Agilent Technologies, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended October 31, 2013. The filing also reports fourth-quarter results for the three months ended October 31, 2013. All financial amounts below are in U.S. dollars.
Business context and reporting period
Agilent sells measurement instruments, software, consumables and services across life sciences and diagnostics, chemical analysis, and electronic measurement. In Q4, it reorganized life sciences and diagnostics as a reportable segment, combining its life sciences and diagnostics and genomics businesses; historical segment data was recast.
Agilent announced plans to spin off electronic measurement as a separate public company through a tax-free pro rata distribution to shareholders, then expected early in November 2014. The company expected approximately $100 million of pre-separation expenses in FY2014.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net revenue | $6.782 billion | $6.858 billion |
| Income from operations | $951 million | $1.119 billion |
| Operating margin | 14.0% | 16.3% |
| Net income | $724 million | $1.153 billion |
| Diluted EPS | $2.10 | $3.27 |
| Operating cash flow | $1.152 billion | $1.228 billion |
| Cash and cash equivalents at year-end | $2.675 billion | $2.351 billion |
| Long-term debt at year-end | $2.699 billion | $2.112 billion |
Revenue declined 1%; product revenue fell 2% while services and other revenue grew 4%. Gross margin was 52.1%, down from 52.6%. Management attributed pressure on operating results to Dako-related amortization and expenses, restructuring, higher wages and inventory charges, partly offset by lower variable and incentive pay. The FY2013 effective tax rate was 16%, compared with a tax benefit rate of 11% in FY2012; the prior year included a one-time $280 million benefit from reversing most U.S. deferred-tax valuation allowances.
Year-end working capital was $3.381 billion. Current assets were $4.983 billion and current liabilities $1.602 billion. The company had no borrowings under its $400 million revolving credit facility. Approximately $2.552 billion of cash was held outside the U.S.; repatriation could trigger additional U.S. taxes.
Segments and material year-over-year changes
| FY2013 segment | Revenue | Income from operations | Operating margin | Revenue change vs. FY2012 |
|---|---|---|---|---|
| Life sciences and diagnostics | $2.300 billion | $377 million | 16.4% | +16% |
| Chemical analysis | $1.594 billion | $355 million | 22.3% | +2% |
| Electronic measurement | $2.888 billion | $544 million | 18.9% | -13% |
Life sciences and diagnostics growth included a substantial Dako contribution: the acquisition accounted for 13 percentage points of segment revenue growth. Chemical analysis growth was modest, with services and consumables helping offset weakness in some product lines and markets. Electronic measurement was the principal drag: revenue and orders each fell 13%, notably reflecting reduced wireless manufacturing demand and the loss of business from a large customer over contractual terms. Its operating margin fell 3.8 percentage points.
Q4 revenue was $1.718 billion, versus $1.767 billion in Q4 FY2012; operating income was $285 million versus $278 million, and diluted EPS was $0.63 versus $1.20. The prior-year quarter’s net income and EPS included the $280 million valuation-allowance reversal, so the reported profit comparison is not like-for-like.
Cash flow, capital allocation and debt
Operating cash flow decreased to $1.152 billion from $1.228 billion. Inventory used $100 million of cash, and inventory days on hand rose to 118 from 108, partly reflecting lower electronic-measurement shipments. Capital expenditures were $195 million. Investing activities used $248 million, compared with $2.366 billion in FY2012, when the Dako acquisition was completed.
Financing activities used $554 million. Agilent repurchased 20.5 million shares for $900 million and paid $156 million in dividends. It issued $600 million of 2023 senior notes and repaid $250 million of notes that matured. Senior unsecured notes had $2.593 billion aggregate principal outstanding at year-end; an additional $46 million of secured Danish mortgage debt was outstanding. Management stated that cash, operating cash generation and access to capital markets and credit lines should meet foreseeable liquidity needs.
Outlook, management commentary and risks
- Management described near-term electronic measurement conditions as slow-growth and challenging, while indicating the business could return to growth in the next fiscal year. It expected positive trends in the other businesses. These statements are qualitative; the filing provides no consolidated numerical earnings or revenue guidance.
- Management expected academic and government spending to remain constrained, but cited consumables, services, instrument replacement and clinical markets as potential supports. For chemical analysis, it cited a positive outlook in core end markets and planned product launches.
- A restructuring program targeted approximately 450 employees, with a further approximately 250 positions associated with manufacturing streamlining. About 250 employees had been terminated under the targeted program and 100 through manufacturing streamlining by year-end. The targeted program was expected to reduce annual cost of sales and operating expenses by about $50 million; most international actions were expected to finish in the second half of FY2014.
- The China investigation is a significant unresolved contingency: Agilent reported possible policy noncompliance involving subsidiary employees and third-party intermediaries, notified the SEC and DOJ, and said it could not estimate the duration, cost or outcome. No provision was recorded; adverse government findings could materially affect future-period financial statements.
- Agilent reported pricing irregularities on certain electronic-measurement sales to U.S. government agencies, had proposed a resolution methodology to the DOD Inspector General, and accrued an amount based on its then-current understanding. Management did not believe the matter was reasonably likely to have a material impact.
- Key risks include economic and customer-budget weakness, cyclical demand and forecasting, competition and product obsolescence, supply-chain and outsourcing disruption, foreign exchange and international operations, regulatory and tax uncertainty, pension-market exposure, and execution, cost and timing risks in the planned spin-off. The company also noted environmental remediation and indemnification exposures, while management considered a material adverse effect from identified environmental matters unlikely.
Important facts for investors to verify
- Track electronic-measurement orders, revenue and margins for evidence of the expected recovery; assess the effect of lost large-customer business.
- Separate underlying life-sciences and diagnostics growth from Dako’s acquisition contribution, and monitor Dako integration costs and returns.
- Reconcile FY2012’s $280 million tax benefit when comparing earnings, EPS and effective tax rates; review ongoing tax audits and $516 million of unrecognized tax benefits.
- Monitor progress, total costs and expected savings from restructuring, and actual FY2014 spin-off expenses, timetable, tax treatment and separation readiness.
- Follow the China investigation and DOD pricing matter for updates on government action, potential penalties, accruals and disclosures.
- Assess cash availability given the large overseas cash balance, potential repatriation taxes, debt maturities, share repurchases and dividend commitments; also monitor inventory levels and operating cash conversion.