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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(MARK ONE) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For the quarterly period ended January 31, 2021 
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
For transition period from              to        
 Commission File Number: 001-15405
 AGILENT TECHNOLOGIES, INC.
(Exact Name of registrant as specified in its charter)
Delaware 77-0518772
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
 
5301 Stevens Creek Blvd.,
Santa Clara, California 95051
(Address of principal executive offices)

Registrant’s telephone number, including area code: (800) 227-9770  

Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTrading SymbolName of each Exchange on which registered
Common Stock, $0.01 par valueANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No  
 Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No    
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No   

As of February 25, 2021, the registrant had 304,697,515 shares of common stock, $0.01 par value per share, outstanding.


Table of Contents
AGILENT TECHNOLOGIES, INC.
TABLE OF CONTENTS
 
   Page
Number
 
 
  
  
  
  
 
 
 
 
 
 
 
 
Item 6.
Exhibits
  

2

Table of Contents
PART I— FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
 
Three Months Ended
 January 31,
 20212020
Net revenue:  
Products$1,172 $1,023 
Services and other376 334 
Total net revenue1,548 1,357 
Costs and expenses:  
Cost of products509 454 
Cost of services and other201 180 
Total costs710 634 
Research and development103 104 
Selling, general and administrative407 404 
Total costs and expenses1,220 1,142 
Income from operations328 215 
Interest income 3 
Interest expense(19)(20)
Other income (expense), net3 21 
Income before taxes312 219 
Provision for income taxes24 22 
Net income$288 $197 
Net income per share:
Basic$0.94 $0.64 
Diluted$0.93 $0.63 
Weighted average shares used in computing net income per share:  
Basic306 310 
Diluted309 313 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

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

Three Months Ended
 January 31,
 20212020
Net income$288 $197 
Other comprehensive income (loss):
Unrealized gain (loss) on derivative instruments, net of tax expense (benefit) of $(2) and $0
(4)1 
Amounts reclassified into earnings related to derivative instruments, net of tax expense of $2 and $0
6  
Foreign currency translation, net of tax expense of $0 and $0
42 (11)
Net defined benefit pension cost and post retirement plan costs:
Change in actuarial net loss, net of tax expense of $4 and $3
9 6 
Change in net prior service benefit, net of tax expense of $0 and $1
 (3)
Other comprehensive income (loss)53 (7)
Total comprehensive income$341 $190 


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

4

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AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share amounts)
(Unaudited)
 January 31,
2021
October 31,
2020
ASSETS  
Current assets:  
Cash and cash equivalents$1,329 $1,441 
Accounts receivable, net1,087 1,038 
Inventory755 720 
Other current assets312 216 
Total current assets3,483 3,415 
Property, plant and equipment, net866 845 
Goodwill3,618 3,602 
Other intangible assets, net787 831 
Long-term investments165 158 
Other assets755 776 
Total assets$9,674 $9,627 
LIABILITIES AND EQUITY  
Current liabilities:  
Accounts payable$398 $354 
Employee compensation and benefits298 367 
Deferred revenue419 386 
Short-term debt314 75 
Other accrued liabilities258 285 
Total current liabilities1,687 1,467 
Long-term debt2,185 2,284 
Retirement and post-retirement benefits389 389 
Other long-term liabilities609 614 
Total liabilities4,870 4,754 
Commitments and contingencies (Note 12)
Total equity:  
Stockholders’ equity:  
Preferred stock; $0.01 par value; 125 million shares authorized; none issued and outstanding
  
Common stock; $0.01 par value; 2 billion shares authorized; 305 million shares at January 31, 2021 and 306 million shares at October 31, 2020 issued and outstanding
3 3 
Additional paid-in-capital5,266 5,311 
Retained earnings 4 81 
Accumulated other comprehensive loss(469)(522)
Total stockholders' equity4,804 4,873 
Total liabilities and stockholders' equity$9,674 $9,627 

