | 23 | | | $ | 122 | |
Share-based compensation expense (1) | $ | 60 | | | $ | 22 | | | $ | 24 | | | $ | 106 | |
Year Ended October 31, 2020: | | | | | | | |
Total net revenue | $ | 3,115 | | | $ | 1,047 | | | $ | 1,177 | | | $ | 5,339 | |
Income from operations | $ | 792 | | | $ | 192 | | | $ | 272 | | | $ | 1,256 | |
Depreciation expense | $ | 58 | | | $ | 39 | | | $ | 22 | | | $ | 119 | |
Share-based compensation expense (1) | $ | 46 | | | $ | 17 | | | $ | 18 | | | $ | 81 | |
(1) Share-based compensation expense in 2022, 2021 and 2020 excludes amounts not allocated to the segments related to accelerated share-based compensation expense from workforce reduction and from our acquisition of BioTek and Resolution Bioscience.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reconciles reportable segments' income from operations to Agilent's total enterprise income before taxes:
| | | | | | | | | | | | | | | | | |
| Years Ended October 31, |
| 2022 | | 2021 | | 2020 |
| (in millions) |
Total reportable segments' income from operations | $ | 1,857 | | | $ | 1,613 | | | $ | 1,256 | |
Amortization of intangible assets related to business combinations | (191) | | | (194) | | | (184) | |
Acquisition and integration costs | (25) | | | (41) | | | (41) | |
Transformational initiatives | (30) | | | (37) | | | (53) | |
| | | | | |
Acceleration of share-based compensation expense related to workforce reduction | — | | | (1) | | | (2) | |
Asset impairments | — | | | (2) | | | (99) | |
Business exit and divestiture costs | (7) | | | (5) | | | (2) | |
| | | | | |
Change in fair value of contingent consideration | 25 | | | 21 | | | — | |
| | | | | |
Special compliance costs | — | | | (1) | | | — | |
Other (1) | (11) | | | (6) | | | (29) | |
Interest Income | 9 | | | 2 | | | 8 | |
Interest Expense | (84) | | | (81) | | | (78) | |
Other income (expense), net (2) | (39) | | | 92 | | | 66 | |
Income before taxes, as reported | $ | 1,504 | | | $ | 1,360 | | | $ | 842 | |
(1) For the year ended October 31, 2020, the other category primarily includes legal costs related to a claim we pursued against Twist Bioscience Corporation in addition to other miscellaneous adjustments.
(2) For the year ended October 31, 2022 and 2021, other income (expense), net includes net gains and losses on the fair value of equity securities. For the year ended October 31, 2020, other income (expense), net includes the settlement of a legal claim against Twist Bioscience Corporation.
Major Customers. No customer represented 10 percent or more of our total net revenue in 2022, 2021 or 2020.
The following table reflects segment assets and capital expenditures under our management reporting system. Segment assets include allocations of corporate assets, goodwill, net other intangibles and other assets. Unallocated assets primarily consist of cash, cash equivalents, short-term and long-term investments, deferred tax assets, right-of use assets and other assets.
| | | | | | | | | | | | | | | | | | | | | | | |
| Life Sciences and Applied Markets | | Diagnostics and Genomics | | Agilent CrossLab | | Total Segments |
| (in millions) |
As of and for the Year Ended October 31, 2022: | | | | | | | |
Assets | $ | 3,955 | | | $ | 3,489 | | | $ | 869 | | | $ | 8,313 | |
Capital expenditures | $ | 77 | | | $ | 181 | | | $ | 33 | | | $ | 291 | |
As of and for the Year Ended October 31, 2021: | | | | | | | |
Assets | $ | 3,741 | | | $ | 3,320 | | | $ | 839 | | | $ | 7,900 | |
Capital expenditures | $ | 64 | | | $ | 100 | | | $ | 24 | | | $ | 188 | |
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table reconciles segment assets to Agilent's total assets:
| | | | | | | | | | | |
| October 31, |
| 2022 | | 2021 |
| (in millions) |
Total reportable segments' assets | $ | 8,313 | | | $ | 7,900 | |
Cash and cash equivalents | 1,053 | | | 1,484 | |
| | | |
Short-term investments | — | | | 91 | |
Prepaid expenses | 119 | | | 91 | |
Long-term investments | 195 | | | 185 | |
Long-term and other receivables | 134 | | | 126 | |
Deferred tax assets | 246 | | | 309 | |
Right of use assets | 150 | | | 178 | |
Other | 322 | | | 341 | |
Total assets | $ | 10,532 | | | $ | 10,705 | |
The other category primarily includes over funded pension plans which are not allocated to the segments.
The following table presents summarized information for net revenue by geographic region. Revenues from external customers are generally attributed to countries based upon the customers' location.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | China(1) | | | | Rest of the World | | Total |
| (in millions) |
Net revenue: | | | | | | | | | |
Year Ended October 31, 2022 | $ | 2,385 | | | $ | 1,499 | | | | | $ | 2,964 | | | $ | 6,848 | |
Year Ended October 31, 2021 | $ | 2,159 | | | $ | 1,273 | | | | | $ | 2,887 | | | $ | 6,319 | |
Year Ended October 31, 2020 | $ | 1,752 | | | $ | 1,087 | | | | | $ | 2,500 | | | $ | 5,339 | |
1.China also includes Hong Kong net revenue.
The following table presents summarized information for long-lived assets by geographic region. Long lived assets consist of property, plant, and equipment, right-of-use assets, long-term receivables and other long-term assets excluding intangible assets. The rest of the world primarily consists of Asia and the rest of Europe.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | | | Germany | | Rest of the World | | Total |
| (in millions) |
Long-lived assets: | | | | | | | | | |
October 31, 2022 | $ | 1,080 | | | | | $ | 151 | | | $ | 492 | | | $ | 1,723 | |
October 31, 2021 | $ | 912 | | | | | $ | 134 | | | $ | 587 | | | $ | 1,633 | |