AGILENT TECHNOLOGIES, INC. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding growth opportunities, including for revenue and our end markets, strength and drivers of the markets into which we sell, sales funnels, our strategic direction, new product and service introductions and the position of our current products and services, market demand for and adoption of our products, the ability of our products and solutions to address customer needs and meet industry requirements, our focus on differentiating our product solutions, improving our customers' experience and growing our earnings, future financial results, our operating margin, mix, our investments, including in manufacturing infrastructure, research and development and expanding and improving our applications and solutions portfolios, expanding our position in developing countries and emerging markets, our focus on balanced capital allocation, our contributions to our pension and other defined benefit plans, impairment of goodwill and other intangible assets, the impact of foreign currency movements, our hedging programs and other actions to offset the effects of tariffs and foreign currency movements, our future effective tax rate, tax valuation allowance and unrecognized tax benefits, the impact of local government regulations on our ability to pay vendors or conduct operations, our ability to satisfy our liquidity requirements, including through cash generated from operations, the potential impact of adopting new accounting pronouncements, indemnification, source and supply of materials used in our products, our sales, our purchase commitments, our capital expenditures, the integration and effects of our acquisitions and other transactions, our stock repurchase program and dividends and the potential or anticipated direct or indirect impact of COVID-19 on our business that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Part I Item 1A and elsewhere in this Form 10-K.
Overview and Executive Summary
Agilent Technologies Inc. ("we", "Agilent" or the "company"), incorporated inDelaware inMay 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.
COVID-19 Pandemic
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. Many countries, including the United States ,
implemented measures such as quarantine, shelter-in-place, curfew, travel and
activity restrictions and similar isolation measures, including government
orders and other restrictions on the conduct of business operations at different
times. Due to these measures, we experienced unpredictable reductions or
increases in demand for certain of our products, disruptions or delays in
shipments of certain materials or components of our products, and delays in
installations and services due to the inability to access customer sites,
primarily in the latter part of our second quarter.
As an essential business throughout the COVID-19 pandemic, we have remained open
with our top priority being the health and safety of our employees, customers
and community. At every stage of the pandemic, we have taken decisive and
appropriate precautions, including a mandatory work from home policy for all
employees with the exception of manufacturing, distribution, and certain
laboratory environments, as well as restrictions on all non-essential travel and
visitors into our facilities. At this time, our factories continue to operate
around the world in accordance with the guidance issued by local, state and
national government authorities. Our digital workplace strategy and strategic
technology investments have enabled us to provide modern connectivity and
collaboration tools to our employees to meet remote working needs as this
situation has escalated. We have taken and continue to take proactive measures
to ensure the health and safety of our global employee base. We designed a
multi-phase return-to-office process for the safe return of our employees to our
sites. We developed and implemented rigorous return-to-office protocols to
promote a safe work environment in all locations for employees who have been
working on-site throughout the pandemic and for employees who will be returning
in the future, as well as, for the safety of all customer and vendor
interactions.
At this time, the COVID-19 pandemic has not significantly impacted our
manufacturing facilities or third parties to whom we outsource certain
manufacturing processes, the distribution centers where our inventory is managed
or the operations of our logistics and other service providers. We continue
working with our customers and suppliers to understand the existing and
potential future negative impacts to our delivery and supply chain and take
actions in an effort to mitigate such impacts. The majority of the markets we
serve, such as the pharmaceutical, biopharmaceutical, food, environmental and
diagnostics and clinical markets, have continued to operate at various levels
throughout the pandemic, and we continue working closely with
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our customers to ensure their seamless operations. From a customer-facing
perspective, we continue leveraging digital demand generation activities,
including virtual demonstrations across all regions, remote instrument repairs,
virtual sales seminars, online product training, and rapid one-on-one
communications over emails, phone and video conferencing.
Despite the economic challenges due to the COVID-19 pandemic, we ended fiscal
year 2020 with revenue growth of 3 percent year over year with revenue growth
from most of our key end markets. In the latter part of the fiscal year, our
Agilent CrossLab business began to see an increase in revenue for our on-demand
services and installation services due to the re-opening of laboratories around
the world, especially in Europe . While we began to see elective medical
procedures resume in the fourth quarter, revenue from our diagnostics and
genomics business continues to be negatively impacted by the COVID-19 pandemic.
In our life sciences and applied markets business, we saw an increase in demand
for some of our products for use in the COVID-19 testing, vaccine and
therapeutic drug development. We also benefited from our cost savings actions
which included reduction in travel and non-essential spending.
The COVID-19 pandemic continues to be dynamic, and near-term challenges across
the economy remain. Although we anticipate there will be vaccines distributed
widely in the near future, we expect continued volatility and unpredictability
related to the impact of COVID-19 on our business results. We continue to
actively monitor the pandemic and we will continue to take appropriate steps to
mitigate the adverse impacts on our business posed by the on-going spread of
COVID-19.
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 .
Acquisitions
In 2019, we acquired 100 percent of the stock of ACEA Biosciences Inc. ("ACEA"),
a developer of cell analysis tools, for $250 million . In addition, we completed
the acquisition of privately-owned Lionheart Technologies LLC ("BioTek"), a
leader in the design, manufacture and distribution of innovative life science
instrumentation for $1.17 billion . The financial results of these businesses
have been included in our financial results from the date of the close.
Actual Results
Agilent's net revenue of$5,339 million in 2020 increased 3 percent when compared to 2019. Foreign currency movements for 2020 had an overall unfavorable impact on revenue of approximately 1 percentage point compared to 2019. In 2020, acquisitions from 2019 had an overall favorable impact of 3 percentage points when compared to 2019. Revenue in the life sciences and applied markets business increased 4 percent in 2020 when compared to 2019. In 2020 acquisitions from 2019 had an overall favorable impact of 7 percentage points when compared to 2019. Foreign currency movements had no overall impact on revenue in 2020 when compared to 2019. Revenue in the diagnostics and genomics business increased 2 percent in 2020 when compared to 2019. Foreign currency movements had an overall unfavorable impact on revenue of 1 percentage point in 2020 when compared to 2019. Revenue in the Agilent CrossLab business increased 3 percent in 2020 when compared to 2019. Foreign currency movements had an overall unfavorable impact on revenue of 1 percentage point in 2020 when compared to 2019. Agilent's net revenue of$5,163 million increased 5 percent in 2019 when compared to 2018. Foreign currency movements for 2019 had an overall unfavorable impact on revenue of approximately 2 percentage points compared to 2018. In 2019, acquisitions from 2018 had an overall favorable impact of 2 percentage points when compared to 2018. Revenue in the life sciences and applied markets business increased 1 percent in 2019 when compared to 2018. Foreign currency movements had an overall unfavorable impact on revenue of 2 percentage points in 2019 when compared to 2018. Revenue in the diagnostics and genomics business increased 8 percent in 2019 when compared to 2018. Foreign currency movements had an overall unfavorable impact of 3 percentage points on revenue in 2019 when compared to 2018. Revenue in the Agilent CrossLab business increased 8 percent in 2019 when compared to 2018. Foreign currency movements had an overall unfavorable impact on revenue of 3 percentage points in 2019 when compared to 2018. Net income was$719 million in 2020 compared to net income of$1,071 million and$316 million in 2019 and 2018, respectively. Net income in 2020 was impacted by revenue declines in certain of our businesses associated with the COVID-19 pandemic and increased costs and expenses which included an impairment charge of$98 million related to the closure of our 32 -------------------------------------------------------------------------------- Table of Contents sequencer development program. Net income for the year endedOctober 31, 2019 was impacted by a discrete tax benefit of$299 million related to the extension of the company's tax incentives inSingapore . Net income for the year endedOctober 31, 2018 was impacted by a discrete tax charge of$552 million related to the enactment of the Tax Act that was passed onDecember 22, 2017 . As ofOctober 31, 2020 and 2019, we had cash and cash equivalents balances of$1,441 million and$1,382 million , respectively. OnMay 28, 2015 we announced that our board of directors had approved a share repurchase program (the "2015 repurchase program"). The 2015 share repurchase program authorizes the purchase of up to$1.14 billion of our common stock at the company's discretion through and includingNovember 1, 2018 . The 2015 repurchase program did not require the company to acquire a specific number of shares and could have been suspended or discontinued at any time. During the year endedOctober 31, 2018 , we repurchased and retired approximately 6.4 million shares for$422 million under this authorization. As ofOctober 31, 2018 , we had remaining authorization to repurchase up to$188 million of our common stock under this program which expired onNovember 1, 2018 . OnNovember 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 endedOctober 31, 2019 , we repurchased and retired 10.4 million shares for$723 million under this authorization. During the year endedOctober 31, 2020 , we repurchased and retired approximately 5.2 million shares for$469 million under this authorization. As ofOctober 31, 2020 , we had remaining authorization to repurchase up to$558 million of our common stock under this program. During the year endedOctober 31, 2020 , cash dividends of 0.720 per share, or$222 million were declared and paid on the company's outstanding common stock. During the year endedOctober 31, 2019 , cash dividends of 0.656 per share, or$206 million were declared and paid on the company's outstanding common stock. During the year endedOctober 31, 2018 , cash dividends of 0.596 per share, or$191 million were declared and paid on the company's outstanding common stock. OnNovember 18, 2020 we declared a quarterly dividend of$0.194 per share of common stock, or approximately$59 million which will be paid onJanuary 27, 2021 to shareholders of record as of the close of business onJanuary 5, 2021 . The timing and amounts of any future dividends are subject to determination and approval by our board of directors. Looking forward, our top priority continues to be the health and safety of our employees, customers and community, as well as supporting our customers' operations. We also remain focused on improving our customers' experience, differentiating product solutions and productivity especially during these extraordinary times. Our focus on meeting our customers' needs supported several aspects of the COVID-19 research and testing along with therapeutic and vaccine development. While uncertainties remain as the spread of COVID-19 begins to rise, we are cautiously optimistic that in the short-term our financial results can continue to improve as the global economy continues its path towards recovery.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in theU.S. requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, retirement and post-retirement plan assumptions, valuation of goodwill and purchased intangible assets and accounting for income taxes.