 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

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AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
Three Months Ended
 January 31,
 20212020
Net income$288 $197 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:  
Depreciation and amortization76 79 
Share-based compensation40 27 
Deferred taxes29 10 
Excess and obsolete inventory related charges6 4 
Loss on extinguishment of debt5  
Unrealized gain on equity securities (16)
Other non-cash expense, net2 2 
Changes in assets and liabilities:  
Accounts receivable(31)(40)
Inventory(35)(32)
Accounts payable43 (15)
Employee compensation and benefits(88)(80)
Other assets and liabilities(97)(195)
Net cash provided by (used in) operating activities238 (59)
Cash flows from investing activities:  
Investments in property, plant and equipment(41)(34)
Payment to acquire fair value investments(1)(1)
Net cash used in investing activities(42)(35)
Cash flows from financing activities:  
Issuance of common stock under employee stock plans25 32 
Payment of taxes related to net share settlement of equity awards(72)(33)
Payment of dividends(59)(56)
Proceeds from revolving credit facility 432 
Repayment of revolving credit facility (372)
Repayment of senior notes(105) 
Proceeds from commercial paper785  
Repayment of commercial paper(546) 
Repayment of finance lease (4)
Treasury stock repurchases(344)(60)
Net cash used in financing activities(316)(61)
Effect of exchange rate movements9 (1)
Net decrease in cash, cash equivalents and restricted cash(111)(156)
Cash, cash equivalents and restricted cash at beginning of period1,447 1,388 
Cash, cash equivalents and restricted cash at end of period$1,336 $1,232 
Supplemental cash flow information:
Income tax paid, net$52 $241 
Interest payments$19 $17 

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

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AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(in millions, except number of shares in thousands)
(Unaudited)

 Common Stock Accumulated
Other
Comprehensive
Loss
 
Three Months Ended January 31, 2021Number
of
Shares
Par
Value
Additional
Paid-in
Capital
Retained
Earnings
Total Stockholders' Equity
Balance as of October 31, 2020306,198 $3 $5,311 $81 $(522)$4,873 
Components of comprehensive income, net of tax:
Net income— — — 288 — 288 
Other comprehensive income— — — — 53 53 
Total comprehensive income     341 
Cash dividends declared ($0.194 per common share)             
— — — (59)— (59)
Share-based awards issued, net of tax of $72
1,592 — (47)— — (47)
Repurchase of common stock(2,885)— (38)(306)— (344)
Share-based compensation— — 40 — — 40 
Balance as of January 31, 2021304,905 $3 $5,266 $4 $(469)$4,804 

 Common Stock Accumulated
Other
Comprehensive
Loss
 
Three Months Ended January 31, 2020Number
of
Shares
Par
Value
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated Deficit)
Total Stockholders' Equity
Balance as of October 31, 2019309,071 $3 $5,277 $(18)$(514)$4,748 
Components of comprehensive income, net of tax:
Net income— — — 197 — 197 
Other comprehensive loss— — — — (7)(7)
Total comprehensive income     190 
Cash dividends declared ($0.18 per common share)             
— — — (56)— (56)
Share-based awards issued, net of tax of $33
1,703 — (1)— — (1)
Repurchase of common stock(726)— (10)(50)— (60)
Share-based compensation— — 27 — — 27 
Balance as of January 31, 2020310,048 $3 $5,293 $73 $(521)$4,848 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7

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

1. OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Overview. Agilent Technologies, Inc. ("we", "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow.

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

Basis of Presentation. We have prepared the accompanying financial data for the three months ended January 31, 2021 and 2020 pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations. The October 31, 2020 condensed balance sheet data was derived from audited financial statements but does not include all the disclosures required in audited financial statements by U.S. GAAP. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of our condensed consolidated balance sheet as of January 31, 2021 and October 31, 2020, condensed consolidated statement of comprehensive income (loss) for the three months ended January 31, 2021 and 2020, condensed consolidated statement of operations for the three months ended January 31, 2021 and 2020, condensed consolidated statement of cash flows for the three months ended January 31, 2021 and 2020 and condensed consolidated statement of equity for the three months ended January 31, 2021 and 2020.

