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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(MARK ONE) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended July 31, 2019 
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For transition period from              to        
 Commission File Number: 001-15405
 AGILENT TECHNOLOGIES, INC.
(Exact Name of registrant as specified in its charter)
 
Delaware
 
 
 
77-0518772
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
5301 Stevens Creek Blvd.,
Santa Clara, California 95051
(Address of principal executive offices)

Registrant’s telephone number, including area code: (408) 345-8886  

Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
 
Trading Symbol
 
Name of each Exchange on which registered
Common Stock, $0.01 par value
 
 
A
 
 
 
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  
 Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No    
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
Emerging growth company
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No   

As of  August 23, 2019, the registrant had 309,467,678 shares of common stock, $0.01 par value per share, outstanding.


Table of Contents

AGILENT TECHNOLOGIES, INC.
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I
— FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
July 31,
 
July 31,
 
2019
 
2018
 
2019
 
2018
Net revenue:
 

 
 

 
 

 
 

Products
$
949

 
$
907

 
$
2,850

 
$
2,755

Services and other
325

 
296

 
946

 
865

Total net revenue
1,274

 
1,203

 
3,796

 
3,620

Costs and expenses:
 

 
 

 
 

 
 

Cost of products
411

 
381

 
1,225

 
1,170

Cost of services and other
171

 
163

 
503

 
478

Total costs
582

 
544

 
1,728

 
1,648

Research and development
101

 
97

 
302

 
283

Selling, general and administrative
366

 
341

 
1,075

 
1,029

Total costs and expenses
1,049

 
982

 
3,105

 
2,960

Income from operations
225

 
221

 
691

 
660

Interest income
10

 
9

 
30

 
28

Interest expense
(18
)
 
(18
)
 
(53
)
 
(57
)
Other income (expense), net
5

 
30

 
20

 
71

Income before taxes
222

 
242

 
688

 
702

Provision (benefit) for income taxes
31

 
6

 
(189
)
 
581

Net income
$
191

 
$
236

 
$
877

 
$
121

 
 
 
 
 
 
 
 
Net income per share:
 

 
 

 
 
 
 
Basic
$
0.61

 
$
0.74

 
$
2.78

 
$
0.38

Diluted
$
0.60

 
$
0.73

 
$
2.74

 
$
0.37

 
 
 
 
 
 
 
 
Weighted average shares used in computing net income per share:
 

 
 

 
 

 
 

Basic
312

 
320

 
316

 
322

Diluted
316

 
324

 
320

 
326

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


3

Table of Contents

AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)

 
Three Months Ended
Nine Months Ended
 
July 31,
July 31,
 
2019
 
2018
2019
 
2018
 
 
 
 
 
 
 
Net income
$
191

 
$
236

$
877

 
$
121

Other comprehensive income (loss):
 
 
 
 
 
 
Unrealized gain on derivative instruments, net of tax expense of $1, $2, $0 and $0
3

 
6

2

 
3

Amounts reclassified into earnings related to derivative instruments, net of tax expense (benefit) of $(1), $0, $(2) and $2

 
1

(4
)
 
4

Foreign currency translation, net of tax expense (benefit) of $(1), $0, $(10) and $0
(12
)
 
(39
)
1

 
(13
)
Net defined benefit pension cost and post retirement plan costs:
 
 
 
 
 
 
Change in actuarial net loss, net of tax expense of $5, $3, $11 and $8
5

 
8

17

 
21

Change in net prior service benefit, net of tax benefit of $0, $(1), $(1) and $(2)
(2
)
 
(1
)
(5
)
 
(4
)
Other comprehensive income (loss)
(6
)
 
(25
)
11

 
11

Total comprehensive income
$
185

 
$
211

$
888

 
$
132



The accompanying notes are an integral part of these condensed consolidated financial statements.


