Agilent Technologies, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended October 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Agilent operates in life sciences and applied markets, diagnostics and genomics, and laboratory services and consumables (Agilent CrossLab). Keysight was spun off in November 2014; its prior-period results are presented as discontinued operations.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $4.202 billion | $4.038 billion |
| Income from operations | $615 million | $522 million |
| Income from continuing operations | $462 million | $438 million |
| Net income | $462 million | $401 million |
| Diluted EPS | $1.40 | $1.20 |
| Gross margin | 52.3% | 50.5% |
| Operating margin | 14.6% | 12.9% |
| Cash from operating activities | $793 million | $512 million |
- Revenue rose 4%; foreign currency movements reduced reported growth by about 2 percentage points. Products contributed $3.227 billion (+3%) and services and other revenue $975 million (+9%).
- Segment revenue: Life Sciences and Applied Markets $2.073 billion (+1%); Diagnostics and Genomics $709 million (+7%); CrossLab $1.420 billion (+7%). Segment operating margins were 20.7%, 16.0%, and 22.3%, respectively.
- Cash used in investing activities was $238 million, including $139 million of capital expenditures and $261 million for acquisitions and intangible assets, partly offset by a $245 million inflow from restricted cash. Cash used in financing was $268 million, including $434 million of repurchases and $150 million of dividends.
- At year-end, cash and cash equivalents were $2.289 billion, working capital was $2.690 billion, total assets were $7.802 billion, and long-term debt was $1.912 billion. Approximately $2.181 billion of cash was held outside the U.S. The $700 million revolving credit facility had no borrowings at year-end; $65 million was outstanding on December 20, 2016.
Material changes versus prior period
- Revenue returned to growth after being flat in FY2015. Continuing-operations income increased 5%, while operating income increased 18% and operating margin expanded to 14.6% from 12.9%.
- Gross margin improved 2 percentage points, attributed to the completed NMR business exit, margin initiatives, lower logistics costs, and reduced costs related to the FDA warning letter. Operating margin also benefited from a $16 million pension curtailment and settlement gain; acquisition and integration costs and investment-related impairments partly offset gains.
- Operating cash flow increased $281 million year over year, with lower net tax payments cited as a factor. FY2015 cash flow also reflected substantial uses in other assets and liabilities.
- FY2016 included the $242 million Seahorse acquisition, the $26 million iLab acquisition, and an $80 million preferred-stock investment in Lasergen. Agilent recorded $18 million of investment impairment and $7 million of related loan impairment.
Outlook, risks, and unusual items
- Management expects continued strength in pharmaceutical markets and solid growth in food and environmental markets, but remains uncertain about chemical and energy markets. It expects unfavorable currency effects near term and plans to focus on operating-margin growth, operational simplification, product differentiation, and customer experience. No specific consolidated revenue or earnings guidance was provided.
- Management expects to return a significant proportion of cash flow through dividends and repurchases. FY2016 repurchases totaled $434 million; $804 million remained authorized at year-end. A quarterly dividend of $0.132 per share was declared after year-end.
- Key risks include uncertain and seasonally variable customer orders and budgets, pricing and competition, supply-chain constraints, foreign currency and international exposure, regulatory requirements (including FDA oversight), acquisition integration, taxes and repatriation costs, pension funding, and reliance on outsourced providers and critical IT systems.
- The effective tax rate was 15.1%, versus 8.7% in FY2015, which included a net discrete tax benefit. FY2016 tax expense included $17 million of net discrete expense; tax holidays reduced FY2016 income taxes by $86 million and are due for renewal between 2018 and 2023.
- Agilent early adopted share-based-payment accounting guidance, recording a $196 million cumulative adjustment to opening retained earnings. The company said the prior-year material weakness in income-tax controls was remediated; management and the auditor concluded internal control over financial reporting was effective at October 31, 2016. The auditor’s opinion on the financial statements was unqualified.
- Management reported no pending legal matters it believed reasonably possible of having a material impact. Environmental indemnities and other transaction-related obligations remain, although their fair value was assessed as not material. A subsequent agreement to acquire Multiplicom for approximately €68 million was signed in December 2016.
Most important facts for investors to verify
- Whether underlying growth and margin improvement persist after separating currency effects, acquisitions, the NMR exit, and the pension gain.
- The trajectory of chemical and energy demand, and the continued growth of pharmaceutical, diagnostics, food, and environmental markets.
- Availability and tax cost of overseas cash, the November 2017 maturity of $100 million principal of 2017 notes, and subsequent credit-facility borrowings.
- Cash conversion and capital allocation, including acquisition spending, repurchases, dividends, and planned pension contributions.
- Tax exposure: $293 million of unrecognized tax benefits, deferred-tax valuation allowances, and renewal of tax holidays.
- Execution and returns from Seahorse, iLab, Lasergen, and the announced Multiplicom acquisition, alongside continuing regulatory and supply-chain risks.