Use of Estimates. The preparation of condensed consolidated financial statements in accordance with GAAP in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, retirement and post-retirement benefit plan assumptions, valuation of goodwill and purchased intangible assets and accounting for income taxes.

Restricted Cash and Restricted Cash Equivalents. Restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. A reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheet follows:
 January 31,October 31
 20212020
(in millions)
Cash and cash equivalents$1,329 $1,441 
Restricted cash included in other assets7 6 
Total cash, cash equivalents and restricted cash$1,336 $1,447 

Leases. As of January 31, 2021 and October 31, 2020, operating lease right-of-use assets where we are the lessee were $173 million and $175 million, respectively, and were included within other assets in the accompanying condensed consolidated balance sheet. The associated operating lease liabilities were $176 million and $178 million as of January 31, 2021 and October 31, 2020, respectively, and were included in other accrued liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheet.

Variable Interest Entities. We make a determination upon entering into an arrangement whether an entity in which we have made an investment is considered a Variable Interest Entity (“VIE”). We evaluate our investments in privately held companies on an ongoing basis. We have determined that as of January 31, 2021 and October 31, 2020, there were no VIEs required to be consolidated in our consolidated financial statements because we do not have a controlling financial interest in
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any of the VIEs in which we have invested nor are we the primary beneficiary. We account for these investments under either the equity method or as equity investments without readily determinable fair value, depending on the circumstances. We periodically reassess whether we are the primary beneficiary of a VIE. The reassessment process considers whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have become VIEs, based on changes in facts and circumstances including changes in contractual arrangements and capital structure.

As of January 31, 2021 and October 31, 2020, the total carrying value of investments and loans in privately held companies considered as VIEs was $78 million and $67 million respectively. The maximum exposure is equal to the carrying value because we do not have future funding commitments. The investments are included on the long-term investments line and the loans on the other current assets and other assets lines (depending upon tenure of loan) on the condensed consolidated balance sheet.

Fair Value of Financial Instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of long-term equity investments which are readily determinable, and which are not accounted under the equity method are reported at fair value using quoted market prices for those securities when available with gains and losses included in net income. The fair value of long-term equity investments which are not readily determinable, and which are not accounted under the equity method are reported at cost with adjustments for observable changes in prices or impairments included in net income. The fair value of our senior notes, calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance fair value hierarchy exceeds the carrying value by approximately $162 million as of January 31, 2021 and October 31, 2020. The fair value is greater than carrying value primarily due to decreased market interest rates. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 9, "Fair Value Measurements" for additional information on the fair value of financial instruments.


 2. NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued new guidance to require a financial asset measured at amortized cost basis, such as accounts receivable, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. During 2018 and 2019, the FASB issued additional guidance and clarification. On November 1, 2020, we adopted this guidance which did not have a material impact on our condensed consolidated financial statements.

In January 2017, the FASB issued new guidance that simplifies the measurement of goodwill impairment by eliminating the Step 2 requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax deductible goodwill when measuring goodwill impairment loss. On November 1, 2020, we adopted this guidance which did not have a material impact on our condensed consolidated financial statements.

In August 2018, the Financial Accounting Standards Board ("FASB") issued updates to improve the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement which eliminates certain disclosure requirements and modifies others. On November 1, 2020, we adopted these amendments which did not have a material impact on our consolidated financial statements and disclosures. See Note 9, "Fair Value Measurements" for additional information on the fair value of financial instruments disclosures.

In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. This guidance eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance also improves consistent application by clarifying and amending existing guidance related to aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step up in the tax basis of goodwill. On November 1, 2020, we early adopted this guidance which did not have a material impact on our condensed
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consolidated financial statements and disclosures.

