| AGILENT TECHNOLOGIES INC Item 1A Risk Factors 22 Item 1A Risk Factors Risks, Uncertainties and Other Factors That May Affect Future Results Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated |
| Visibility into our markets is limited |
| Our quarterly sales and operating results are highly dependent on the volume and timing of orders received during the quarter, which are difficult to forecast |
| In addition, our revenues and earnings forecast for future quarters are often based on the expected seasonality or cyclicality of our markets |
| However, the markets we serve do not always experience the seasonality or cyclicality that we expect |
| Any decline in our customers &apos markets or in general economic conditions would likely result in a reduction in demand for our products and services |
| For example, if the Asia Pacific market does not grow as anticipated, our results could suffer |
| In addition, we have not yet completed our proposed spin-off of our SOC and memory test businesses, which are directly influenced by changes in the semiconductor market |
| Since the broader semiconductor market is one of the drivers for our electronic measurement business, a continued decrease in the semiconductor market could harm our electronic measurement business |
| Also, if our customers &apos markets decline, we may not be able to collect on outstanding amounts due to us |
| Such decline could harm our consolidated financial position, results of operations, cash flows and stock price, and could limit our ability to sustain profitability |
| Also, in such an environment, pricing pressures could intensify |
| Since a significant portion of our operating expenses is relatively fixed in nature due to sales, research and development and manufacturing costs, if we were unable to respond quickly enough these pricing pressures could further reduce our gross margins |
| Finally, we may be required to secure additional debt or equity financing at some time in the future, and we cannot assure you that such financing will be available on acceptable terms when required |
| If our corporate credit rating is downgraded, we could be required to pay a higher interest rate for future borrowing needs and we may have stricter terms |
| The actions we are taking to focus our organization on our core businesses may cause disruption and increase expenses, which may affect our results of operations or financial condition |
| The spin-off of our SOC and memory test businesses and the divestiture of our semiconductor products business, even after its completion, could involve a number of risks, including: • the diversion of the attention of management and other key personnel; and 22 _________________________________________________________________ • restructuring, inventory and other charges which may affect our results of operations |
| There can be no assurance that our completed sale of the semiconductor products business or our spin-off of the SOC and memory test businesses would cause us to achieve our goal of successfully focusing on our core businesses |
| Also, there can there be no assurance that this strategic realignment of the business will be beneficial to our business or financial condition |
| Even assuming the strategic realignment would be beneficial, we may fail to properly implement the spin-off, which might adversely affect our financial condition and results of operations |
| Additionally, our decision to divest the semiconductor products business and to spin-off the SOC and memory test businesses may result in the recording of special charges, such as inventory, goodwill and intangible-asset impairments, workforce reduction costs, pension and stock option costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products |
| Prior to its divestiture, our semiconductor products business was a significant portion of our consolidated business, but its financial results are no longer included in our consolidated financial results on a continuing operations basis |
| Our semiconductor test business represents a significant portion of our consolidated business, but we will not report the financial results of this business, including net revenues and net income, after it is spun off |
| The result of omitting the semiconductor products business from our continuing operations has caused our net revenues to decline and the result of omitting our semiconductor test business from our consolidated financial statements could cause our net revenues to decline |
| Accordingly, our historical consolidated financial results may not necessarily reflect our future financial position, results of operations or cash flows |
| In addition, as a result of a spin-off or divestiture, our stock price may fluctuate |
| We will retain contingent liabilities from the divestiture of our semiconductor products business |
| We agreed to retain responsibility for specified contingent liabilities related to these businesses, including designated tax and environmental liabilities and potential claims by Avago Technologies Ltd |
| (formerly known as Argos Acquisition Pte |
| ) ( "e Avago "e ) that the representations and warranties we made about the businesses were inaccurate |
| The resolution of these contingencies may have a material adverse effect on our continuing results of operations or financial condition |
| We may not be successful in our efforts to maintain a reduced cost structure, and the actions that we take in order to reduce costs could have long-term adverse effects on our business |
| We have taken, and continue to take, various actions to transition our company to a reduced cost structure |
| In conjunction with the divestiture of our semiconductor products business and proposed spin-off of our SOC and memory test businesses, we recently announced the restructuring of our global infrastructure organization to reduce costs by dlra450 million |
| There are several risks inherent in our efforts to maintain a reduced cost structure |
| These include the risks that we will not be able to reduce expenditures quickly enough and hold them at a level necessary to sustain or increase profitability and that we may have to undertake further restructuring initiatives that would entail additional charges |
| For example, our expenses were higher than anticipated during the second quarter of 2004, due to increases in demand for items like travel, training, consultants, manufacturing and operating supplies, which adversely affected our performance |
| If our current plan to reduce costs leads to similar increases in demand we could face the same situation in the future |
| As we transform our infrastructure, we expect to face ongoing pressure to control expenses |
| If we are not able to hold down expenses we may have to further reduce our workforce |
