Agilent Technologies, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended October 31, 2015. Unless noted, financial amounts are U.S. dollars. Agilent is a life sciences, diagnostics and applied chemical markets company. Its electronic-measurement business, Keysight, was distributed to shareholders on November 1, 2014 and is reported as discontinued operations; consequently, FY2015 continuing operations reflect Agilent’s post-separation businesses.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $4.038 billion | $4.048 billion |
| Income from operations | $522 million | $419 million |
| Operating margin | 12.9% | 10.4% |
| Income from continuing operations | $438 million | $232 million |
| Net income, including discontinued operations | $401 million | $549 million |
| Diluted EPS from continuing operations | $1.31 | $0.69 |
| Operating cash flow | $491 million | $711 million |
| Capital expenditures | $98 million | $205 million |
| Cash and cash equivalents at year-end | $2.003 billion | $2.218 billion |
| Working capital at year-end | $2.710 billion | $3.817 billion |
| Long-term debt at year-end | $1.655 billion | $1.663 billion |
FY2015 gross margin was 50.5%, up from 48.8%. The reported effective tax rate on continuing operations was 8.7%, including $55 million of net discrete tax benefits. Cash and cash equivalents exclude $242 million of restricted cash held in escrow for the Seahorse acquisition.
Segments
- Life Sciences and Applied Markets: Revenue of $2.046 billion, down 2%; operating income of $380 million and segment operating margin of 18.6%.
- Diagnostics and Genomics: Revenue of $662 million, essentially flat; operating income of $88 million and segment operating margin of 13.3%.
- Agilent CrossLab: Revenue of $1.330 billion, up 2%; operating income of $299 million and segment operating margin of 22.5%.
Segment operating income and margins use management’s segment measures and exclude certain corporate, restructuring, amortization and other items; they are not the consolidated operating result.
Changes versus the prior comparable period
- Revenue was nearly unchanged year over year, but unfavorable currency movements reduced FY2015 revenue growth by approximately 6 percentage points. Management expected currency to remain a near-term headwind.
- Consolidated operating margin improved by 2.5 percentage points, supported by higher gross margin, favorable product mix, manufacturing efficiencies, lower intangible amortization and lower expenses. Interest expense fell to $66 million from $110 million, while FY2014 included an $89 million loss on early redemption of senior notes.
- Operating cash flow fell to $491 million from $711 million. Management cited cash used by other assets and liabilities, including pension contributions, restructuring accruals and tax-related items. FY2014 and FY2013 cash flow included Keysight operations, limiting direct comparability.
- FY2015 reported net income declined from $549 million to $401 million, while continuing-operations income increased. FY2015 included a $37 million loss from discontinued operations; FY2014 included $317 million of income from discontinued operations, primarily Keysight before its separation.
- The three reporting segments were reorganized in November 2014, and historical segment results were recast. Agilent also revised prior-period financial statements for income-tax errors; it deemed the errors immaterial to previously issued statements but revised comparative periods.
Outlook, commentary, risks and unusual items
- Management’s stated priorities are organic growth, expanding operating margins, continued investment in strategic products and returning a significant proportion of cash flow through dividends and share repurchases. No quantified company-wide revenue or earnings guidance is provided in the supplied filing text.
- Management cited growth opportunities in pharmaceutical and biotechnology markets, diagnostics, genomics and CrossLab services and consumables. It identified lower life-science research spending and weakness in chemical and energy markets, including reduced capital spending associated with low oil prices, as ongoing concerns.
- Agilent introduced an operations improvement initiative that generated approximately $40 million of savings in FY2015. It repurchased 6.47 million shares for $267 million and paid $133 million in dividends. A new authorization allows up to $1.14 billion of repurchases through November 1, 2018. The board declared a quarterly dividend of $0.115 per share in November 2015.
- Agilent exited its NMR product line because of limited growth and profitability. FY2015 included $6 million of related restructuring and special charges; management said the exit benefited operating profit by $15 million in FY2015, with remaining activities expected to finish by early FY2016. Service support for the installed base will continue.
- On November 2, 2015, after year-end, Agilent completed its $242 million cash acquisition of Seahorse Bioscience. Its results are to be included beginning in FY2016. Agilent also acquired Cartagenia for €60 million in May 2015.
- At October 31, 2015, Agilent had $1.6 billion in senior notes and $38 million in secured mortgage debt; the $700 million revolving credit facility was undrawn. Approximately $1.78 billion of cash was held outside the U.S., and repatriation could trigger additional U.S. taxes. Management stated that available cash, operating cash generation and access to credit were expected to meet liquidity needs for at least 12 months.
- Control and reporting issue: Management and the auditor concluded that internal control over financial reporting was ineffective at year-end because of a material weakness in income-tax accounting, involving controls over foreign earnings, international tax provisions and tax-payable reconciliations. The company revised prior-period statements and expected remediation in FY2016; successful remediation was not yet established.
- Other key exposures include foreign exchange, customer budget and order volatility, supplier and component availability, regulatory and FDA compliance, pension funding, tax audits and incentives, environmental indemnities, and risks related to the Keysight separation. The FDA warning letter for the Glostrup facility had been lifted. Management reported no pending legal matter it believed reasonably likely to have a material impact.
Most important facts for investors to verify
- Whether the income-tax control weakness is remediated and whether subsequent filings identify further tax-accounting errors or revisions.
- Underlying organic revenue trends by segment and market, separating currency effects and the NMR exit from reported growth.
- Whether operating-margin improvement persists while revenue is flat and R&D spending declines; review transformation savings and segment cost allocations.
- Cash-flow generation and working-capital trends, including the effects of pension funding, taxes and post-separation cash transfers.
- Cash availability and tax costs associated with repatriating foreign funds, alongside debt maturities, interest costs, dividends and authorized repurchases.
- Seahorse integration and purchase accounting, the NMR exit’s completion, and progress in diagnostics growth following the lifted FDA warning letter.