4

Table of Contents

AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share amounts)
(Unaudited)
 
July 31,
2019
 
October 31,
2018
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,765

 
$
2,247

Accounts receivable, net
856

 
776

Inventory
660

 
638

Other current assets
176

 
187

Total current assets
3,457

 
3,848

Property, plant and equipment, net
839

 
822

Goodwill
3,107

 
2,973

Other intangible assets, net
511

 
491

Long-term investments
99

 
68

Other assets
612

 
339

Total assets
$
8,625

 
$
8,541

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
316

 
$
340

Employee compensation and benefits
270

 
304

Deferred revenue
344

 
324

Short-term debt
504

 

Other accrued liabilities
188

 
203

Total current liabilities
1,622

 
1,171

Long-term debt
1,294

 
1,799

Retirement and post-retirement benefits
225

 
239

Other long-term liabilities
737

 
761

Total liabilities
3,878

 
3,970

Commitments and contingencies (Note 12)


 


Total equity:
 

 
 

Stockholders’ equity:
 

 
 

Preferred stock; $0.01 par value; 125 million shares authorized; none issued and outstanding

 

Common stock; $0.01 par value; 2 billion shares authorized; 310 million shares at July 31, 2019 and 318 million shares at October 31, 2018 issued
3

 
3

Additional paid-in-capital
5,270

 
5,308

Accumulated deficit
(122
)
 
(336
)
Accumulated other comprehensive loss
(404
)
 
(408
)
Total stockholders' equity
4,747

 
4,567

Non-controlling interest

 
4

Total equity
4,747

 
4,571

Total liabilities and equity
$
8,625

 
$
8,541


 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
 
Nine Months Ended
 
July 31,
 
2019
 
2018
 
 

 
 

Net income
$
877

 
$
121

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
162

 
154

Share-based compensation
57

 
56

Deferred taxes
(267
)
 
(21
)
Excess and obsolete inventory related charges
12

 
22

Gain on step acquisition

 
(20
)
Other non-cash expense, net
4

 
7

Changes in assets and liabilities:
 

 
 

Accounts receivable
(58
)
 
(9
)
Inventory
(31
)
 
(66
)
Accounts payable

 
(9
)
Employee compensation and benefits
(35
)
 
(24
)
Change in assets and liabilities due to Tax Act

 
533

Other assets and liabilities
(14
)
 
(29
)
Net cash provided by operating activities
707

 
715

 
 
 
 
Cash flows from investing activities:
 

 
 

Investments in property, plant and equipment
(125
)
 
(141
)
Payment to acquire fair value investments
(21
)
 
(11
)
Payment in exchange for convertible note
(2
)
 
(2
)
Payment to acquire intangible assets
(1
)
 

Acquisitions of businesses and intangible assets, net of cash acquired
(248
)
 
(437
)
Net cash used in investing activities
(397
)
 
(591
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Issuance of common stock under employee stock plans
52

 
53

Payment of taxes related to net share settlement of equity awards
(15
)
 
(29
)
Payment of dividends
(155
)
 
(144
)
Purchase of non-controlling interest
(4
)
 

Proceeds from revolving credit facility

 
483

Repayment of debt and revolving credit facility

 
(693
)
Treasury stock repurchases
(674
)
 
(336
)
Net cash used in financing activities
(796
)
 
(666
)
 
 
 
 
Effect of exchange rate movements
3

 
(5
)
 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
(483
)
 
(547
)
 
 
 
 
Cash, cash equivalents and restricted cash at beginning of period
2,254

 
2,686

Cash, cash equivalents and restricted cash at end of period
$
1,771

 
$
2,139

 
 
 
 
Supplemental cash flow information:
 
 
 
Income tax paid, net
$
108

 
$
86

Interest payments
$
61

 
$
68

Non-cash changes in investments in property, plant and equipment - increase (decrease)
$
(26
)
 
$
(24
)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Table of Contents

AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions, except number of shares in thousands)
(Unaudited)
 
Common Stock
 
Treasury Stock
 
 
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
 
 
 
 
 
Three Months Ended July 31, 2019
Number
of
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Number
of
Shares
 
Treasury
Stock at
Cost
 
Retained
Earnings
(Accumulated Deficit)
 
Total Stockholders' Equity
 
Non-
Controlling
Interest
 
Total
Equity
Balance as of April 30, 2019
317,285

 
$
3

 
$
5,343

 
(9
)
 
$
(1
)
 
178

 
$
(398
)
 
$
5,125

 
$

 
$
5,125

Components of comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
191

 

 
191

 

 
191

Other comprehensive loss

 

 

 

 

 

 
(6
)
 
(6
)
 

 
(6
)
Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
185

 
 
 
185

Cash dividends declared ($0.164 per common share)

 

 

 

 

 
(51
)
 

 
(51
)
 

 
(51
)
Share-based awards issued, net of tax
325

 

 
19

 

 

 

 

 
19

 

 
19

Repurchase of common stock

 

 

 
(8,004
)
 
(549
)
 