Revenue Recognition. On
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.
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We derive revenue primarily from the sale of analytical and diagnostics products
and services. A performance obligation is a promise in a contract to transfer a
distinct product or service to a customer and is the unit of account under ASC
606. Revenue is recognized when control of the promised products or services is
transferred to our customers and the performance obligation is fulfilled in an
amount that reflects the consideration that we expect to be entitled in exchange
for those products or services, the transaction price. For equipment,
consumables, and most software licenses, control transfers to the customer at a
point in time. We use present right to payment, legal title, physical possession
of the asset, and risks and rewards of ownership as indicators to determine the
transfer of control to the customer. Where acceptance is not a formality, the
customer must have documented their acceptance of the product or service. For
products that include installation, if the installation meets the criteria to be
considered a separate performance obligation, product revenue is recognized when
control has passed to the customer, and recognition of installation revenue
occurs once completed. Product revenue, including sales to resellers and
distributors is reduced for provisions for warranties, returns, and other
adjustments in the period the related sales are recorded.
Service revenue includes extended warranty, customer and software support
including: Software as a Service, post contract support, consulting including
companion diagnostics, and training and education. Instrument service contracts
and software maintenance contracts are typically annual contracts, which are
billed at the beginning of the contract or maintenance period. Revenue for these
contracts is recognized on a straight-line basis to revenue over the service
period, as a time-based measure of progress best reflects our performance in
satisfying this obligation. There are no deferred costs associated with the
service contract, as the cost of the service is recorded when the service is
performed. Service calls not included in a support contract are recognized to
revenue at the time a service is performed.
We have sales from standalone software. These arrangements typically include
software licenses and maintenance contracts, both of which we have determined
are distinct performance obligations. We determine the amount of the transaction
price to allocate to the license and maintenance contract based on the relative
standalone selling price of each performance obligation. Software license
revenue is recognized at the point in time when control has been transferred to
the customer. The revenue allocated to the software maintenance contract is
recognized on a straight-line basis over the maintenance period, which is the
contractual term of the contract, as a time-based measure of progress best
reflects our performance in satisfying this obligation. Unspecified rights to
software upgrades are typically sold as part of the maintenance contract on a
when-and-if-available basis.
Our multiple-element arrangements are generally comprised of a combination of
instruments, installation or other start-up services, and/or software, and/or
support or services. Hardware and software elements are typically delivered at
the same time and revenue is recognized when control passes to the customer.
Service revenue is deferred and recognized over the contractual period or as
services are rendered and accepted by the customer. Our arrangements generally
do not include any provisions for cancellation, termination, or refunds that
would significantly impact recognized revenue.
For contracts with multiple performance obligations, we allocate the
consideration to which we expect to be entitled to each performance obligation
based on relative standalone selling prices and recognize the related revenue
when or as control of each individual performance obligation is transferred to
customers. We estimate the standalone selling price by calculating the average
historical selling price of our products and services per country for each
performance obligation. Stand-alone selling prices are determined for each
distinct good or service in the contract and then we allocate the transaction
price in proportion to those standalone selling prices by performance
obligations.
A portion of our revenue 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. 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. 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.
Inventory Valuation. We assess the valuation of our inventory on a periodic
basis and make adjustments to the value for estimated excess and obsolete
inventory based upon estimates about future demand and actual usage. Such
estimates are difficult to make under most economic conditions. The excess
balance determined by this analysis becomes the basis for our excess inventory
charge. Our excess inventory review process includes analysis of sales
forecasts, managing product rollovers and working with manufacturing to maximize
recovery of excess inventory. If actual market conditions are less favorable
than those projected by management, additional write-downs may be required. If
actual market conditions are more favorable than anticipated, inventory
previously written down may be sold to customers, resulting in lower cost of
sales and higher income from operations than expected in that period.
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Retirement and Post-Retirement Benefit Plan Assumptions. Retirement and post-retirement benefit plan costs are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to estimation. Pension accounting is intended to reflect the recognition of future benefit costs over the employees' average expected future service to Agilent based on the terms of the plans and investment and funding decisions. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are required to make assumptions using actuarial concepts within the framework of accounting principles generally accepted in theU.S. Two critical assumptions are the discount rate and the expected long-term return on plan assets. Other important assumptions include, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates, and portfolio composition. We evaluate these assumptions at least annually. The discount rate is used to determine the present value of future benefit payments at the measurement date -October 31 for bothU.S. and non-U.S. plans. For 2020 and 2019, theU.S. discount rates were based on the results of matching expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. In 2020, discount rates for theU.S. plans decreased compared to the previous year due to the decrease in the corporate bond rates. For 2020 and 2019, the discount rates for non-U.S. plans were generally based on published rates for high quality corporate bonds and in 2020, decreased marginally compared to the previous year. If we changed our discount rate by 1 percent, the impact would be less than$1 million inU.S. pension expense and$17 million on non-U.S. pension expense. Lower discount rates increase present values of the pension benefit obligation and subsequent year pension expense; higher discount rates decrease present values of the pension benefit obligation and subsequent year pension expense. The company uses alternate methods of amortization as allowed by the authoritative guidance which amortizes the actuarial gains and losses on a consistent basis for the years presented. ForU.S. Plans, gains and losses are amortized over the average future lifetime of participants using the corridor method. For most Non-U.S. Plans andU.S. Post-Retirement Benefit Plans, gains and losses are amortized using a separate layer for each year's gains and losses. In theU.S. , target asset allocations for our retirement and post-retirement benefit plans are approximately 80 percent to equities and approximately 20 percent to fixed income investments. Our Deferred Profit-Sharing Plan target asset allocation is approximately 60 percent to equities and approximately 40 percent to fixed income investments. Approximately 1 percent of the retirement and post-retirement plans consists of limited partnerships. Outside theU.S. , our target asset allocation ranges from 24 percent to 60 percent to equities, from 38 percent to 65 percent to fixed income investments, and from zero to 25 percent to real estate, depending on the plan. All plans' assets are broadly diversified. Due to fluctuations in equity markets, our actual allocations of plan assets atOctober 31, 2020 and 2019 differ from the target allocation. Our policy is to bring the actual allocation in line with the target allocation. Equity securities include exchange-traded common stock and preferred stock of companies from broadly diversified industries. Fixed income securities include a global portfolio of corporate bonds of companies from diversified industries, government securities, mortgage-backed securities, asset-backed securities, derivative instruments and other. Other investments include a group trust consisting primarily of private equity partnerships. The expected long-term return on plan assets is estimated using current and expected asset allocations as well as historical and expected returns. Plan assets are valued at fair value. If we changed our estimated return on assets by 1 percent, the impact would be$4 million onU.S. pension expense and$9 million on non-U.S. pension expense. The net periodic pension and post-retirement benefit costs recorded were a$22 million expense in 2020,$10 million expense in 2019 and$3 million benefit in 2018. The year endedOctober 31, 2020 included a loss on settlement of$4 million . The year endedOctober 31, 2018 included a settlement gain of$5 million .Goodwill and Purchased Intangible Assets. Under the authoritative guidance, we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The accounting standard gives an entity the option to first assess qualitative factors to determine whether performing the two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e., greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required. The guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers. 35 -------------------------------------------------------------------------------- Table of Contents If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We aggregate components of an operating segment that have similar economic characteristics into our reporting units. In fiscal year 2020, we assessed goodwill impairment for our three reporting units which consisted of three segments: life sciences and applied markets, diagnostics and genomics and Agilent CrossLab. We performed a qualitative test for goodwill impairment of the three reporting units as ofSeptember 30, 2020 . 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 endedOctober 31, 2020 , 2019 and 2018. Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized using the best estimate of the asset's useful life that reflect the pattern in which the economic benefits are consumed or used up or a straight-line method ranging from 6 months to 15 years. Our determination of the fair value of the intangible assets acquired involves the use of significant estimates and assumptions. Specifically, our determination of the fair value of the developed product technology and in-process research and development ("IPR&D") acquired involves significant estimates and assumptions related to revenue growth rates and discount rates. Our determination of the fair value of customer relationships acquired involves 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 involves the use of significant estimates and assumptions related to revenue growth rates, royalty rates and discount rates. The company believes that the fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that marketplace participants would use. Actual results could differ materially from these estimates. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, we will record a charge for the value of the related intangible asset to our consolidated statement of operations in the period it is abandoned. We continually monitor events and changes in circumstances that could indicate carrying amounts of finite-lived intangible assets may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of finite-lived intangible assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. During 2018, we recorded an impairment charge of$21 million related to purchased intangible assets within the diagnostics and genomics segment that were deemed unrecoverable. Our indefinite-lived intangible assets are IPR&D intangible assets. The accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more-likely-than-not (i.e., greater than 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. We performed a qualitative test for impairment of indefinite-lived intangible assets as ofSeptember 30, 2020 . Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair value of these indefinite-lived intangible assets is greater than their respective carrying values. Each quarter we review the events and circumstances to determine if impairment of indefinite-lived intangible assets is indicated. During fiscal year 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. During the year endedOctober 31, 2019 and 2018 there were no impairments of indefinite-lived intangible assets. Accounting for Income Taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period. On a quarterly basis, we provide for income taxes based upon an estimated annual effective tax rate. The effective tax rate is highly dependent 36 -------------------------------------------------------------------------------- Table of Contents upon the geographic composition of worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of our tax planning strategies. We monitor the changes in many factors and adjust our effective income tax rate on a timely basis. If actual results differ from these estimates, this could have a material effect on our financial condition and results of operations. Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more-likely-than-not that all or some portion of deferred tax assets may not be realized, a valuation allowance must be established against such deferred tax assets. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of losses in recent years and our forecast of future taxable income. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for allU.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations.
