Agilent Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2015. Amounts are in U.S. dollars; financial statements are unaudited. Agilent completed the distribution of Keysight Technologies on November 1, 2014, and presents Keysight as discontinued operations. Prior-period income statements were recast for that presentation, but prior-year cash flows were not adjusted. Agilent now reports three segments: Life Sciences and Applied Markets, Diagnostics and Genomics, and Agilent CrossLab.
Financial performance
| Metric | Three months ended April 30, 2015 | Six months ended April 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $963 million, down 3% | $1.989 billion, flat | $988 million and $1.996 billion, respectively |
| Operating income / margin | $107 million / 11.1% | $222 million / 11.2% | $94 million / 9.5%; $218 million / 10.9% |
| Continuing-operations income | $88 million | $190 million | $40 million; $161 million |
| Net income, including discontinued operations | $83 million | $155 million | $139 million; $334 million |
| Diluted EPS | $0.25 | $0.46 | $0.41; $0.99 |
| Gross margin | 49.8% | 49.9% | 49.1%; 49.8% |
| Operating cash flow | Not provided for the quarter | $163 million | $519 million for six months |
Quarterly revenue comprised $759 million of products and $204 million of services and other; six-month revenue was $1.574 billion and $415 million, respectively. The 2015 six-month tax provision included net discrete tax benefits of $21 million, contributing to a 9.1% effective tax rate (8.3% for the quarter). Continuing-operations income rose despite lower quarterly revenue; reported net income fell mainly because the prior-year periods included income from Keysight.
Segments and operating drivers
- Life Sciences and Applied Markets: Q2 revenue of $473 million, down 5%; six-month revenue of $1.020 billion, down 1%. Segment operating income was $75 million for Q2 and $182 million for six months. Currency and start-up issues at a new logistics center weighed on growth; pharmaceutical and biotechnology demand was comparatively strong.
- Diagnostics and Genomics: Q2 revenue of $169 million, up 1%; six-month revenue of $317 million, down 3%. Segment operating income was $25 million for Q2 and $26 million for six months. Manufacturing issues from Q1 were addressed, but gross margins remained pressured by remediation, wages, and excess inventory costs.
- Agilent CrossLab: Q2 revenue of $321 million, down 1%; six-month revenue of $652 million, up 2%. Segment operating income was $69 million for Q2 and $137 million for six months. Consumables mix supported gross margins; higher wages, commissions, and allocated costs limited operating-margin improvement.
Segment operating income is a management measure that excludes specified items and does not equal consolidated GAAP operating income. The strong U.S. dollar reduced revenue growth by approximately 7 percentage points in Q2 and 5 percentage points over six months. The NMR business exit also affected comparisons.
Cash, debt, and liquidity
- At April 30, cash and cash equivalents were $2.197 billion, versus $2.218 billion at October 31, 2014. The company transferred $734 million net to Keysight during the first half. About $1.873 billion of cash was held outside the U.S.; repatriation could trigger additional U.S. taxes.
- Six-month operating cash flow was $163 million; capital expenditures were $52 million. Cash used in financing was $929 million, including the $734 million Keysight transfer, $168 million of share repurchases, and $67 million of dividends. Cash used in investing was $38 million.
- Current assets were $3.620 billion and current liabilities $930 million. Long-term debt on the balance sheet was $1.656 billion. Senior-note principal totaled approximately $1.596 billion, with $38 million of Danish mortgage debt. No borrowings were outstanding under the $400 million revolving credit facility or the Danish facility.
- Management said cash, operating cash generation, and access to capital markets and credit lines should meet liquidity needs for at least the next 12 months. The company reported compliance with credit-facility covenants.
Outlook, material developments, and risks
- Agilent expects the strong U.S. dollar to remain a headwind. If exchange rates remain at current levels, management estimated an approximately 6-percentage-point adverse impact on full-year revenue versus the prior year. This is an FX estimate, not formal earnings guidance.
- Improvement initiatives, including the NMR restructuring, were expected to generate approximately $50 million of savings in 2015; about $24 million had been realized in the first half. The NMR exit was expected to improve 2015 operating profit by approximately $15 million. Restructuring was expected to be substantially complete by fiscal 2016; about 180 employees remained pending termination at quarter-end.
- Management cited pharmaceutical and biotechnology demand as a growth opportunity, while noting weakness in chemical and energy markets, uneven regional demand, and continuing currency pressure. Life Sciences and Applied Markets revenue also faced logistics-center start-up challenges. Diagnostics and Genomics had incurred manufacturing and regulatory-remediation costs; the FDA lifted Dako’s warning letter.
- Agilent completed the acquisition of Cartagenia for €60 million after quarter-end. It also agreed to sell its X-ray diffraction business to Rigaku; the transaction had no material impact on reported periods. A new share repurchase authorization of up to $1.14 billion through November 1, 2018 was announced after quarter-end. The board declared a $0.10-per-share dividend payable July 22, 2015.
- Tax audits and uncertain tax positions remain relevant: $291 million of long-term liabilities related to uncertain tax positions was reported at April 30, and management could not estimate possible changes over the next 12 months. The U.S. federal tax years 2008–2011 were under IRS audit.
- The filing identifies risks including foreign exchange exposure, customer and government research-budget variability, competition and product-cycle risk, supply-chain and logistics disruption, regulatory compliance, acquisition integration, pension-market exposure, tax uncertainty, and liabilities or disputes arising from the Keysight separation. Agilent reported no pending legal matter it believed probable of having a material impact.
Important facts for investors to verify
- Assess underlying growth after separating currency effects, the NMR exit, and the Keysight separation; confirm the basis of year-over-year comparisons.
- Track whether logistics-center challenges and Diagnostics and Genomics manufacturing and remediation costs ease, and whether segment margins recover.
- Compare operating cash flow and working-capital trends with earnings; monitor the foreign-held cash balance and potential tax cost of repatriation.
- Review the assumptions behind the estimated 6-point full-year FX revenue headwind, $50 million of 2015 savings, and $15 million NMR operating-profit benefit.
- Monitor tax audits and uncertain tax positions, the Keysight separation’s tax status and indemnities, and any changes in legal or environmental contingencies.
- Consider capital allocation and liquidity implications of repurchases, dividends, the Cartagenia acquisition, and ongoing debt obligations.