Agilent Technologies, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014. Comparisons are with the three months ended January 31, 2013 unless otherwise noted. Amounts are in U.S. dollars.
Business context
Agilent supplies measurement solutions to life sciences and diagnostics, chemical analysis, communications, and electronics markets. It reported three segments: Life Sciences and Diagnostics, Chemical Analysis, and Electronic Measurement. Agilent planned to separate Electronic Measurement into a publicly traded company, Keysight Technologies, through a tax-free pro rata distribution expected in early November 2014.
Financial results and changes
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Revenue | $1.679 billion | $1.680 billion |
| Operating income | $218 million | $217 million |
| Net income | $195 million | $179 million |
| Diluted EPS | $0.58 | $0.51 |
| Gross margin | 52.6% | 52.4% |
| Operating margin | 13.0% | 12.9% |
| Cash from operations | $194 million | $245 million |
- Products revenue fell 1% to $1.366 billion; services and other revenue rose 4% to $313 million. Orders declined 2% to $1.678 billion, including an approximately 2-percentage-point foreign-exchange headwind.
- Segment revenue: Life Sciences and Diagnostics $591 million, up 5%; Chemical Analysis $417 million, up 6%; Electronic Measurement $671 million, down 7%. Segment operating income was $100 million, $94 million, and $102 million, respectively; segment figures exclude certain specified costs and are not necessarily GAAP results.
- Life Sciences and Diagnostics and Chemical Analysis benefited from revenue growth and improved margins. Electronic Measurement faced lower volume and unfavorable mix: its gross margin declined 2 percentage points to 55.6%, and operating margin fell 2 points to 15.2%.
- Net income increased despite slightly lower pretax income, mainly reflecting a reported $4 million income-tax benefit versus $16 million expense a year earlier. The current quarter included a $35 million net discrete tax benefit; the year-ago quarter included an $11 million net discrete benefit.
- Operating cash flow declined by $51 million. The company cited a larger cash use from other assets and liabilities ($86 million versus $9 million); lower income-tax payments partly offset this. Investing used $47 million and financing used $68 million. Capital expenditures were $45 million.
Balance sheet and liquidity
At January 31, 2014, cash and cash equivalents were $2.742 billion, current assets $5.073 billion, current liabilities $1.549 billion, total assets $10.638 billion, and total liabilities $5.191 billion. Long-term debt was $2.695 billion, including senior notes and Danish mortgage debt. The $400 million revolving credit facility had no borrowings outstanding, and Agilent reported covenant compliance. Approximately $1.983 billion of cash was held outside the United States; repatriation could trigger additional U.S. taxes. Management stated that cash, operating cash flow, and access to capital and credit were expected to meet foreseeable liquidity needs.
Outlook, commentary, and notable items
- Management described a slow-growth, challenging near-term environment for Electronic Measurement, but expected that business to return to growth later in the year. It expected positive trends to continue in the other businesses and anticipated improvement in semiconductor test demand.
- Agilent expected to incur $140 million of pre-separation expenses in FY2014. The separation’s timing and completion remained subject to execution, regulatory, tax, and other risks.
- Restructuring and manufacturing streamlining targeted approximately 650 position reductions. Management expected about $50 million of annual cost reductions from the targeted restructuring program; approximately 180 employees remained pending termination at quarter-end.
- Management estimated FY2014 capital expenditures of approximately $247 million and expected about $85 million of defined-benefit plan contributions during the remainder of FY2014.
- The January 2014 IRS settlement for tax years 2006–2007 resulted in recognition of $160 million of previously unrecognized tax benefits, offset by approximately $125 million of tax liability related principally to foreign distributions. A separate $65 million correction reduced long-term tax liabilities and increased retained earnings, with no impact on net income or cash flows.
- An internal investigation into possible policy and legal compliance issues involving sales through third-party intermediaries in China was disclosed to the SEC and Department of Justice. No provision was recorded; the company said the potential duration, cost, and outcome could not be estimated and adverse outcomes could be material. Agilent also reported pricing irregularities in certain U.S. government sales; it had accrued an amount based on its current understanding and did not consider a material impact reasonably possible.
- Other watch items include foreign-exchange exposure, customer and government spending, supply-chain and market cyclicality, and tax examinations. No goodwill impairment was recorded in the quarter. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting.
Investor verification checklist
- Track order trends and segment performance, especially Electronic Measurement’s recovery and the drivers of growth in the other segments.
- Assess whether operating cash flow rebounds and whether inventory days, reported at 123 versus 117 a year earlier, and other working-capital movements normalize.
- Verify the separation timetable, total pre-separation costs against the $140 million estimate, and the planned distribution terms.
- Monitor the China compliance investigation, the government-sales pricing matter, and any changes to related accruals or contingencies.
- Review the sustainability of reported earnings and tax benefits, including pending tax audits, unrecognized tax benefits, and potential tax costs of repatriating overseas cash.