| There is also the risk that cost-cutting initiatives will impair our ability to effectively develop and market products, to remain competitive in the industries in which we compete and to operate effectively |
| Each of the above measures could have long-term effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, making it 23 _________________________________________________________________ more difficult for us to respond to customers, limiting our ability to increase production quickly if and when the demand for our products increases and limiting our ability to hire and retain key personnel |
| These circumstances could cause our income to be lower than it otherwise might be, which would adversely affect our stock price |
| If we do not introduce successful new products and services in a timely manner, our products and services will become obsolete, and our operating results will suffer |
| We generally sell our products in industries that are characterized by rapid technological changes, frequent new product and service introductions and changing industry standards |
| Without the timely introduction of new products, services and enhancements, our products and services will become technologically obsolete over time, in which case our revenue and operating results would suffer |
| The success of our new products and services will depend on several factors, including our ability to: • properly identify customer needs; • innovate and develop new technologies, services and applications; • successfully commercialize new technologies in a timely manner; • manufacture and deliver our products in sufficient volumes on time; • differentiate our offerings from our competitors &apos offerings; • price our products competitively; • anticipate our competitors &apos development of new products, services or technological innovations; and • control product quality in our manufacturing process |
| Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation |
| Dependence on outsourced information technology functions may impair our ability to operate effectively |
| As part of our efforts to streamline operations and to cut costs, we have been outsourcing and will continue to evaluate additional outsourcing |
| If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer |
| For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling our customers &apos orders on a timely basis |
| The ability of these manufacturers to perform is largely outside of our control |
| In addition, we outsourced significant portions of our information technology ( "e IT "e ) function |
| Since IT is critical to our operations, any failure to perform on the part of the IT providers could impair our ability to operate effectively |
| In addition to the risks outlined above, problems with manufacturing or IT outsourcing could result in lower revenues, and impact our results of operations and our stock price |
| Much of our outsourcing takes place in developing countries, and as a result may be subject to geopolitical uncertainty |
| Future changes in financial accounting standards may adversely affect our reported results of operations |
| A change in accounting standards can have a significant effect on our reported results |
| New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future |
| These new accounting pronouncements may adversely affect our reported financial results |
| 24 _________________________________________________________________ For example, under Statement of Financial Accounting Standards Nodtta 123R, "e Share Based Payment "e ( "e SFAS Nodtta 123R "e ), we will be required to account for our stock-based awards as a compensation expense and our net income and net income per share will be significantly reduced |
| Currently, we record compensation expense only in connection with option grants that have an exercise price below fair market value |
| For option grants that have an exercise price at fair market value, we calculate compensation expense and disclose their impact on net income (loss) and net income (loss) per share, as well as the impact of all stock-based compensation expense in a footnote to the consolidated financial statements |
| SFAS Nodtta 123R requires us to adopt the new accounting provisions beginning in our first quarter of 2006, and will require us to expense stock- based awards, including shares issued under our employee stock purchase plan, stock options, restricted stock and stock appreciation rights, as compensation cost |
| Failure to adjust our purchases due to changing market conditions or failure to estimate our customers &apos demand could adversely affect our income |
| Our income could be harmed if we are unable to adjust our purchases to market fluctuations, including those caused by the seasonal or cyclical nature of the markets in which we operate |
| The sale of our products and services are dependent, to a large degree, on customers whose industries are subject to seasonal or cyclical trends in the demand for their products |
| For example, the consumer electronics market is particularly volatile, making demand difficult to anticipate |
| During a market upturn, we may not be able to purchase sufficient supplies or components to meet increasing product demand, which could materially affect our results |
| In addition, some of the parts that require custom design are not readily available from alternate suppliers due to their unique design or the length of time necessary for design work |
| Should a supplier cease manufacturing such a component, we would be forced to reengineer our product |
| In addition to discontinuing parts, suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors |
| In order to secure components for the production of products, we may continue to enter into non-cancelable purchase commitments with vendors, or at times make advance payments to suppliers, which could impact our ability to adjust our inventory to declining market demands |
| Prior commitments of this type have resulted in an excess of parts when demand for our communications, semiconductor and electronics products has decreased |
| If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges |
| Our income may suffer if our manufacturing capacity does not match our demand |
| Because we cannot immediately adapt our production capacity and related cost structures to rapidly changing market conditions, when demand does not meet our expectations, our manufacturing capacity will likely exceed our production requirements |
| If, during a general market upturn or an upturn in one of our segments, we cannot increase our manufacturing capacity to meet product demand, we will not be able to fulfill orders in a timely manner |
| This inability could materially and adversely limit our ability to improve our results |
| By contrast, if during an economic downturn we had excess manufacturing capacity, then our fixed costs associated with excess manufacturing capacity would adversely affect our income |