Adoption of New Pronouncements
See Note 2, "New Accounting Pronouncements," to the consolidated financial statements for a description of new accounting pronouncements.
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. Foreign currency movements for the year endedOctober 31, 2020 had an overall unfavorable impact on revenue of 1 percentage point when compared to the same period last year. The unfavorable effects of changes in foreign currency exchange rates have decreased revenue by approximately 2 percentage points for the year endedOctober 31, 2019 . When movements in foreign currency exchange rates have a negative impact on revenue, they will also have a positive impact on our costs and expenses. We calculate the impact of movements in foreign currency exchange rates by applying the actual foreign currency exchange rates in effect during the last month of each quarter of the current year to both the applicable current and prior year periods. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the consolidated statement of operations and balance sheet because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (up to a rolling thirteen-month period). We may also hedge equity balances denominated in foreign currency on a long-term basis. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact theU.S. dollar cost of the transaction. 37
-------------------------------------------------------------------------------- Table of Contents Results from OperationsNet Revenue Years Ended October 31, 2020 over 2019 2020 2019 2018 Change 2019 over 2018 Change (in millions) Net revenue: Products$ 3,993 $ 3,877 $ 3,746 3% 3% Services and other$ 1,346 $ 1,286 $ 1,168 5% 10% Total net revenue$ 5,339 $ 5,163 $ 4,914 3% 5% Years Ended October 31, 2020 over 2019 2020 2019 2018 Change 2019 over 2018 Change % of total net revenue: Products 75 % 75 % 76 % - (1) ppt Services and other 25 % 25 % 24 % - 1 ppt Total 100 % 100 % 100 % Agilent's net revenue of$5,339 million for the year endedOctober 31, 2020 increased 3 percent when compared to 2019. Foreign currency movements for 2020 had an unfavorable impact of approximately 1 percentage point when compared to 2019. Agilent's net revenue of$5,163 million increased 5 percent in 2019 when compared to 2018. Foreign currency movements for 2019 had an unfavorable impact of approximately 2 percentage points when compared to 2018. Product revenue includes revenue generated from the sales of our analytical instrumentation, software and consumables. Revenue from products increased 3 percent for the year endedOctober 31, 2020 , when compared to 2019. Revenue in 2020 was impacted by the global COVID-19 pandemic within most of our product lines as customers curtailed equipment spending at various times when countries around the world were in the lockdown phase of the COVID-19 pandemic. Growth was due to our cell analysis business, automation products and our nucleic acid solutions business. The increase in the cell analysis business is primarily due to the contributions from our acquisitions and the increased demand for our products for use in COVID-19 testing and vaccine research. Revenue from products increased 3 percent for the year endedOctober 31, 2019 , when compared to 2018. The growth in product revenue was impacted by increased sales within our cell analysis business, mainly due to contributions from our recent acquisitions. In addition, product revenue growth was impacted by strong sales in our consumables and nucleic acid solutions businesses partially offset by revenue weakness in our liquid chromatography, gas chromatography, liquid chromatography mass spectrometry and spectroscopy products. Services and other revenue increased 5 percent in 2020 as compared to 2019. Services and other revenue increased 10 percent in 2019 as compared to 2018. Services and other revenue consist of revenue generated from our three business segments: Agilent CrossLab, diagnostics and genomics and our life science and applied markets businesses. Some of the prominent services in the Agilent CrossLab business include repair and maintenance on multi-vendor instruments, compliance services and installation services. Services in the diagnostics and genomics business include consulting services related to the companion diagnostics and nucleic acid businesses. Services in the life science and applied markets business include repair and maintenance and installation services. For the year endedOctober 31, 2020 , the service revenue from the Agilent CrossLab business increased 4 percent when compared to the same period last year, with a 1 percentage point unfavorable currency impact. This growth for the year endedOctober 31, 2020 is reflective of the resilience of the contracted service business throughout the year, as well as the recovery of the on-demand and installation service businesses in the latter half of 2020, as customer sites gradually reopened following their COVID-19 related closures earlier in the year. Those site re-openings were fastest inChina . Services and other revenue in the Agilent CrossLab business increased 9 percent in 2019 as compared to 2018, with a 3 percentage point unfavorable currency impact. Nearly all major service offerings from the Agilent CrossLab business contributed to the revenue growth across all geographic regions. 38
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For the year endedOctober 31, 2020 , the service revenue from the diagnostics and genomics business remained flat when compared to the same period last year. Services in the diagnostics and genomics business in 2019 increased due to growth in service revenue throughout all our businesses when compared to 2018. For the year endedOctober 31, 2020 , the service revenue from the life sciences and applied markets business increased 28 percent when compared to the same period last year. The increase in life sciences and applied markets service revenue is due to the additional service revenue within the cell analysis business due to theLionheart Technologies LLC ("BioTek") acquisition. Services and other revenue in the life sciences and applied markets business increased in 2019 as compared to 2018 due to the impact of acquisitions made in 2019.
Net Revenue By Segment
Years Ended October 31, 2020 over 2019
2020 2019 2018 Change 2019 over 2018 Change
(in millions)
Net revenue by segment:
Life sciences and applied markets $ 2,392 $ 2,302 $ 2,270 4% 1%
Diagnostics and genomics $ 1,047 $ 1,021 $ 943 2% 8%
Agilent CrossLab $ 1,900 $ 1,840 $ 1,701 3% 8%
Total net revenue $ 5,339 $ 5,163 $ 4,914 3% 5%
Revenue in the life sciences and applied markets business increased 4 percent in
2020 when compared to 2019. Foreign currency movements had no overall impact on
revenue in 2020 when compared to 2019. Acquisitions had an overall favorable
impact on revenue growth of 7 percentage points and primarily impacted the
overall growth in the pharmaceutical and academia and government markets.