 

 
(549
)
 

 
(549
)
Retirement of treasury stock
(8,013
)
 

 
(110
)
 
8,013

 
550

 
(440
)
 

 

 

 

Share-based compensation

 

 
18

 

 

 

 

 
18

 

 
18

Balance as of July 31, 2019
309,597

 
$
3

 
$
5,270

 

 
$

 
$
(122
)
 
$
(404
)
 
$
4,747

 
$

 
$
4,747


 
Common Stock
 
Treasury Stock
 
 
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
 
 
 
 
 
Nine Months Ended July 31, 2019
Number
of
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Number
of
Shares
 
Treasury
Stock at
Cost
 
Retained
Earnings
(Accumulated Deficit)
 
Total Stockholders' Equity
 
Non-
Controlling
Interest
 
Total
Equity
Balance as of October 31, 2018
317,715

 
$
3

 
$
5,308

 

 
$

 
$
(336
)
 
$
(408
)
 
$
4,567

 
$
4

 
$
4,571

Effects of adoption of new accounting standards

 

 

 

 

 
33

 
(7
)
 
26

 

 
26

Components of comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
Net income

 

 

 

 

 
877

 

 
877

 

 
877

Other comprehensive income

 

 

 

 

 

 
11

 
11

 

 
11

Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
888

 
 
 
888

Change in non-controlling interest

 

 

 

 

 

 

 

 
(4
)
 
(4
)
Cash dividends declared ($0.492 per common share)             

 

 

 

 

 
(155
)
 

 
(155
)
 

 
(155
)
Share-based awards issued, net of tax
1,652

 

 
37

 

 

 

 

 
37

 

 
37

Repurchase of common stock

 

 

 
(9,770
)
 
(674
)
 

 

 
(674
)
 

 
(674
)
Retirement of treasury stock
(9,770
)
 

 
(133
)
 
9,770

 
674

 
(541
)
 

 

 

 

Share-based compensation

 

 
58

 

 

 

 

 
58

 

 
58

Balance as of July 31, 2019
309,597

 
$
3

 
$
5,270

 

 
$

 
$
(122
)
 
$
(404
)
 
$
4,747

 
$

 
$
4,747




7

Table of Contents

 
Common Stock
 
Treasury Stock
 
 
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
 
 
 
 
 
Three Months Ended July 31, 2018
Number
of
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Number
of
Shares
 
Treasury
Stock at
Cost
 
Retained
Earnings
(Accumulated Deficit)
 
Total Stockholders' Equity
 
Non-
Controlling
Interest
 
Total
Equity
Balance as of April 30, 2018
322,315

 
$
3

 
$
5,332

 

 
$

 
$
(412
)
 
$
(310
)
 
$
4,613

 
$
4

 
$
4,617

Components of comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
236

 

 
236

 

 
236

Other comprehensive loss

 

 

 

 

 

 
(25
)
 
(25
)
 

 
(25
)
Total comprehensive income
 

 
 

 
 

 
 

 
 

 
 

 
 

 
211

 
 
 
211

Cash dividends declared ($0.149 per common share)             

 

 

 

 

 
(48
)
 

 
(48
)
 

 
(48
)
Share-based awards issued, net of tax
351

 

 
18

 

 

 

 

 
18

 

 
18

Repurchase of common stock

 

 

 
(3,762
)
 
(243
)
 

 

 
(243
)
 

 
(243
)
Retirement of treasury stock
(3,762
)
 

 
(51
)
 
3,762

 
243

 
(192
)
 

 

 

 

Share-based compensation

 

 
13

 

 

 

 

 
13

 

 
13

Balance as of July 31, 2018
318,904

 
$
3

 
$
5,312

 

 
$

 
$
(416
)
 
$
(335
)
 
$
4,564

 
$
4

 
$
4,568


 
Common Stock
 
Treasury Stock
 
 
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
 
 
 
 
 
Nine Months Ended July 31, 2018
Number
of
Shares
 
Par
Value
 
Additional
Paid-in
Capital
 
Number
of
Shares
 
Treasury
Stock at
Cost
 
Retained
Earnings
(Accumulated Deficit)
 
Total Stockholders' Equity
 
Non-
Controlling
Interest
 
Total
Equity
Balance as of October 31, 2017
321,975

 
$
3

 
$
5,300

 

 
$

 
$
(126
)
 
$
(346
)
 
