Agilent Technologies, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014. Financial results are consolidated and include the electronic measurement business, later distributed as Keysight on November 1, 2014; that business is expected to be reported as discontinued operations from FY2015. The filing was audited, and the auditor reported effective internal control over financial reporting.
Business context and financial performance
Before the separation, Agilent operated life sciences and diagnostics, chemical analysis, and electronic measurement businesses. It reported $6.981 billion in FY2014 revenue; 70% originated outside the U.S. Total orders rose 4% to $7.134 billion, while revenue increased 3% from FY2013. Foreign exchange reduced both growth rates by about one percentage point.
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $6.981B | $6.782B | +3% |
| Gross margin | 51.5% | 52.1% | -0.6 percentage points |
| Operating income / margin | $831M / 11.9% | $951M / 14.0% | Income -13%; margin -2.1 points |
| Income before taxes | $646M | $859M | -25% |
| Net income / diluted EPS | $504M / $1.49 | $724M / $2.10 | Net income -30% |
| Operating cash flow | $711M | $1.152B | -38% |
| Cash and cash equivalents | $3.028B | $2.675B | +$353M |
| Working capital | $3.798B | $3.381B | +$417M |
| Long-term debt | $2.762B | $2.699B | +$63M |
Capital expenditures were $205 million; investing activities used $230 million and financing activities used $97 million. FY2014 dividends paid were $176 million ($0.528 per share), and share repurchases were $200 million. Cash and debt figures are at October 31, before the Keysight distribution and associated transfers.
Segments and changes versus prior periods
- Life sciences and diagnostics: Revenue increased 3% to $2.372 billion; operating income was $376 million versus $377 million. Growth in genomics, chromatography, consumables and services was partly offset by softer life-science research demand. The NMR business weighed on FY2014 segment operating margin by about two percentage points.
- Chemical analysis: Revenue rose 5% to $1.676 billion; operating income increased 9% to $387 million. Food testing, forensics and high-end instruments were strengths.
- Electronic measurement: Revenue rose 2% to $2.933 billion; operating income increased 3% to $559 million. General-purpose and communications test growth was partly offset by lower aerospace and defense revenue. Keysight assumed this business at separation.
Consolidated profitability weakened despite revenue growth. Management attributed the operating-margin decline mainly to $191 million of pre-separation costs. Other notable factors included $89 million of expense associated with early debt redemptions and approximately $68 million of costs related to exiting NMR. Gross inventory charges increased to $79 million from $48 million. FY2013 net income had also benefited from a $280 million non-recurring tax valuation-allowance reversal, complicating year-over-year comparisons.
Outlook, risks and unusual items
- Management expected positive trends to continue in the retained life sciences and diagnostics and chemical analysis businesses, supported by product development and expanded services and consumables. It expected continued low spending in life-science research markets.
- The NMR exit was driven by limited growth and profitability. Agilent stopped accepting new system orders but planned to honor existing orders and continue installed-system service. The exit affects about 300 jobs, is expected to be substantially completed by FY2016, and was projected to add about $10 million to FY2015 operating profit, or roughly one percentage point to operating margin.
- Keysight separation-related post-separation costs were estimated at approximately $50 million. Agilent said the separation would reduce its debt obligations by $1.1 billion and related interest payments by approximately $359 million. Keysight distributed $900 million in cash to Agilent before distribution.
- Agilent reported $2.397 billion of cash held outside the U.S.; repatriation of some foreign earnings could trigger additional U.S. taxes. Management believed available cash, operating cash generation and access to capital markets and credit lines would meet liquidity needs for at least 12 months.
- Material risks include the FDA warning letter issued to Dako in 2013 and the cost and uncertainty of remediation; volatile customer and government spending; competition and product-cycle risks; supply-chain and foreign-exchange exposure; pension funding and tax examination uncertainty; and environmental liabilities and indemnities associated with the separation. The company also warned that the Keysight distribution’s intended tax-free treatment could be challenged.
- The DOJ settled an investigation into pricing irregularities in sales to U.S. government agencies on October 31, 2014, for an amount described as not material. The SEC and DOJ closed their inquiries into the China sales-compliance investigation without recommending enforcement action against Agilent. Management said other pending legal matters were not reasonably expected to have a material impact.
Important facts for investors to verify
- Review post-separation financial statements to assess Agilent’s continuing-business revenue, margins, cash flow, debt and liquidity without Keysight.
- Track whether the expected $50 million of separation costs and the projected NMR savings and margin benefit are realized, and whether NMR exit costs remain within estimates.
- Assess the sustainability of operating cash flow, given the FY2014 decline and the effect of separation costs, taxes and working-capital movements.
- Monitor the FDA remediation at Dako, tax audits and incentives, repatriation exposure, and environmental and separation-related indemnity obligations.
- Confirm the debt and cash transferred with Keysight and Agilent’s resulting post-separation capital structure; October 31 balances include the pre-distribution structure.