Revenue growth within the life sciences and applied markets was driven by strong
growth in the academia and government, the pharmaceutical and the diagnostics
and clinical markets with moderate growth from the food market partially offset
by declines in revenue within the environmental and forensics and chemical and
energy markets. Revenue in the life sciences and applied markets business
increased 1 percent in 2019 when compared to 2018. Foreign currency movements
had an overall unfavorable impact of 2 percentage points in 2019 when compared
to 2018. Acquisitions had an overall favorable impact on revenue growth of 4
percentage points and primarily impacted the pharmaceutical and academia and
government markets when compared to 2018. For the year ended October 31, 2019 ,
revenue growth was favorable within academia and government, moderate within the
pharmaceutical and the environmental and forensics markets which was mostly
offset by declines in revenue from the food market and to a lesser extent from
the chemical and energy market when compared to 2018.
Revenue in the diagnostics and genomics business increased 2 percent in 2020
when compared to 2019. Foreign currency movements had an overall unfavorable
impact on revenue of 1 percentage point in 2020 when compared to 2019. Revenue
growth within the diagnostics and genomics business was driven by strong growth
in our nucleic acid solutions and biomolecular analysis businesses partially
offset by declines in our genomics business. Revenue in the diagnostics and
genomics business increased 8 percent in 2019 when compared to 2018. Foreign
currency movements had an overall unfavorable impact on revenue of 3 percentage
points in 2019 when compared to 2018. Revenue growth within the diagnostics and
clinical market and the pharmaceutical market continued to be strong led by
performance from our nucleic acid solutions and biomolecular analysis
businesses.
Revenue in the Agilent CrossLab business increased 3 percent in 2020 when
compared to 2019. Foreign currency movements had an overall unfavorable impact
on revenue of 1 percentage point in 2020 when compared to 2019. Revenue growth
within Agilent CrossLab business was strong within the pharmaceutical and food
markets which was partially offset by declines in the academia and government
and clinical and diagnostics markets. Revenue generated by Agilent CrossLab
increased 8 percent in 2019 when compared to 2018. Foreign currency movements
had an overall unfavorable impact of 3 percentage points in 2019 when compared
to 2018. Our performance in the Agilent CrossLab business saw continued growth
in all key end markets with strong growth in the pharmaceutical, academia and
government and food markets compared to 2018.
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Costs and Expenses
Years Ended October 31, 2020 over 2019
2020 2019 2018 Change 2019 over 2018 Change
(in millions, except margin data)
Gross margin on products 55.0 % 56.7 % 57.4 % (2) ppts (1) ppt
Gross margin on services and other 47.5 % 47.3 % 45.3 % - 2 ppts
Total gross margin 53.1 % 54.3 % 54.5 % (1) ppt -
Research and development $ 495 $ 404 $ 387 22% 5%
Selling, general and administrative $ 1,496 $ 1,460 $ 1,389 2% 5%
Operating margin 15.8 % 18.2 % 18.4 % (2) ppts -
Total gross margin for the year ended October 31, 2020 decreased 1 percentage
point when compared to 2019. Gross margin declined due to the impacts of pricing
pressure, higher intangible amortization expense, higher wages, net unfavorable
currency impact and higher fixed costs related to the new manufacturing facility
in Frederick, Colorado , partially offset by lower period and travel costs. Total
gross margin for the year ended October 31, 2019 was flat when compared to 2018.
Total gross margin reflects the impact of efficiency gains, lower inventory
charges and favorable currency impact on costs offset by higher wages and
variable pay, product mix, higher expenses related to tariffs and higher
amortization expense of intangible assets.
Gross inventory charges were $28 million in 2020, $19 million in 2019 and $26
million in 2018. Sales of previously written down inventory were $7 million in
2020, $6 million in 2019 and $8 million in 2018.
Research and development expenses increased 22 percent for the year ended
October 31, 2020 when compared to 2019. Research and development expenses
increased primarily due to intangible and other asset impairments of $97 million
related to the shutdown of our sequencer development program. The increase is
also due to higher wages and additional expenses related to our acquisition of
BioTek partially offset by lower discretionary expenditures including lower
travel costs and favorable currency impact. Research and development expenses
increased 5 percent for the year ended October 31, 2019 when compared to 2018.
Research and development expenses increased due to increased program spending on
new products related to all of our businesses in addition to higher wages and
variable pay and additional expenses related to acquired businesses partially
offset by favorable currency movements when compared to spending in 2018.
Selling, general and administrative expenses increased 2 percent in 2020 when
compared to 2019. The increase in selling, general and administrative expenses
was due to higher wages, higher intangible amortization expense and higher
transformational initiative expenses, which was partially offset by lower
discretionary expenditures including lower travel costs and favorable currency
impact. Selling, general and administrative expenses increased 5 percent in 2019
compared to 2018. Selling, general and administrative expenses increased due to
increased wages and variable pay, higher commissions, higher legal expenses,
higher acquisition and integration costs and higher transformation initiatives
expenses partially offset by operational efficiencies and savings and favorable
currency impact.
Total operating margin decreased 2 percentage points for the year ended
October 31, 2020 , when compared to 2019. Operating margin declined due to
intangible and other asset impairments, higher wages, higher intangible
amortization expense and higher transformational initiative expenses partially
offset by lower discretionary expenditures including lower travel costs and
favorable currency impact. Total operating margin was flat for the year ended
October 31, 2019 , when compared to 2018. Total operating margin was impacted by
higher wages and variable pay, higher acquisition and integration costs, higher
expenses related to tariffs and higher transformation initiatives expenses
offset by operational efficiencies and savings and favorable currency impact.
Interest income for the year ended October 31, 2020 , 2019 and 2018 was $8
million , $36 million and $38 million , respectively. The decrease in interest
income in 2020 was primarily due to lower interest rates for our cash and cash
equivalents.
Interest expense for the years ended October 31, 2020 , 2019 and 2018 was $78
million , $74 million and $75 million , respectively, and relates to the interest
charged on our senior notes, credit facilities, commercial paper and the
amortization of the deferred loss recorded upon termination of the forward
starting interest rate swap contracts partially offset by the amortization of
deferred gains recorded upon termination of interest rate swap contracts.
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At
Other income (expense), net For the year endedOctober 31, 2020 , other income (expense), net includes income of$12 million related to the provision of site service costs to, and lease income from, Keysight Technologies, Inc. ("Keysight"). The costs associated with these services are reported within income from operations. Other income (expense), net also includes net gains on the fair value of equity investments of approximately$27 million and income of$22 million related to the settlement of our legal claim against Twist Bioscience Corporation. For the year endedOctober 31, 2019 , other income (expense), net includes income of$12 million related to the provision of site service costs to, and lease income from, Keysight Technologies, Inc. ("Keysight") and$9 million loss on the extinguishment of debt. For the year endedOctober 31, 2018 , other income (expense), net includes the net gain of$20 million related to the step-up of our initial investment inLasergen ,$15 million of income related to a special one-time settlement with a third-party, a$5 million pension settlement gain related to the substitutional portion of the defined benefit pension plans established under the Japanese Welfare Pension Insurance Law and income of$12 million related to the provision of site service costs to, and lease income from, Keysight. Income Taxes Years Ended October 31, 2020 2019 2018 (in millions) Provision (benefit) for income taxes$ 123 $ (152) $
630
For 2020, the company's income tax expense was$123 million with an effective tax rate of 14.6 percent. For the year endedOctober 31, 2020 , our effective tax rate and the resulting provision for income taxes were impacted by foreign income taxed at lower rates. For 2019, the company's income tax benefit was$152 million with an effective tax rate of (16.5) percent. For the year endedOctober 31, 2019 , our effective tax rate and the resulting provision for income taxes were significantly impacted by the discrete benefit of$299 million related to the extension of the company's tax incentive inSingapore . For 2018, the company's income tax expense was$630 million with an effective tax rate of 66.6 percent. For the year endedOctober 31, 2018 , our effective tax rate and the resulting provision for income taxes were significantly impacted by the discrete charge of$552 million related to the enactment of theU.S. Tax Cuts and Jobs Act (the "Tax Act") consisting of (1) an expense of$499 million ofU.S. transition tax and correlative items on deemed repatriated earnings of non-U.S. subsidiaries and (2) an expense of$53 million associated with the impact on deferred taxes resulting from the decreasedU.S. corporate tax rate. The company has negotiated tax holidays in several different jurisdictions, most significantly inSingapore . The tax holidays provide lower rates of taxation on certain classes of income and require various thresholds of investments and employment or specific types of income in those jurisdictions. InDecember 2018 , the tax holiday inSingapore was renegotiated and extended through 2027. As a result of the incentives, the impact of the tax holidays decreased income taxes by$71 million ,$368 million , and$87 million in 2020, 2019, and 2018, respectively. The benefit of the tax holidays on net income per share (diluted) was approximately$0.23 ,$1.16 , and$0.27 in 2020, 2019 and 2018, respectively. Of the$1.16 benefit of the tax incentives on net income per share (diluted) in 2019,$0.94 of the benefit relates to one-time items from the extension of the company's tax incentive inSingapore . With these jurisdictions and theU.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. 41 -------------------------------------------------------------------------------- Table of Contents The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for allU.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.
