Agilent Technologies, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended April 30, 2014; fiscal year ends October 31. Financial statements are unaudited. Agilent provides measurement solutions across life sciences and diagnostics, chemical analysis, and electronic measurement.
Key financial results
| Metric | Three months 2014 | Three months 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1.731 billion | $1.732 billion | $3.410 billion | $3.412 billion |
| Gross margin | 52.0% | 51.4% | 52.3% | 51.9% |
| Operating income | $210 million | $213 million | $428 million | $430 million |
| Net income | $139 million | $166 million | $334 million | $345 million |
| Diluted EPS | $0.41 | $0.48 | $0.99 | $0.98 |
| Operating cash flow | Not presented quarterly | $519 million | $560 million |
Quarterly operating margin was 12.1%, versus 12.3% a year earlier; the six-month margin was 12.6% in both periods. Q2 interest expense rose to $30 million from $25 million. The Q2 effective tax rate was 25.3%, versus 16.2%; the six-month rate was 11.4%, versus 12.3%, reflecting discrete tax items.
At April 30, cash and cash equivalents were $2.950 billion, current assets $5.377 billion and current liabilities $1.719 billion. Long-term debt was $2.693 billion; the company also reported $47 million of Danish mortgage debt. Cash increased $275 million from October 31, 2013. Six-month capital expenditures were $98 million, dividends paid $88 million, and share repurchases $150 million.
Business trends and changes
- Orders increased 7% in Q2 and 3% for the six-month period, while reported revenue was essentially flat. Foreign exchange reduced growth by approximately one percentage point.
- Q2 segment revenue: life sciences and diagnostics $577 million, up 1%; chemical analysis $411 million, up 3%; electronic measurement $743 million, down 2%. Electronic measurement revenue fell 5% for the six-month period; its orders rose 11% in Q2.
- Management attributed life sciences and diagnostics growth to pharmaceutical, biotechnology, clinical and diagnostics demand, partly offset by softness in academic and government research. Chemical analysis benefited from food safety and selected instrument markets; electronic measurement remained weak in aerospace and defense and wireless R&D.
- Q2 net income declined $27 million year over year despite flat revenue. The company cited product mix and increased operating expenses; the quarter also included $41 million of pre-separation costs. Six-month pre-separation costs were $61 million.
Outlook, material items and risks
- Agilent expected to separate electronic measurement into Keysight Technologies through a tax-free pro rata distribution, targeted for early November 2014. It expected approximately $140 million of fiscal 2014 pre-separation expense, plus transaction, financing and post-separation costs.
- Management expected electronic measurement revenue to return to growth later in the year, with positive trends continuing in the other businesses. It anticipated moderate improvement in life-science research spending and projected near-term softness in handset/device manufacturing. No consolidated revenue or earnings guidance is stated in the supplied filing text.
- Restructuring and manufacturing streamlining targeted approximately 650 positions overall. Management estimated about $50 million of annual cost reductions from the targeted restructuring; approximately 160 employees remained pending termination at April 30.
- A U.K. land-sale contract covered three transfers totaling approximately $34 million; management expected an approximately $11 million gain in Q3 FY2014 for the first tract.
- Agilent disclosed an ongoing investigation concerning China sales through third-party intermediaries, including potential Foreign Corrupt Practices Act issues. No provision was recorded; the company said the scope, cost and outcome could not be predicted and adverse outcomes could materially affect future periods.
- The company was addressing an FDA warning letter concerning Dako’s quality management processes. It also disclosed DOD IG scrutiny of pricing irregularities in certain electronic-measurement sales; Agilent had accrued for the matter and did not expect a material impact based on its current understanding.
- Other exposures include tax audits and uncertain tax positions, foreign-exchange risk, dependence on government and customer capital spending, and execution and timing risks around the planned separation. Approximately $2.228 billion of cash was held outside the U.S.; repatriation could create additional U.S. taxes.
Investor verification priorities
- Track separation timing, total costs, planned Keysight borrowing and any changes to the expected distribution structure.
- Monitor orders versus recognized revenue, especially the electronic-measurement recovery and demand in aerospace and defense, wireless, China and government-funded markets.
- Reconcile earnings and tax-rate trends for discrete tax benefits and expenses, including the IRS settlement and the $65 million correction to prior-period tax liabilities recorded in retained earnings.
- Follow the China compliance investigation, FDA remediation and DOD pricing matter for provisions, regulatory actions or updated estimates.
- Assess cash generation, overseas cash availability, debt obligations, inventory levels and the continuing costs and expected savings of restructuring.