In March 2020, the FASB issued an update for facilitation of the effects of reference rate reform on financial reporting. This update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in the guidance provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply to contracts, hedging relationships, and other transactions that reference London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. When elected, the optional expedients for contract modifications are applied consistently for all eligible contracts or eligible transactions within the relevant Topic or Industry Subtopic in the FASB's Accounting Standards Codification. The guidance was effective upon issuance and may generally be applied through December 31, 2022 to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR. In January 2021, the FASB issued an update that provides supplemental guidance and clarification of the reference rate reform. The update provides additional optional guidance on the transition from LIBOR to include derivative instruments that use an interest rate for margining, discounting or contract price alignment. The standard will ease, if warranted, the requirements for accounting for the future effects of the rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022. We continue to monitor the impact that the discontinuance of LIBOR or another reference rate will have on our contracts, hedging relationships and other transactions.

Accounting Pronouncements Not Yet Adopted
There were no additions to the new accounting pronouncements not yet adopted as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2020.

Other amendments to GAAP in the U.S. that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our condensed consolidated financial statements upon adoption.

3. REVENUE


The following table presents the company’s total revenue and segment revenue disaggregated by geographical region:
Three Months Ended January 31,
20212020
Life Sciences and Applied MarketsAgilent CrossLab
Diagnostics and Genomics
TotalLife Sciences and Applied MarketsAgilent CrossLab
Diagnostics and Genomics
Total
(in millions)
Revenue by Region
Americas$224 $179 $152 $555 $209 $167 $118 $494 
Europe190 147 100 437 167 133 92 392 
Asia Pacific308 206 42 556 262 170 39 471 
Total$722 $532 $294 $1,548 $638 $470 $249 $1,357 
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The following table presents the company’s total revenue disaggregated by end markets and by revenue type:
Three Months Ended
January 31,
20212020
(in millions)
Revenue by End Markets
Pharmaceutical and Biopharmaceutical$521 $423 
Chemical and Energy328 312 
Diagnostics and Clinical216 194 
Food162 130 
Academia and Government142 141 
Environmental and Forensics179 157 
Total$1,548 $1,357 
Revenue by Type
Instrumentation$681 $593 
Non-instrumentation and other867 764 
Total$1,548 $1,357 

Revenue by region is based on the ship to location of the customer. Revenue by end market is determined by the market indicator of the customer and by customer type. Instrumentation revenue includes sales from instruments, remarketed instruments and third-party products. Non-instrumentation and other revenue include sales from contract and per incident services, our companion diagnostics and our nucleic acid solutions businesses as well as sales from spare parts, consumables, reagents, vacuum pumps, subscriptions, software licenses and associated services.

Contract Balances

Contract Assets

Contract assets (unbilled accounts receivable) primarily relate to the company's right to consideration for work completed but not billed at the reporting date. The unbilled receivables are reclassified to trade receivables when billed to customers. Contract assets are generally classified as current assets and are included in "Accounts receivable, net" in the condensed consolidated balance sheet. The balances of contract assets as of January 31, 2021 and October 31, 2020 were $154 million and $153 million, respectively. The increase in unbilled receivables during the three months ended January 31, 2021 is a result of recognition of revenue upon the transfer of the control to the customer.

Contract Liabilities

The following table provides information about contract liabilities (deferred revenue) and the significant changes in the balances during the three months ended January 31, 2021:
Contract
Liabilities
(in millions)
Ending balance as of October 31, 2020$446 
Net revenue deferred in the period197 
Revenue recognized that was included in the contract liability balance at the beginning of the period(186)
Change in deferrals from customer cash advances, net of revenue recognized20 
Currency translation and other adjustments8 
Ending balance as of January 31, 2021$485 

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During the three months ended January 31, 2020 revenue recognized that was included in the contract liability balance at October 31, 2019 was $142 million.

Contract liabilities primarily relate to multiple element arrangements for which billing has occurred but transfer of control of all elements to the customer has either partially or not occurred at the balance sheet date. This includes cash received from customers for products and related installation and services in advance of the transfer of control. Contract liabilities are classified as either current in deferred revenue or long-term in other long-term liabilities in the condensed consolidated balance sheet based on the timing of when we expect to complete our performance obligation.