Segment Overview
ThroughOctober 31, 2020 , we have three business segments comprised of the life sciences and applied markets business, diagnostics and genomics business and the Agilent CrossLab business.
Life Sciences and Applied Markets
Our life sciences and applied markets business provides application-focused
solutions that include instruments and software that enable customers to
identify, quantify and analyze the physical and biological properties of
substances and products, as well as enable customers in the clinical and life
sciences research areas to interrogate samples at the molecular and cellular
level. Key product categories include: liquid chromatography ("LC") systems and
components; liquid chromatography mass spectrometry ("LCMS") systems; gas
chromatography ("GC") systems and components; gas chromatography mass
spectrometry ("GCMS") systems; inductively coupled plasma mass spectrometry
("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave
plasma-atomic emission spectrometry ("MP-AES") instruments; inductively coupled
plasma optical emission spectrometry ("ICP-OES") instruments; raman
spectroscopy; cell analysis plate based assays; flow cytometer; real-time cell
analyzer; cell imaging systems; microplate reader; laboratory software for
sample tracking; information management and analytics; laboratory automation and
robotic systems; dissolution testing; vacuum pumps and measurement technologies.
Net Revenue
Years Ended October 31, 2020 over 2019
2020 2019 2018 Change 2019 over 2018 Change
(in millions)
Net revenue $ 2,392 $ 2,302 $ 2,270 4% 1%
Life science and applied markets business revenue in 2020 increased 4 percent
compared to 2019. Foreign currency movements for 2020 had no impact on revenue
growth when compared to the same period last year. Acquisitions had an overall
favorable impact on revenue growth of 7 percentage points when compared to the
same period last year. Geographically, revenue increased 13 percent in the
Americas with a 1 percentage point unfavorable currency impact, decreased 2
percent in Europe with no currency impact and increased 1 percent in Asia
Pacific with no currency impact. In 2020, revenue increases in our automation,
liquid chromatography mass spectrometry and cell analysis products from our
acquisitions, primarily in the Americas , were partially offset by declines in
other parts of the portfolio when compared to the same period last year.
End market revenue performance in 2020 was mixed with academia and government
and diagnostics and clinical markets delivering strong growth and the
pharmaceutical and food markets delivering moderate growth which was partially
offset by chemical and energy and forensics and environmental markets. In 2020,
despite the unfavorable impact from COVID-19, revenue growth in the academia and
government and pharmaceutical and diagnostics and clinical markets was primarily
driven by strong performance of our cell analysis products from the Lionheart
Technologies LLC ("BioTek") acquisition. The growth in the diagnostics and
clinical business was also due to the strength in liquid phase mass spectrometry
and cell analysis products.
Life science and applied markets business revenue in 2019 increased 1 percent
compared to 2018. Foreign currency movements for 2019 had an overall unfavorable
currency impact of 2 percentage points on revenue growth when compared to 2018.
Acquisitions had an overall favorable impact on revenue growth of 3 percentage
points when compared to 2018.
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Geographically, revenue increased 12 percent in the Americas with a 1 percentage
point unfavorable currency impact, decreased 4 percent in Europe with a 3
percentage point unfavorable currency impact and decreased 2 percent in Asia
Pacific with a 1 percentage point unfavorable currency impact. From a product
standpoint, revenue was driven by strength in sales in our gas chromatography
mass spectrometry and cell analysis primarily due to contributions from our
acquisitions and informatics businesses which was offset by weakness in our
liquid chromatography, gas chromatography, liquid chromatography mass
spectrometry and spectroscopy products when compared to 2018.
End market performance in 2019 was mixed with the pharmaceutical, academia and
government, diagnostics and clinical and forensics markets delivering strong
revenue growth, environmental delivering moderate growth while chemical and
energy markets decreased modestly, and food delivered weak results compared to
2018.
Looking forward, despite short term uncertainties and the adverse effects of the
COVID-19 pandemic, we are optimistic about our long-term growth opportunities in
the life sciences and applied markets as our broad portfolio of products and
solutions are well suited to address customer needs. We anticipate growth from
our new product introductions and acquisitions in the last couple of years as we
continue to invest in expanding and improving our applications and solutions
portfolio. While we anticipate volatility in our markets, we expect continued
growth across most end markets in the long term.
Gross Margin and Operating Margin
The following table shows the life sciences and applied markets business'
margins, expenses and income from operations for 2020 versus 2019, and 2019
versus 2018.
Years Ended October 31, 2020 over 2019
2020 2019 2018 Change 2019 over 2018 Change
(in millions, except margin data)
Total gross margin 59.2 % 61.0 % 61.3 % (2) ppts -
Research and development $ 219 $ 216 $ 220 1% (1)%
Selling, general and administrative $ 650 $ 646 $ 630 1% 3%
Operating margin 22.9 % 23.5 % 23.9 % (1) ppt -
Income from operations $ 548 $ 542 $ 543 1% -
Gross margin decreased 2 percentage points in 2020 compared to 2019. Gross
margin declined due to the increased impact of pricing pressures and a net
unfavorable impact from currency movements partially offset by favorable product
mix and material cost savings. Gross margin was flat in 2019 compared to 2018.
Gross margin was impacted by unfavorable mix and higher expenses related to
tariffs which was offset by favorable currency impact.
Research and development expenses increased 1 percent in 2020 when compared to
2019. Research and development expenses increased due to higher wages and
additional expenses related to the BioTek acquisition partially offset by lower
discretionary spending and favorable impact from foreign currency movements.
Research and development expenses decreased 1 percent in 2019 when compared to
2018. Research and development decreased due to lower discretionary spending and
a favorable currency offset by additional expenses related to acquisitions as
well as higher wages and variable pay.
Selling, general and administrative expenses increased 1 percent in 2020
compared to 2019. Selling, general and administrative expenses increased due to
higher wages and additional expenses related to the BioTek acquisition partially
offset by favorable impact from foreign currency movements and lower travel
costs. Selling, general and administrative expenses increased 3 percent in 2019
compared to 2018. Selling, general and administrative expenses were impacted by
higher wages and variable pay and additional expenses related to our recent
acquisitions partially offset by operational savings and a favorable currency
impact.
Operating margin decreased 1 percentage point in 2020 compared to 2019.
Operating margin declined due to additional expenses related to our recent
acquisitions and unfavorable gross margin due to pricing pressures partially
offset by operational savings and favorable currency impact. Operating margin
was relatively flat in 2019 compared to 2018. Operating margin reflects
relatively flat revenue growth partially offset by an increase in selling,
general and administrative expenses.
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Income from Operations
Income from operations in 2020 increased by$6 million or increased by 1 percent when compared to 2019 on a revenue increase of$90 million . The increase in income from operations was mainly due to the impact of the BioTek acquisition. Income from operations in 2019 decreased by$1 million or was relatively flat when compared to 2018 on a revenue increase of$32 million . The decrease was due to the impact of acquisitions.
Diagnostics and Genomics
Our diagnostics and genomics business includes the genomics, nucleic acid contract manufacturing and research and development, pathology, companion diagnostics, reagent partnership and biomolecular analysis businesses.
Our diagnostics and genomics business is comprised of six areas of activity
providing active pharmaceutical ingredients ("APIs") for oligo-based
therapeutics as well as solutions that include reagents, instruments, software
and consumables, which enable customers in the clinical and life sciences
research areas to interrogate samples at the cellular and molecular
level. First, our genomics business includes arrays for DNA mutation detection,
genotyping, gene copy number determination, identification of gene
rearrangements, DNA methylation profiling, gene expression profiling, as well as
next generation sequencing ("NGS") target enrichment and genetic data management
and interpretation support software. This business also includes solutions that
enable clinical labs to identify DNA variants associated with genetic disease
and help direct cancer therapy. Second, our nucleic acid solutions business
provides equipment and expertise focused on production of synthesized
oligonucleotides under pharmaceutical good manufacturing practices ("GMP")
conditions for use as API in an emerging class of drugs that utilize nucleic
acid molecules for disease therapy. Third, our pathology solutions business is
focused on product offerings for cancer diagnostics and anatomic pathology
workflows. The broad portfolio of offerings includes immunohistochemistry
("IHC"), in situ hybridization ("ISH"), hematoxylin and eosin ("H&E") staining
and special staining. Fourth, we also collaborate with a number of major
pharmaceutical companies to develop new potential pharmacodiagnostics, also
known as companion diagnostics, which may be used to identify patients most
likely to benefit from a specific targeted therapy. Fifth, the reagent
partnership business is a provider of reagents used for turbidimetry and flow
cytometry. Finally, our biomolecular analysis business provides complete
workflow solutions, including instruments, consumables and software, for quality
control analysis of nucleic acid samples. Samples are analyzed using
quantitative and qualitative techniques to ensure accuracy in further genomics
analysis techniques utilized in clinical and life science research applications.