$
4,831

 
$
4

 
$
4,835

Components of comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 
121

 

 
121

 

 
121

Other comprehensive income

 

 

 

 

 

 
11

 
11

 

 
11

Total comprehensive loss
 

 
 

 
 

 
 

 
 

 
 

 
 

 
132

 
 
 
132

Cash dividends declared ($0.447 per common share)             

 

 

 

 

 
(144
)
 

 
(144
)
 

 
(144
)
Share-based awards issued, net of tax
2,039

 

 
25

 

 

 

 

 
25

 

 
25

Repurchase of common stock

 

 

 
(5,110
)
 
(336
)
 

 

 
(336
)
 

 
(336
)
Retirement of treasury stock
(5,110
)
 

 
(69
)
 
5,110

 
336

 
(267
)
 

 

 

 

Share-based compensation

 

 
56

 

 

 

 

 
56

 

 
56

Balance as of July 31, 2018
318,904

 
$
3

 
$
5,312

 

 
$

 
$
(416
)
 
$
(335
)
 
$
4,564

 
$
4

 
$
4,568


The accompanying notes are an integral part of these consolidated financial statements.


8

Table of Contents

AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
OVERVIEW, BASIS OF PRESENTATION 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.

Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, these dates refer to our fiscal year and fiscal quarters.

Basis of Presentation. We have prepared the accompanying financial data for the three and nine months ended July 31, 2019 and 2018 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations. The October 31, 2018 condensed balance sheet data was derived from audited financial statements but does not include all the disclosures required in audited financial statements by U.S. GAAP. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of our condensed consolidated balance sheet as of July 31, 2019 and October 31, 2018, condensed consolidated statement of comprehensive income (loss) for the three and nine months ended July 31, 2019 and 2018, condensed consolidated statement of operations for the three and nine months ended July 31, 2019 and 2018, condensed consolidated statement of cash flows for the nine months ended July 31, 2019 and 2018 and condensed consolidated statement of equity for the three and nine months ended July 31, 2019 and 2018.

Use of Estimates. The preparation of condensed consolidated financial statements in accordance with GAAP in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our condensed 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, inventory valuation, share-based compensation, retirement and post-retirement benefit plan assumptions, goodwill and purchased intangible assets and accounting for income taxes.

Fair Value of Financial Instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of long-term equity investments 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 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. The fair value of our senior notes, calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance fair value hierarchy, exceeds the carrying value by approximately $53 million and is lower than the carrying value by approximately $15 million as of July 31, 2019 and October 31, 2018, respectively. The change in the fair value over carrying value in the nine months ended July 31, 2019 is primarily due to fluctuations in market interest rates. 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 9, "Fair Value Measurements" for additional information on the fair value of financial instruments.

Revenue Recognition.    We enter into agreements to sell products (hardware and/or software), services and other arrangements (multiple element arrangements) that include combinations of products and services.

We 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 2, "New Accounting Pronouncements" and Note 3, "Revenue" for additional information on revenue recognition.

9

AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)


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 to in exchange for those products or services, the transaction price. For equipment, consumables, and most software licenses sold by us, control transfers to the customer at a point in time. We use present right to payment, legal title, physical possession of the asset, and risks and rewards of ownership as indicators to determine the transfer of control to the customer. Where acceptance is not a formality, the customer must have documented their acceptance of the product or service. For products that include installation, if the installation meets the criteria to be considered a separate performance obligation, product revenue is recognized when control has passed to the customer, and recognition of installation revenue occurs once completed. Product revenue, including sales to resellers and distributors is reduced for provisions for warranties, returns, and other adjustments in the period the related sales are recorded.

Revenue from services 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. These contracts are 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 are recognized to revenue at the time a service is performed.

We have sales from standalone software. These arrangements typically include software licenses and maintenance contracts, both of which we have determined are distinct performance obligations. We determine the amount of the transaction price to allocate to the license and maintenance contract based on the relative standalone selling price of each performance obligation. Software license revenue is recognized at the point in time when control has been transferred to the customer. The revenue allocated to the software maintenance contract is recognized on a straight-line basis over the maintenance period, which is the contractual term of the contract, as a time-based measure of progress best reflects our performance in satisfying this obligation. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a when-and-if-available basis.

Our multiple-element arrangements are generally comprised of a combination of instruments, installation or other start-up services, and/or software, and/or support or services. Hardware and software elements are typically delivered at the same time and revenue is recognized when control passes to the customer. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. Our arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.