| Economic, political and other risks associated with international sales and operations could adversely affect our results of operations |
| Because we sell our products worldwide, our business is subject to risks associated with doing business internationally |
| In addition, many of our employees, contract manufacturers, suppliers, job functions and manufacturing facilities are increasingly located outside the US Accordingly, our future results could be harmed by a variety of factors, including: • interruption to transportation flows for delivery of parts to us and finished goods to our customers; 25 _________________________________________________________________ • changes in foreign currency exchange rates; • changes in a specific countryapstas or regionapstas political, economic or other conditions; • trade protection measures and import or export licensing requirements; • negative consequences from changes in tax laws; • difficulty in staffing and managing widespread operations; • differing labor regulations; • differing protection of intellectual property; • unexpected changes in regulatory requirements; and • geopolitical turmoil, including terrorism and war |
| We centralized most of our accounting processes to two locations: Malaysia and India |
| These processes include general accounting, cost accounting, accounts payable and accounts receivables functions |
| If conditions change in those countries, it may adversely affect operations, including impairing our ability to pay our suppliers and collect our receivables |
| Our results of operations, as well as our liquidity, may be adversely affected and possible delays may occur in reporting financial results |
| Our future success depends partly on the continued service of our key research, engineering, sales, marketing, manufacturing, executive and administrative personnel |
| The markets in which we operate are very dynamic, and our businesses continue to respond with reorganizations, workforce reductions and site closures |
| We believe our pay levels are very competitive within the regions that we operate |
| However, there is also intense competition for certain highly technical specialties in geographic areas where we continue to recruit, and it may become more difficult to retain our key employees |
| Our acquisitions, strategic alliances, joint ventures and divestitures may result in financial results that are different than expected |
| In the normal course of business, we frequently engage in discussions with third parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures, and generally expect to complete several transactions per year |
| As a result of such transactions, our financial results may differ from the investment communityapstas expectations in a given quarter, or over the long term |
| In addition, acquisitions and strategic alliances may require us to integrate a different company culture, management team and business infrastructure |
| We may have difficulty developing, manufacturing and marketing the products of a newly acquired company in a way that enhances the performance of our combined businesses or product lines to realize the value from expected synergies |
| Depending on the size and complexity of an acquisition, our successful integration of the entity depends on a variety of factors, including: • the retention of key employees; • the management of facilities and employees in different geographic areas; • the retention of key customers; • the compatibility of our sales programs and facilities within those of the acquired company; and • the compatibility of our existing infrastructure with that of an acquired company |
| A successful divestiture depends on various factors, including our ability to: • effectively transfer liabilities, contracts, facilities and employees to the purchaser; 26 _________________________________________________________________ • identify and separate the intellectual property to be divested from the intellectual property that we wish to keep; and • reduce fixed costs previously associated with the divested assets or business |
| Future impairment of the value of purchased assets and goodwill could have a significant negative impact on our future operating results |
| In addition, if customers of the divested business do not receive the same level of service from the new owners, this may adversely affect our other businesses to the extent that these customers also purchase other Agilent products |
| All of these efforts require varying levels of management resources, which may divert our attention from other business operations |
| Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions |
| If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted |
| Environmental contamination from past operations could subject us to unreimbursed costs and could harm on-site operations and the future use and value of the properties involved and environmental contamination caused by ongoing operations could subject us to substantial liabilities in the future |
| Some of our properties are undergoing remediation by Hewlett-Packard ( "e HP "e ) for subsurface contaminations that were known at the time of our separation from HP HP has agreed to retain the liability for this subsurface contamination, perform the required remediation and indemnify us with respect to claims arising out of that contamination |
| The determination of the existence and cost of any additional contamination caused by us could involve costly and time-consuming negotiations and litigation |
| In addition, HP will have access to our properties to perform remediation |
| While HP has agreed to minimize interference with on-site operations at those properties, remediation activities and subsurface contamination may require us to incur unreimbursed costs and could harm on-site operations and the future use and value of the properties |
| We cannot be sure that HP will continue to fulfill its indemnification or remediation obligations |
| We have agreed to indemnify HP for any liability associated with contamination from past operations at all other properties transferred from HP to us other than those properties currently undergoing remediation by HP While we are not aware of any material liabilities associated with any potential subsurface contamination at any of those properties, subsurface contamination may exist, and we may be exposed to material liability as a result of the existence of that contamination |
| Our semiconductor and other manufacturing processes involve the use of substances regulated under various international, federal, state and local laws governing the environment |
| We may still be subject to liabilities for environmental contamination, and these liabilities may be substantial |