Net Revenue
Years Ended October 31, 2020 over 2019
2020 2019 2018 Change 2019 over 2018 Change
(in millions)
Net revenue $ 1,047 $ 1,021 $ 943 2% 8%
Diagnostics and genomics business revenue in 2020 increased 2 percent compared
to 2019. Foreign currency movements for 2020 had an overall unfavorable impact
on revenue growth of 1 percentage point when compared to the same period last
year. Geographically, revenue increased 2 percent in the Americas with no
currency impact, increased 1 percent in Europe with no currency impact and
increased 7 percent in Asia Pacific with no currency impact. The increase in the
Americas was driven by strong performance in the nucleic acid solutions and
reagent partnership businesses. Revenue growth in the Americas was partly offset
by a decline in the pathology and genomics business driven by the COVID-19
related reduction in routine and cancer testing, as well as the closure of
academic and research laboratories. In Europe , strong revenue from our
biomolecular analysis business was partially offset by the COVID-19 related
declines from our genomics business. In Asia Pacific , revenue growth was driven
by the pathology and biomolecular analysis businesses.
In 2020 revenue performance in the diagnostics and genomics business was led by
strong revenue growth in the nucleic acid solutions and biomolecular analyses
businesses. This was partly offset by a COVID-19 related reduction in routine
and cancer testing, as well as the closure of most academic and research
laboratories. The diagnostics and clinical research end markets remain strong
long-term and growing driven by an aging population and lifestyle developments
such as poor diet and physical inactivity.
Diagnostics and genomics business revenue in 2019 increased 8 percent compared
to 2018. Foreign currency movements for 2019 had an overall unfavorable impact
on revenue growth of 3 percentage points when compared to 2018. Geographically,
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revenue increased 17 percent in the Americas with a 1 percentage point
unfavorable currency impact, was flat in Europe with a 4 percentage point
unfavorable currency impact and increased 2 percent in Asia Pacific with a 2
percentage point unfavorable currency impact. The growth in Americas was driven
by strong growth in our nucleic acid solutions, companion diagnostics and
biomolecular analysis business. In Europe we saw strong growth in the
biomolecular analysis business offset by softness in the genomics business. In
Asia Pacific the growth was driven by our biomolecular analysis business and
negatively impacted by softness in the genomics business.
The revenue growth in 2019 was led by strong revenue performance in our nucleic
acid solutions, companion diagnostics and biomolecular analysis business. The
diagnostics and clinical research market remains strong and growing driven by an
aging population and unhealthy lifestyle developments such as poor diet and
physical inactivity.
Looking forward, although we see short-term impacts to routine and cancer
testing due to COVID-19 which will affect our revenue growth, we are optimistic
about our long-term growth opportunities in our end markets and continue to
invest in expanding and improving our applications and solutions portfolio. We
remain positive about our growth in our end markets as our product portfolio
around OMNIS, PD-L1 assays and SureFISH continue to gain strength with our
customers in clinical oncology applications, and our next generation sequencing
target enrichment solutions continue to be adopted. Market demand in the nucleic
acid solutions business related to therapeutic oligo programs continues, and
with our newly opened and planned extension of our nucleic acid solutions
production facility in Frederick, Colorado , we are well positioned to serve more
of the market demand. We will continue to invest in research and development and
seek to expand our position in developing countries and emerging markets.
Gross Margin and Operating Margin
The following table shows the diagnostics and genomics business' margins,
expenses and income from operations for 2020 versus 2019, and 2019 versus 2018.
Years Ended October 31, 2020 over 2019
2020 2019 2018 Change 2019 over 2018 Change
(in millions, except margin data)
Total gross margin 51.9 % 54.7 % 56.3 % (3) ppts (2) ppts
Research and development $ 114 $ 125 $ 109 (9)% 15%
Selling, general and administrative $ 238 $ 248 $ 249 (4)% -
Operating margin 18.3 % 18.2 % 18.4 % - -
Income from operations $ 192 $ 185 $ 173 3% 7%
Gross margin decreased 3 percentage points in 2020 when compared to 2019. Gross
margin was impacted by unfavorable product mix and higher fixed costs related to
the new manufacturing facility in Frederick, Colorado , partially offset by lower
period and travel costs. Gross margin decreased 2 percentage points in 2019 when
compared to 2018. The decrease in gross margin was driven by an unfavorable
product mix and a higher fixed cost structure due to the addition of a second
nucleic acid manufacturing facility that offset gains from higher sales volumes.
Research and development expenses decreased 9 percent in 2020 when compared to
2019. Research and development expenses decreased due to the shutdown of our
sequencer development program and a reduction in discretionary expenditures
including travel costs. Research and development expenses increased 15 percent
in 2019 when compared to 2018. The increase was due to additional expenses
related to prior year's acquisitions, higher wages and variable pay and
increased spending around the development of clinical applications and
solutions.
Selling, general and administrative expenses decreased 4 percent in 2020 when
compared to 2019. Selling, general and administrative expenses decreased due to
a reduction in discretionary expenditures including travel costs partially
offset by an increase in wages. Selling, general and administrative expenses
were flat in 2019 when compared to 2018. Selling, general and administrative
expenses were impacted by efficiency gains offsetting higher wages and variable
pay.
Operating margin was relatively flat in 2020 when compared to 2019. Operating
margin was aided by savings in operating expenses which were offset by gross
margin decline. Operating margin was relatively flat in 2019 when compared to
2018. Operating margin was impacted by higher sales volume, offsetting the gross
margin deterioration and the increase in research and development spending.
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Income from Operations
Income from operations in 2020 increased by $7 million or 3 percent when
compared to 2019 on a revenue increase of $26 million . The increase was driven
by gains from higher volume and lower operating expenses more than offsetting
the gross margin percentage decline. Income from operations in 2019 increased by
$12 million or 7 percent when compared to 2018 on a revenue increase of $78
million . The increase was due to higher volume partially offset by the gross
margin percentage decline and higher research and development expenses.
Agilent CrossLab
The Agilent CrossLab business spans the entire lab with its extensive consumables and services portfolio, which is designed to improve customer outcomes. Most of the portfolio is vendor neutral, meaning Agilent can serve and supply customers regardless of their instrument purchase choices. Solutions range from chemistries and supplies to services and software helping to connect the entire lab. Key product categories in consumables include GC and LC columns, sample preparation products, custom chemistries, and a large selection of laboratory instrument supplies. Services include startup, operational, training and compliance support, software as a service, as well as asset management and consultative services that help increase customer productivity. Custom service and consumable bundles are tailored to meet the specific application needs of various industries and to keep instruments fully operational and compliant with the respective industry requirements.
Net Revenue
Years Ended October 31, 2020 over 2019
2020 2019 2018 Change 2019 over 2018 Change
(in millions)
Total net revenue $ 1,900 $ 1,840 $ 1,701 3% 8%
Agilent CrossLab business revenue in 2020 increased 3 percent when compared to
2019. Foreign currency movements for 2020 had an overall unfavorable impact of 1
percentage point when compared to 2019. Geographically, revenue was flat in the
Americas with a 1 percentage point unfavorable currency impact, increased 2
percent in Europe with a 1 percentage point favorable currency impact and
increased 7 percent in Asia Pacific with a 1 percentage point unfavorable
currency impact. As a consequence of the COVID-19 related impact on global
commerce in 2020, consumable sales growth has been low single digits in
comparison to 2019 in most countries excluding China . In addition, the COVID-19
related customer site closures have brought a temporary lull in our delivery of
on-demand services and installation services, which has been recovering in the
latter half of the year as customer labs reopen. Consumable sales in China and
the contracted service business across most regions have seen solid gains
throughout 2020. Among our major end markets, the pharmaceutical market and the
food market generated the strongest revenue growth when compared to 2019.
Agilent CrossLab business revenue in 2019 increased 8 percent when compared to
2018. Foreign currency movements for 2019 had an overall unfavorable impact of 3
percentage points when compared to 2018. Acquisitions in 2018 added 1 percentage
point to the revenue growth reported for 2019. Revenue growth in 2019 was driven
broadly by our entire services and consumables portfolio. Geographically,
revenue increased 9 percent in the Americas with a 1 percentage point
unfavorable currency impact, increased 5 percent in Europe with a 5 percentage
point unfavorable currency impact and increased 10 percent in Asia Pacific with
a 3 percentage point unfavorable currency impact. Agilent CrossLab business saw
strong revenue growth in all key end markets, except in the diagnostics and
clinical market, when compared to 2018.
