Agilent Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2015. Amounts are in U.S. dollars; financial statements are unaudited. Agilent focuses on life sciences, diagnostics and applied markets. Keysight was spun off on November 1, 2014, and is reported as discontinued operations; accordingly, prior-period comparisons of consolidated results and cash flows are affected by the separation.
Financial performance
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Revenue | $1.014 billion, up 1% from $1.009 billion | $3.003 billion, essentially flat from $3.005 billion |
| Operating income | $144 million, versus $131 million | $366 million, versus $349 million |
| Income from continuing operations | $105 million, versus $63 million | $295 million, versus $224 million |
| Diluted EPS from continuing operations | $0.31, versus $0.19 | $0.88, versus $0.66 |
| Gross margin | 50.6%, versus 49.8% | 50.2%, versus 49.8% |
| Operating margin | 14.2%, versus 13.0% | 12.2%, versus 11.6% |
| Operating cash flow | Not presented separately for the quarter | $254 million, versus $547 million |
Quarterly net income was $103 million versus $147 million; nine-month net income was $258 million versus $481 million. These totals include discontinued operations: 2014 included Keysight operating results, while 2015 included separation-related costs. Continuing-operations results are more useful for assessing the ongoing business.
Segment revenue for the quarter was $511 million in Life Sciences and Applied Markets, $167 million in Diagnostics and Genomics, and $336 million in Agilent CrossLab. Segment operating income was $95 million, $28 million, and $76 million, respectively. For the nine months, segment revenue was $1.531 billion, $484 million, and $988 million, respectively.
Balance sheet, cash flow and capital allocation
- Cash and cash equivalents were $2.075 billion at July 31, 2015, down from $2.218 billion at October 31, 2014. Current assets were $3.478 billion and current liabilities $853 million.
- Long-term debt on the balance sheet was $1.655 billion. Senior-note principal was $1.596 billion, with approximately $37 million of Danish mortgage debt. The $700 million revolving credit facility had no borrowings outstanding; Agilent reported compliance with its covenants.
- Nine-month investing cash outflow was $125 million; financing cash outflow was $1.039 billion, including a net $734 million cash transfer to Keysight. Agilent repurchased $267 million of shares and paid $100 million in dividends.
- Capital expenditures were $71 million for the nine months. Management expected approximately $90 million for fiscal 2015. Cash generated by operations and access to capital and credit were expected to cover liquidity needs for at least 12 months.
- Approximately $1.869 billion of cash was held outside the United States. Repatriation may trigger additional U.S. federal and state tax.
Changes, outlook and management commentary
- Orders declined 6% in the quarter and 1% for the nine months. Management attributed approximately 7 and 6 percentage points of those declines, respectively, to foreign exchange, and approximately 2 percentage points in each period to the NMR business exit. Agilent said it would stop reporting orders beginning in fiscal Q4 2015.
- Foreign exchange reduced revenue growth by approximately 7 percentage points in the quarter and 6 points for the nine months. If exchange rates remained at then-current levels, management expected an approximately 6-point adverse impact on full-year revenue versus the prior year.
- Management cited strength in pharmaceutical and biotechnology markets and diagnostics/clinical applications, offset by weakness in life-sciences research, chemical and energy markets, and Japan. It expected pharma and biotechnology strength to continue offsetting chemical and energy weakness in the near term.
- Management emphasized organic growth and operating-margin expansion, and expected to return a significant proportion of cash flow through dividends and repurchases. The company authorized a new share-repurchase program of up to $1.14 billion through November 1, 2018; commencement was at Agilent’s option and the program could be suspended or discontinued.
- Operational improvement initiatives, including the NMR restructuring, were expected to generate approximately $50 million of savings in 2015; about $35 million had been realized by the end of July. The NMR exit was expected to be completed by early fiscal 2016, with approximately 60 employees still pending termination.
- Cartagenia was acquired for €60 million in May 2015. The X-ray diffraction business sale to Rigaku was completed; the filing said it had no material impact on current or prior-period results.
Risks, contingencies and unusual items
- Management identified market demand and customer order timing, foreign exchange, pricing, government and research funding, product innovation, supply chain capacity, and international operations as risks. Currency hedges cover exposures on a short-term basis, generally up to 12 months.
- The IRS was expected to complete its audit of 2008–2011 U.S. federal returns in fiscal Q4 2015; Agilent expected to pay approximately $12 million. Management could not estimate the range of possible changes to unrecognized tax benefits, and was evaluating a July 2015 Tax Court decision affecting certain cost-sharing arrangements.
- Agilent reported no pending legal matter it believed probable of having a material effect. It remains exposed to environmental, intellectual-property, regulatory and Keysight separation-related indemnity and tax risks.
- There was no reported goodwill or indefinite-lived intangible impairment in the periods presented. The filing also describes NMR restructuring charges, acquisition-related amortization, and discrete tax benefits that affect period comparisons.
- Disclosure controls and procedures were reported effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether continuing revenue and margin trends persist after adjusting for currency effects and the Keysight separation.
- How much of reported earnings improvement reflects underlying operations versus lower interest expense, tax items, and restructuring or transformation costs.
- Whether the projected $50 million of 2015 savings is achieved and the NMR exit is completed on schedule.
- The duration and magnitude of foreign-exchange pressure, particularly in Europe and Japan, and performance in chemical and energy markets.
- Cash generation, overseas cash accessibility and tax costs, debt service, and the actual pace of repurchases and dividends.
- Outcomes of the IRS audit and other tax examinations, and any liabilities arising from the Keysight separation or environmental matters.