| Although our policy is to apply strict standards for environmental protection at our sites inside and outside the US, even if the sites outside the US are not subject to regulations imposed by foreign governments, we may not be aware of all conditions that could subject us to liability |
| Our customers and we are subject to various governmental regulations, compliance with which may cause us to incur significant expenses, and if we fail to maintain satisfactory compliance with certain regulations, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties |
| Our businesses are subject to various significant international, federal, state and local regulations, including but not limited to health and safety, packaging, product content, labor and import/export regulations |
| These regulations are complex, change frequently and have tended to become more 27 _________________________________________________________________ stringent over time |
| We may be required to incur significant expenses to comply with these regulations or to remedy violations of these regulations |
| Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations |
| In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products |
| Our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation by other agencies such as the US Federal Communications Commission |
| We also must comply with work safety rules |
| If we fail to adequately address any of these regulations, our businesses could be harmed |
| Some of our chemical analysis products are used in conjunction with chemicals whose manufacture, processing, distribution and notification requirements are regulated by the US Environmental Protection Agency under the Toxic Substances Control Act, and by regulatory bodies in other countries with laws similar to the Toxic Substances Control Act |
| We must conform the manufacture, processing, distribution of and notification about these chemicals to these laws and adapt to regulatory requirements in all countries as these requirements change |
| If we fail to comply with these requirements in the manufacture or distribution of our products, then we could be made to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products in commerce until the products or component substances are brought into compliance |
| We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in revenue associated with these customers |
| We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government |
| The laws governing government contracts differ from the laws governing private contracts |
| For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts |
| We are also subject to investigation for compliance with the regulations governing government contracts |
| A failure to comply with these regulations might result in suspension of these contracts, or administrative penalties |
| Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products |
| While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may be unaware of intellectual property rights of others that may cover some of our technology, products or services |
| Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert our management and key personnel from our business operations |
| The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks |
| Claims of intellectual property infringement might also require us to enter into costly license agreements |
| However, we may not be able to obtain license agreements on terms acceptable to us, or at all |
| We also may be subject to significant damages or injunctions against development and sale of certain of our products |
| We often rely on licenses of intellectual property useful for our businesses |
| We cannot ensure that these licenses will be available in the future on favorable terms or at all |
| In addition, our position with respect to the negotiation of licenses has changed as a result of our agreement to divest our semiconductor products business |
| In the past, we benefited from a substantial intellectual property portfolio, including the intellectual property that is being sold to the buyer of our semiconductor products business, when asserting counterclaims and negotiating cross-licenses with third parties |
| Our divestiture agreement gives us only a limited ability to sublicense the semiconductor products 28 _________________________________________________________________ intellectual property portfolio |
| Accordingly, we may be unable to obtain agreements on terms as favorable as we may have been able to obtain if we could have licensed the intellectual property portfolio we owned prior to the divestiture agreement |
| Third parties may infringe our intellectual property, and we may expend significant resources enforcing our rights or suffer competitive injury |
| Our success depends in large part on our proprietary technology |
| We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights |
| If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results |
| Our pending patent and trademark registration applications may not be allowed, or competitors may challenge the validity or scope of our patents, copyrights or trademarks |
| In addition, our patents may not provide us a significant competitive advantage |
| We may be required to spend significant resources to monitor and police our intellectual property rights |
| We may not be able to detect infringement and our competitive position may be harmed before we do so |
| In addition, competitors may design around our intellectual property rights or develop competing technologies |
| Intellectual property rights and our ability to enforce them may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share and result in lost revenues |
| Furthermore, some intellectual property rights are licensed to other companies, allowing them to compete with us using that intellectual property |
| If we suffer loss to our factories, facilities or distribution system due to catastrophe, our operations could be seriously harmed |
| Our factories, facilities and distribution system are subject to catastrophic loss due to fire, flood, terrorism or other natural or man-made disasters |
| In particular, several of our facilities could be subject to a catastrophic loss caused by earthquake due to their locations |
| Our production facilities, headquarters and Agilent Technologies Laboratories in California, and our production facilities in Washington and Japan, are all located in areas with above average seismic activity |
| If any of these facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility |
| In addition, since we have recently consolidated our manufacturing facilities, we are more likely to experience an interruption to our operations in the event of a catastrophe in any one location |
| Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from earthquakes or terrorism |