Looking forward, the Agilent CrossLab portfolio of products and services
capabilities is well positioned to continue to succeed in our key end markets.
With less predictable access to customer sites during the global COVID-19
pandemic, the business is taking advantage of digital and remote capabilities to
offer services and consumables to customers. Despite the current COVID-19
environment, we remain confident about the long-term growth opportunities as
customer feedback remains very positive on the value Agilent CrossLab brings to
customer labs. Geographically, the business is well diversified across all
regions to take advantage of local market opportunities as they reopen to
commerce.
46
--------------------------------------------------------------------------------Gross Margin and Operating Margin
The following table shows the Agilent CrossLab business' margins, expenses and income from operations for 2020 versus 2019 and 2019 versus 2018.
Years Ended October 31, 2020 over 2019
2020 2019 2018 Change 2019 over 2018 Change
(in millions, except margin data)
Total gross margin 52.2 % 51.8 % 50.4 % - 1 ppt
Research and development $ 58 $ 58 $ 56 - 3%
Selling, general and administrative $ 417 $ 421 $ 413 (1)% 2%
Operating margin 27.2 % 25.8 % 22.8 % 1 ppt 3 ppts
Income from operations $ 516 $ 475 $ 388 9% 23%
Gross margin for products and services was relatively flat in 2020 when compared
to 2019. Gross margin benefited from lower service delivery costs which include
travel, parts and labor as well as improved productivity in manufacturing in the
consumables business. Those operational gains were offset by a net unfavorable
impact from currency movements. Gross margin for products and services increased
1 percentage point in 2019 when compared to 2018. Gross margin was impacted by
higher sales volume, combined with efficiency gains in the service delivery
operation and in the logistics and manufacturing processes for the consumables
business. Some of those gains were offset by higher wages and higher variable
costs and increased headcount.
Research and development expenses were relatively flat in 2020 when compared to
2019. The higher wages and variable pay in research and development expenses
were offset by lower travel costs and the reduction of other discretionary
expenditures. Research and development expenses increased 3 percent in 2019 when
compared to 2018. Research and development increased due to higher wages and
higher variable pay and additional research and development expenditures from
acquisitions made in 2018.
Selling, general and administrative expenses decreased 1 percent in 2020 when
compared to 2019. Selling, general and administrative expenses decreased due to
favorable currency movements, reduced travel and training by the sales
organization, lower sales commissions, and a reduction in discretionary
expenditures which were partially offset by higher wages. Selling, general and
administrative expenses increased 2 percent in 2019 when compared to 2018.
Selling, general and administrative expenses were higher due to additional
operating expenses from our acquisitions made in 2018, in addition to higher
wages and higher variable pay. Those increases were partially offset by a
favorable impact from foreign currency movements.
Operating margin increased 1 percentage point in 2020 when compared to 2019. The
increase was primarily due to the growth in revenue while lowering service
delivery and selling costs and the reduction of discretionary expenditures,
partially offset by higher wages. Operating margin increased 3 percentage points
in 2019 when compared to 2018. The increase in operating margin was driven by
the higher sales volume, combined with efficiency gains across the service
delivery operations, order fulfillment processes and other operations.
Income from Operations
Income from operations in 2020 increased by$41 million or 9 percent when compared to 2019 on a revenue increase of$60 million . The increase was primarily due to the growth in revenue while lowering service delivery and selling costs and the reduction of discretionary expenditures, partially offset by higher wages. Income from operations in 2019 increased by$87 million or 23 percent when compared to 2018 on a revenue increase of$139 million . The increase was driven by the higher sales volume, combined with efficiency gains across the service delivery operations, order fulfillment processes and other operations. 47 --------------------------------------------------------------------------------
Financial Condition
Liquidity and Capital Resources
We believe our cash and cash equivalents, cash generated from operations, and ability to access capital markets and credit lines will satisfy, for at least the next twelve months, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, business acquisitions, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations. Our sources and uses of cash were not materially impacted by COVID-19 to date. We have not identified any material liquidity concerns as a result of the COVID-19 pandemic. We will continue to monitor and assess the impact COVID-19 may have on our business and financial results. Economic stimulus legislation was passed in many countries in response to COVID-19. In March in theU.S. , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted to provide for tax relief and government loans, subsidies and other relief for entities in affected industries. As ofOctober 31, 2020 , the CARES Act and other government benefits outside theU.S. did not have a material impact on our consolidated financial statements and related disclosures.
Our financial position as of
As ofOctober 31, 2020 , approximately$1,395 million of our cash and cash equivalents is held outside of theU.S. by our foreign subsidiaries and can be repatriated to theU.S. as local working capital and other regulatory conditions permit. We utilize a variety of funding strategies to ensure that our worldwide cash is available in the locations in which it is needed. We may, from time to time, retire certain outstanding debt of ours through open market cash purchases, privately-negotiated transactions or otherwise. Such transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was$921 million in 2020 as compared to$1,021 million provided in 2019 and$1,087 million provided in 2018. We paid approximately$79 million under our variable and incentive pay programs in 2020, as compared to a total of$118 million in 2019 and$103 million in 2018. The decrease in the amount for variable and incentive pay programs paid in 2020 is primarily due to changes made for certain incentive pay programs which are now paid annually versus semi-annually as was done in 2019 and 2018. Net cash paid for income taxes was approximately$361 million in 2020 which included a one-time payment of$231 million related to the transfer of intellectual property compared to incomes taxes paid of$159 million in 2019 and$102 million in 2018. For the years endedOctober 31, 2020 and 2019, the net change in tax related assets and liabilities due to the Tax Act was zero compared to$552 million in the same period of 2018. In 2018,$552 million in tax-related assets and liabilities related to the enactment of theU.S. Tax Act, which primarily consisted of an estimated provision of$499 million ofU.S. transition tax on deemed repatriated earnings of non-U.S. subsidiaries as well as an estimated$53 million associated with the impact on deferred taxes resulting from the decreasedU.S. corporate income tax rate. Deferred tax inflows were$29 million in 2020 compared to cash outflows of$255 million 2019, which included$266 million related to the extension of the company's tax incentive inSingapore , and cash outflows of$16 million in 2018. In 2020, there was a net unrealized gain on fair value of equity investments of$28 million . In 2020, there was an impairment charge of$99 million mainly related to the shutdown of our sequencer development program compared to impairment charges of zero in 2019, and$21 million in 2018. For the years endedOctober 31, 2020 , 2019 and 2018, other assets and liabilities used cash of$181 million ,$43 million and$4 million , respectively. The cash outflow in the year endedOctober 31, 2020 was largely the result of increased income tax payments, interest payments on senior notes and changes in deferred revenue. Cash outflow for the year endedOctober 31, 2019 and 2018 in other assets and liabilities is primarily due to tax payments and interest on senior notes. In 2020, the change in accounts receivable used cash of$107 million ,$106 million in 2019, and$65 million in 2018. Days' sales outstanding as ofOctober 31 , were 63 days in 2020, 61 days in 2019 and 54 days in 2018. The change in accounts payable provided cash of$2 million in 2020,$29 million in 2019 and$40 million in 2018. Cash used in inventory was$68 million in 2020,$36 million in 2019 and$83 million in 2018. Inventory days on-hand decreased to 93 days in 2020 compared to 97 days in 2019 and decreased compared to 98 days in 2018. In the year endedOctober 31, 2020 , we increased our inventory levels to meet our customer needs in response to the COVID-19 pandemic. 48 -------------------------------------------------------------------------------- We made no contributions to ourU.S defined benefit plans in 2020, 2019 and 2018. We contributed$31 million in 2020 and$21 million each year in 2019 and 2018 to our non-U.S. defined benefit plans, respectively. We did not contribute to ourU.S. post-retirement benefit plans in 2020, 2019 and 2018. Our non-U.S. defined benefit plans are generally funded ratably throughout the year. The increase in 2020 mainly related to$12 million additional contribution inthe Netherlands . Our annual contributions are highly dependent on the relative performance of our assets versus our projected liabilities, among other factors. We do not expect to contribute to ourU.S. plans andU.S. post-retirement benefit plans during 2021. We expect to contribute$22 million to our non-U.S. defined benefit plans during 2021.