Contract Costs

Incremental costs of obtaining a contract with a customer are recognized as an asset if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs meet the requirements to be capitalized. The change in total capitalized costs to obtain a contract was immaterial during the three months ended January 31, 2021 and was included in other current and long-term assets on the condensed consolidated balance sheet. We have applied the practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include the company's internal sales force compensation program, as we have determined that annual compensation is commensurate with annual sales activities.

Transaction Price Allocated to the Remaining Performance Obligations

We have applied the practical expedient in ASC 606-10-50-14 and have not disclosed information about transaction price allocated to remaining performance obligations that have original expected durations of one year or less.
The estimated revenue expected to be recognized for remaining performance obligations that have an original term of more than one year, as of January 31, 2021, was $222 million, the majority of which is expected to be recognized over the next 12 months. Remaining performance obligations primarily include extended warranty, customer manufacturing contracts, and software maintenance contracts and revenue associated with lease arrangements.

4.     SHARE-BASED COMPENSATION
 
We account for share-based awards in accordance with the provisions of the authoritative accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock options, restricted stock units, employee stock purchases made under our employee stock purchase plan and performance share awards granted to selected members of our senior management under the long-term performance plan (“LTPP”) based on estimated fair values.

We have two LTPP performance stock award programs, which are administered under the 2018 Stock Plan, for our executive officers and other key employees. Participants in our LTPP Total Stockholders’ Return (“TSR”) and LTPP Earnings Per Share (“EPS”) programs are entitled to receive shares of the company's stock after the end of a three-year period, if specified performance targets for the programs are met. The LTPP-TSR awards are generally designed to meet the criteria of a performance award with the performance metrics and peer group comparison based on the TSR set at the beginning of the performance period. The LTPP-EPS awards are based on the company’s EPS performance over a three-year period. The performance targets for the LTPP-EPS for year 2 and year 3 of the performance period are set in the first quarter of year 2 and year 3, respectively. All LTPP awards are subject to a one-year post-vest holding period.

The final LTPP award may vary from 0 percent to 200 percent of the target award. We consider the dilutive impact of these programs in our diluted net income per share calculation only to the extent that the performance conditions are expected to be met. Restricted stock units generally vest, with some exceptions, at a rate of 25 percent per year over a period of four years from the date of grant.

In fiscal year 2021, we resumed granting stock options. Stock options granted under the 2018 Stock Plan may be either "incentive stock options", as defined in Section 422 of the Internal Revenue Code, or non-statutory. Options generally vest at a rate of 25 percent per year over a period of four years from the date of grant with a maximum contractual term of ten years. The exercise price for stock options is generally not less than 100 percent of the fair market value of our common stock on the date the stock award is granted. We issue new shares of common stock when employee stock options are exercised.
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The impact on our results for share-based compensation was as follows:
 
Three Months Ended
January 31,
 20212020
 (in millions)
Cost of products and services$9 $6 
Research and development4 3 
Selling, general and administrative27 18 
Total share-based compensation expense$40 $27 
 
At January 31, 2021 and October 31, 2020, there was no share-based compensation capitalized within inventory.
The following assumptions were used to estimate the fair value of awards granted.
 
Three Months Ended
January 31,
 20212020
Stock Option Plans:  
Weighted average risk-free interest rate0.2%
Dividend yield0.7%
Weighted average volatility26%
Expected life5.5 years
LTPP:
Volatility of Agilent shares30%23%
Volatility of selected peer-company shares
24%-57%
15%-44%
Pair-wise correlation with selected peers45%29%
Post-vest holding restriction discount for all executive awards6.8%5.3%
 
The fair value of share-based awards for our employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTPP (TSR) were valued using a Monte Carlo simulation model. The Monte Carlo simulation fair value model requires the use of highly subjective and complex assumptions, including the price volatility of the underlying stock.  For the volatility of our LTPP (TSR) grants, we used our own historical stock price volatility.  

