Agilent Technologies, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2014; comparisons are with the periods ended July 31, 2013 unless otherwise noted. Amounts are in millions of dollars except per-share data. The statements are unaudited.
Business context
Agilent supplied measurement products and services across life sciences and diagnostics, chemical analysis, and electronic measurement. The company was preparing to separate electronic measurement into Keysight Technologies: substantially all related assets, liabilities, and operations were transferred to Keysight on August 1, 2014, after quarter-end. A tax-free pro rata distribution to Agilent shareholders was expected in early November 2014.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Orders | $1,739 | $1,600 | $5,229 | $4,998 |
| Revenue | $1,766 | $1,652 | $5,176 | $5,064 |
| Gross margin | 51.7% | 51.8% | 52.1% | 51.9% |
| Operating income | $229 | $236 | $657 | $666 |
| Operating margin | 13.0% | 14.3% | 12.7% | 13.2% |
| Net income | $147 | $168 | $481 | $513 |
| Diluted EPS | $0.43 | $0.49 | $1.42 | $1.47 |
Q3 revenue rose 7% and orders rose 9%; nine-month revenue rose 2% and orders rose 5%. Net income declined 13% in Q3 and 6% year to date. Operating margin fell 1.3 percentage points in Q3 and 0.5 points year to date. Management attributed margin pressure in part to separation costs; gross margin was essentially flat.
Segment revenue, Q3 / nine months: Life sciences and diagnostics: $592 / $1,760, up 5% / 4%; chemical analysis: $417 / $1,245, up 8% / 5%; electronic measurement: $757 / $2,171, up 8% / down 1%. Segment operating income is reported on management’s adjusted basis: $93, $97, and $149, respectively, for Q3; $269, $281, and $399 for nine months. These segment measures exclude specified items and are not directly comparable to consolidated GAAP operating income.
Cash, liquidity, and debt
- Cash and equivalents were $2,391 at July 31, 2014, down from $2,675 at October 31, 2013; approximately $2,266 was held outside the U.S. Management said available cash, operating cash flow, and access to capital and credit were expected to meet foreseeable liquidity needs.
- Nine-month operating cash flow was $547, versus $775 a year earlier. Investing used $172, including $162 of capital expenditures; financing used $658. Cash declined $284 over the period.
- At July 31, total debt was approximately $2,251, including $35 of short-term debt, $2,181 of long-term debt, and $45 of Danish mortgage debt. The $35 Indian short-term borrowing carried a 9.95% rate. The $400 revolving facility had no balance outstanding; the company reported covenant compliance.
- Agilent redeemed $500 of 5.5% notes due 2015 for approximately $528, plus $9 of accrued interest. The redemption generated a reported $21 net loss in other income/expense. Long-term debt carrying value was $2,181 versus $2,699 at October 31, 2013.
- Current assets were $4,834 and current liabilities $1,579. The company paid $132 in dividends and repurchased $200 of shares during the nine months.
Outlook, commentary, and unusual items
- Management expected electronic measurement to maintain its growth position for the rest of fiscal 2014 and anticipated positive trends in the other businesses. It expected to invest about 10% of revenue in R&D and forecast approximately $210 of capital expenditures for fiscal 2014.
- Management expected approximately $180 of fiscal 2014 pre-separation expense; $123 had been incurred in the first nine months. Transaction and post-separation costs were also expected. The filing does not provide a full-year revenue or earnings forecast.
- Company-wide Q3 order growth was broad-based. Management cited pharmaceutical, biotechnology, clinical/diagnostics, food safety, forensics, and environmental demand, while noting softness in some academic/government, China, Japan, aerospace and defense, and handset/device markets. It described electronic measurement market indicators as supporting modest growth and identified geopolitical conditions, particularly Russia, as a risk.
- Other income/expense included the $21 debt-redemption loss. Q3 included an $11 land-sale gain in SG&A; the overall U.K. land contract was approximately $34, with later payments and property transfer passing to Keysight after distribution.
- Restructuring plans covered approximately 650 positions, including manufacturing streamlining; about 140 employees remained pending termination at July 31. Management reported expected savings being realized and forecast approximately $50 of annual cost reductions from the targeted program.
- Contingencies include an investigation of sales through third-party intermediaries in China, voluntarily disclosed to the SEC and DOJ. The company could not estimate its duration, cost, or outcome and recorded no provision; adverse outcomes could materially affect future periods. A separate U.S. government pricing matter was accrued for, but management did not believe it was reasonably likely to have a material impact.
- Dako had received an FDA warning letter in August 2013 concerning quality management processes at its Glostrup facility. The filing warns that further regulatory action remains possible. Management also identified economic and market uncertainty, currency exposure, tax examinations, separation execution, product development, supply chain, and pension funding as risks.
- The nine-month effective tax rate was 14%, including discrete tax benefits and expenses; management estimated a 16.5% annual rate excluding discrete items. The quarter included a $23 reversal of previously recognized share-based compensation windfall tax benefits, described as an immaterial out-of-period correction.
Investor verification priorities
- Track completion and costs of the Keysight separation, including the distribution timing, transaction expenses, and allocation of assets, liabilities, and ongoing costs.
- Reconcile operating cash flow’s decline, especially the $208 cash use in other assets and liabilities and management-identified separation-related supplier prepayments and debt-related payments.
- Monitor segment orders and revenue, particularly whether electronic measurement’s nine-month revenue decline and regional weakness persist.
- Review debt maturities, post-redemption interest costs, foreign cash availability and potential repatriation taxes, and the use of the high-rate Indian loan.
- Follow developments in the China compliance investigation, DOD pricing matter, Dako FDA remediation, and open tax audits; assess any resulting accruals or disclosures.