For contracts with multiple performance obligations, we allocate the consideration to which we expect to be entitled to each performance obligation based on relative standalone selling prices and recognize the related revenue when or as control of each individual performance obligation is transferred to customers. We estimate the standalone selling price by calculating the average historical selling price of our products and services per country for each performance obligation. Stand-alone selling prices are determined at contract inception 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 840, Leases. Each of these contracts is evaluated as a lease arrangement, either as an operating lease or a sales-type capital lease using the current lease classification guidance.

 2. NEW ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Not Yet Adopted

There were no changes to the new accounting pronouncements not yet adopted as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2018 except for the following:

In February 2016, the Financial Accounting Standards Board ("FASB") issued guidance which amends the existing accounting standards for leases. Consistent with existing guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize right-of-use assets and lease liabilities on the balance sheet. In July 2018, the FASB clarified two requirements in the new leases standard. The FASB decided to provide another transition method by allowing companies to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, the FASB decided to provide lessors with a practical expedient to not separate

10

AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)


nonlease components from the associated lease component, similar to the expedient provided for lessees. In December 2018, the FASB update clarified application of Accounting Standard Codification ("ASC") Topic 842, Leases. The new guidance is effective for us beginning November 1, 2019, and for interim periods within that year. Early adoption is permitted, and we will be required to adopt using a modified retrospective approach. We are evaluating the impact of this guidance on our consolidated financial statements and disclosures.


Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued new revenue recognition guidance, ASC Topic 606, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The objective of the new revenue standard is to significantly enhance comparability and clarify principles of revenue recognition practices across entities, industries, jurisdictions and capital markets. Under the new guidance, there are specific criteria to determine if a performance obligation should be recognized over time or at a point in time.

On November 1, 2018, we adopted ASC 606 using the modified retrospective approach only to contracts not completed as of this date. Results for reporting periods after November 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with ASC Topic 605, Revenue Recognition.

We recorded a net increase to beginning retained earnings of $23 million as of November 1, 2018 due to the cumulative impact of adopting ASC 606. The impact to beginning retained earnings is primarily due to an increase in contract assets (unbilled accounts receivable), a reduction in inventory and a reduction in contract liabilities (deferred revenue). The net increase in retained earnings and resulting changes in assets and liabilities was mainly driven by the change in timing of the recognition of revenue from the fulfillment of separate performance obligations as control transfers to the customer.

Had we continued to use the revenue recognition guidance in effect prior to 2018, no material changes would have resulted to the consolidated statements of income, comprehensive income, or cash flows for the three and nine months ended July 31, 2019. Refer to Note 1, for a description of the company’s revenue recognition policies and Note 3, "Revenue" for the disclosures required by the standard.

As of November 1, 2018, we elected to early adopt new accounting guidance which amends reporting comprehensive income to allow a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for the deferred taxes previously recorded in AOCI that exceed the current federal tax rate of 21 percent resulting from the enacted corporate tax rate in the U.S. Tax Cuts and Jobs Act ("the Tax Act"). The adoption of this guidance resulted in a reclassification of $7 million from AOCI to beginning retained earnings on our condensed consolidated balance sheet.

As of November 1, 2018, we adopted new accounting guidance which eliminates the exception in ASC 740, Income Taxes against immediate recognition of income tax consequences of intra-entity transfers of assets other than inventory. The amendment in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of period of adoption. We recorded a net decrease in beginning retained earnings of $2 million as of November 1, 2018 due to removing unamortized tax expense previously deferred.

As of November 1, 2018, we adopted new accounting guidance which addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments and also the related guidance which addresses technical corrections and improvements to this guidance. The guidance requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. The total impact of adoption to our condensed consolidated balance sheet was an increase of $7 million to long-term investments and a net increase of $5 million to beginning retained earnings.



11

AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)


The following table summarizes the impacts of recently adopted accounting pronouncements on our condensed consolidated balance sheet as of November 1, 2018:

 
October 31,
2018
 
Impact of Adopting New
 
November 1,
2018
 
As Reported
 
Revenue Recognition Guidance
 
Tax Effects on Items in AOCI Guidance
 
Intra-Entity Tax Guidance
 
Investments Valuation Guidance
 
As Adopted
 
(in millions)
ASSETS
 

 
 
 
 
 
 
 
 
 
 

Current assets:
 

 
 
 
 
 
 
 
 
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