The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the price at purchase and uses the purchase date to establish the fair market value.

We use historical volatility to estimate the expected stock price volatility assumption for employee stock option awards. In reaching the conclusion, we have considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. In estimating the expected life of our options granted we considered the historical option exercise behavior of our executives, which we believe is representative of future behavior.

The estimated fair value of restricted stock units and LTPP (EPS) awards is determined based on the market price of our common stock on the date of grant adjusted for expected dividend yield. The compensation cost for LTPP (EPS) reflects the cost of awards that are probable to vest at the end of the performance period.

All LTPP awards granted to our senior management employees have a one-year post-vest holding restriction. The estimated discount associated with post-vest holding restrictions is calculated using the Finnerty model. The model calculates the potential lost value if the employees were able to sell the shares during the lack of marketability period, instead of being required to hold the shares. The model used the same historical stock price volatility and dividend yield assumption used for the Monte Carlo simulation model and an expected dividend yield to compute the discount.

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5.     INCOME TAXES

For the three months ended January 31, 2021, our income tax expense was $24 million with an effective tax rate of 7.7 percent. For the three months ended January 31, 2021, our effective tax rate and the resulting provision for income taxes were impacted by the expiration of various foreign statutes of limitations which resulted in the recognition of previously unrecognized tax benefits of $16 million. The income taxes for the three months ended January 31, 2021 also include the excess tax benefits from stock-based compensation of $20 million.

Our calculation of income tax expense for the three months ended January 31, 2021 is dependent in part on forecasts of full year results. The impact of the COVID-19 outbreak on the economic environment is uncertain and may change these forecasts, which could impact tax expense.

For the three months ended January 31, 2020, our income tax expense was $22 million with an effective tax rate of 10.0 percent. For the three months ended January 31, 2020, our effective tax rate and the resulting provision for income taxes were impacted by a discrete benefit of $13 million related to the excess tax benefits from stock compensation.

In the U.S., tax years remain open back to the year 2017 for federal income tax purposes and for significant states. In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2009.

With these jurisdictions and the U.S., it is reasonably possible 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.

6. NET INCOME PER SHARE
 
The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented below:
 
Three Months Ended
January 31,
 20212020
 (in millions)
Numerator:  
Net income$288 $197 
Denominator:
Basic weighted-average shares306 310 
Potential common shares— stock options and other employee stock plans3 3 
Diluted weighted-average shares309 313 
 
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards.

We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. In addition, we exclude from the calculation of diluted earnings per share stock options, ESPP, LTPP and restricted stock awards whose combined exercise price and unamortized fair value were greater than the average market price of our common stock because their effect would also be anti-dilutive.  

For both the three months ended January 31, 2021 and 2020 potential common shares excluded from the calculation of diluted earnings per share were not material.
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7. INVENTORY
 
Inventory as of January 31, 2021 and October 31, 2020 consisted of the following:

 January 31,
2021
October 31,
2020
 (in millions)
Finished goods$416 $417 
Purchased parts and fabricated assemblies339 303 
Inventory$755 $720 

8. GOODWILL AND OTHER INTANGIBLE ASSETS
 
The following table presents goodwill balances and the movements for each of our reportable segments during the three months ended January 31, 2021:
 
 Life Sciences and Applied MarketsDiagnostics and GenomicsAgilent CrossLabTotal
 (in millions)
Goodwill as of October 31, 2020$1,441 $1,599 $562 $3,602 
Foreign currency translation impact8 3 5 16 
Goodwill as of January 31, 2021$1,449 $1,602 $567 $3,618 

The component parts of other intangible assets as of January 31, 2021 and October 31, 2020 are shown in the table below:
 