Net cash used in investing activities in 2020 was
Investments in property, plant and equipment were$119 million in 2020,$155 million in 2019 and$177 million in 2018. In 2020 we made no acquisitions of businesses. In 2019 we invested$1,408 million in acquisitions of businesses and intangible assets, net of cash acquired, for the acquisition of two businesses compared to the acquisition of seven businesses for$516 million in 2018. In 2020 cash used to purchase fair value investments was$20 million compared to$23 million outlay in 2019 and$11 million in 2018.
Net cash used in financing activities in 2020 was
Treasury Stock Repurchases
OnMay 28, 2015 we announced that our board of directors had approved a share repurchase program (the "2015 repurchase program"). The 2015 share repurchase program authorizes the purchase of up to$1.14 billion of our common stock at the company's discretion through and includingNovember 1, 2018 . The 2015 repurchase program did not require the company to acquire a specific number of shares and could have been suspended or discontinued at any time. During the year endedOctober 31, 2018 , we repurchased and retired approximately 6.4 million shares for$422 million under this authorization. As ofOctober 31, 2018 , we had remaining authorization to repurchase up to$188 million of our common stock under this program which expired onNovember 1, 2018 . OnNovember 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 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 endedOctober 31, 2019 , we repurchased and retired 10.4 million shares for$723 million under this authorization. During the year endedOctober 31, 2020 , we repurchased and retired approximately 5.2 million shares for$469 million under this authorization. As ofOctober 31, 2020 , we had remaining authorization to repurchase up to$558 million of our common stock under this program.
Dividends
For the years endedOctober 31, 2020 , 2019 and 2018 cash dividends of$222 million ,$206 million and$191 million were paid on the company's outstanding common stock, respectively. OnNovember 18, 2020 we declared a quarterly dividend of$0.194 per share of common stock, or approximately$59 million which will be paid onJanuary 27, 2021 to shareholders of record as of the close of business onJanuary 5, 2021 . The timing and amounts of any future dividends are subject to determination and approval by our board of directors. 49 --------------------------------------------------------------------------------
Credit Facilities
OnMarch 13, 2019 , we entered into a credit agreement with a group of financial institutions which provides for a$1 billion five-year unsecured credit facility that will expire onMarch 13, 2024 . For the year endedOctober 31, 2020 , we borrowed$798 million and repaid$913 million under the credit facility. As ofOctober 31, 2020 , the company had no borrowings outstanding under the credit facility. OnAugust 7, 2019 , we entered into an amendment to the credit agreement, which provides for a$500 million short-term loan facility that was used in full to complete the BioTek acquisition and which was repaid in full as ofOctober 31, 2020 . OnOctober 21, 2019 , we entered into a second amendment to the credit agreement, which refreshed the amount available for additional incremental term loan facilities under the credit agreement to permit additional incremental facilities of up to$500 million . We had no borrowings under the additional incremental facilities as ofOctober 31, 2020 . OnApril 17, 2020 , we entered into a third amendment to the credit agreement which provides the company with the option to request the consent of the applicable class of lenders to extend the maturity date of revolving borrowings and swingline loans for an additional period of one year and of the 2019 incremental term loans for an additional period of up to 364 days. We were in compliance with the covenants for the credit facility during the year endedOctober 31, 2020 .
Commercial Paper
InMay 2020 , we established aU.S. commercial paper program, under which the company may issue and sell unsecured, short-term promissory notes in the aggregate principal amount not to exceed$1.0 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 ofOctober 31, 2020 , borrowings outstanding under ourU.S. commercial paper program had a weighted average annual interest rate of 0.17 percent and a weighted average remaining maturity of approximately five days. We had borrowings of$75 million outstanding under theU.S. commercial paper program as ofOctober 31, 2020 .
Long-term Debt
2022 Senior Notes
OnSeptember 13, 2012 , the company issued an aggregate principal amount of$400 million in senior notes ("2022 senior notes"). The 2022 senior notes were issued at 99.80% of their principal amount. The notes will mature onOctober 1, 2022 , and bear interest at a fixed rate of 3.20% per annum. The interest is payable semi-annually onApril 1st andOctober 1st of each year and payments commenced onApril 1, 2013 . InJuly 2012 , Agilent executed treasury lock agreements for$400 million in connection with future interest payments to be made on our 2022 senior notes issued onSeptember 13, 2012 . The treasury lock contracts were terminated onSeptember 10, 2012 and we recognized a deferred gain in accumulated other comprehensive income (loss) which is being amortized to interest expense over the life of the 2022 senior notes. The remaining gain to be amortized related to the treasury lock agreements atOctober 31, 2020 was less than$1 million .
2023 Senior Notes
OnJune 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 will mature onJuly 15, 2023 and bear interest at a fixed rate of 3.875% per annum. The interest is payable semi-annually onJanuary 15th andJuly 15th of each year and payments commencedJanuary 15, 2014 . 2026 Senior Notes OnSeptember 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 onSeptember 22, 2026 and bear interest at a fixed rate of 3.05% per annum. The interest is payable semi-annually onMarch 22nd andSeptember 22nd of each year and payments commencedMarch 22, 2017 . InFebruary 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 onSeptember 15, 2016 . The swap arrangements were terminated onSeptember 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 50 --------------------------------------------------------------------------------
life of the 2026 senior notes. The remaining loss to be amortized related to the
interest rate swap agreements at
2029 Senior Notes
OnSeptember 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 onSeptember 15, 2029 , and bear interest at a fixed rate of 2.75% per annum. The interest is payable semi-annually onMarch 15th andSeptember 15th of each year and payments commenced onMarch 15, 2020 . InAugust 2019 , Agilent executed treasury lock agreements for$250 million in connection with future interest payments to be made on our 2029 senior notes issued onSeptember 16, 2019 . We designated the treasury lock as a cash flow hedge. The treasury lock contracts were terminated onSeptember 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 atOctober 31, 2020 was$5 million .
2030 Senior Notes
OnJune 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 onJune 4, 2030 , and bear interest at a fixed rate of 2.10% per annum. The interest is payable semi-annually onJune 4th andDecember 4th of each year and payments commenced onDecember 4, 2020 .
Off Balance Sheet Arrangements and Other
Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and markets. Our cash balances are generated and held in many locations throughout the world. Local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout our global organization. Contractual Commitments Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results, accounts receivable collections, inventory management, and the timing of tax and other payments. As a result, the impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors. The following table summarizes our total contractual obligations atOctober 31, 2020 for Agilent operations and excludes amounts recorded in our consolidated balance sheet (in millions): Less than one One to three More than five year years Three to five years years Commitments to contract manufacturers and suppliers $ 541 $ 15 $ 1 $ - Other purchase commitments 85 - - - Retirement plans 22 - - - Transitional pension contributions to our U.S. 401(k) plan 6 3 - - Total $ 654 $ 18 $ 1 $ - Commitments to Contract Manufacturers and Suppliers. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. The above amounts represent the commitments under the open purchase orders with our suppliers that have not yet been received. However, our agreements with these suppliers usually provide us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. We expect to fulfill most of our purchase commitments for inventory within one year. 51 -------------------------------------------------------------------------------- Other Purchase Commitments. We have categorized "other purchase commitments" related to contracts with professional services suppliers. 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 contact's termination period before such contract can be cancelled. Our contractual obligations with these suppliers under "other purchase commitments" were approximately$85 million within the next year. Approximately$23 million of the contracts relate to penalties that will reduce over the next 13 years. Retirement Plans. Commitments under the retirement plans relate to expected contributions to be made to ourU.S. and non-U.S. defined benefit plans and to our post-retirement medical plans for the next year only. Contributions after next year are impractical to estimate. EffectiveMay 1, 2016 untilApril 30, 2022 , we will provide an additional transitional company contribution for certain eligible employees equal to 3 percent, 4 percent or 5 percent of an employee's annual eligible compensation due to theU.S. Retirement Plan benefits being frozen.
We had no material off-balance sheet arrangements as of
On Balance Sheet Arrangements
The following table summarizes our total contractual obligations on our
Less than one One to three Three to five More than five
year years years years
Senior notes $ - $ 1,000 $ - $ 1,300
Commercial paper 75 - - -
Interest expense 69 126 67 117
Transition tax - 7 68 49
Operating leases 54 69 25 49
Total $ 198 $ 1,202 $ 160 $ 1,515
Other long-term liabilities as of October 31, 2020 and October 31, 2019 include
$323 million and $328 million , respectively, related to long-term income tax
liabilities. Of these amounts, $199 million related to uncertain tax positions
as of both October 31, 2020 and October 31, 2019 , respectively. We are unable to
accurately predict when these amounts will be realized or released. However, it
is reasonably possible that there could be significant changes to our
unrecognized tax benefits in the next twelve months due to either the expiration
of a statute of limitations or a tax audit settlement. The remaining $124
million in other long-term liabilities relates to the one-time transition tax
payable.
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