 Other Intangible Assets
 Gross
Carrying
Amount
Accumulated
Amortization
Net Book
Value
 (in millions)
As of October 31, 2020   
Purchased technology$1,429 $863 $566 
Trademark/Tradename196 117 79 
Customer relationships330 158 172 
Third-party technology and licenses11 7 4 
Total amortizable intangible assets1,966 1,145 821 
In-Process R&D10 — 10 
Total$1,976 $1,145 $831 
As of January 31, 2021   
Purchased technology$1,433 $891 $542 
Trademark/Tradename196 121 75 
Customer relationships332 176 156 
Third-party technology and licenses10 7 3 
Total amortizable intangible assets1,971 1,195 776 
In-Process R&D11 — 11 
Total$1,982 $1,195 $787 

During the three months ended January 31, 2021, there were no additions to goodwill or to other intangible assets. During the three months ended January 31, 2021, other intangible assets in total increased $1 million due to the impact of foreign currency translation.

In general, for United States federal tax purposes, goodwill from asset purchases is deductible; however, any goodwill created as part of a stock acquisition is not deductible. 

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Each quarter we review the events and circumstances to determine if impairment of indefinite-lived intangible assets and goodwill is indicated. During the three months ended January 31, 2021 and 2020 we did not identify any triggering events or circumstances, including impacts due to COVID-19, which would indicate an impairment of goodwill or indefinite-lived intangible assets.

Amortization expense of intangible assets was $45 million and $48 million for the three months ended January 31, 2021 and 2020, respectively.

Future amortization expense related to existing finite-lived purchased intangible assets for the remainder of fiscal year 2021 and for each of the next five fiscal years and thereafter is estimated below:
Estimated future amortization expense:
(in millions)
Remainder of 2021$129 
2022$152 
2023$109 
2024$88 
2025$70 
2026$40 
Thereafter$188 
 
9. FAIR VALUE MEASUREMENTS
 
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

Level 1- applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2- applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.

Level 3- applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

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Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2021 were as follows:
 
  Fair Value Measurement at January 31, 2021 Using
 January 31,
2021
Quoted Prices
 in Active
 Markets for
 Identical Assets
 (Level 1)
Significant
 Other
 Observable
 Inputs
 (Level 2)
Significant
 Unobservable
 Inputs
 (Level 3)
 (in millions)
Assets:    
Short-term    
Cash equivalents (money market funds)$449 $449 $ $ 
Derivative instruments (foreign exchange contracts)8  8  
Long-term
Trading securities31 31   
Other investments28  28  
Total assets measured at fair value$516 $480 $36 $ 
Liabilities:    
Short-term
Derivative instruments (foreign exchange contracts) $17 $ $17 $ 
Long-term
Deferred compensation liability31  31  
Total liabilities measured at fair value$48 $ $48 $ 

Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2020 were as follows:
 
  Fair Value Measurement at October 31, 2020 Using
 October 31,
2020
Quoted Prices
 in Active
 Markets for
 Identical Assets
 (Level 1)
Significant
 Other
 Observable
 Inputs
 (Level 2)
Significant
 Unobservable
 Inputs
 (Level 3)
 (in millions)
Assets:    
Short-term    
Cash equivalents (money market funds)$740 $740 $ $ 
Derivative instruments (foreign exchange contracts)2  2  
Long-term
Trading securities30 30   
Other investments25  25  
Total assets measured at fair value$797 $770 $27 $ 
Liabilities:    
Short-term
Derivative instruments (foreign exchange contracts)$17 $ $17 $ 
Long-term
Deferred compensation liability30  30  
Total liabilities measured at fair value$47 $ $47 $ 
 
Our money market funds and trading securities are generally valued using quoted market prices and therefore are classified within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred compensation liability is classified as level 2 because, although the values are not directly based on quoted market prices, the inputs used in the calculations are observable. Other investments represent shares we own in a special fund that targets underlying investments of approximately 40 percent in debt securities and 60 percent in equity securities. It has been classified as level 2 because, although the shares of the fund are not traded on any active stock exchange, each of the
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individual underlying securities are or can be derived from and hence we have a readily determinable value for the underlying securities, from which we a