Agilent Technologies, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 31, 2015. Unaudited results; dollar amounts are in millions except per-share data. Agilent completed the distribution of Keysight on November 1, 2014, and presents Keysight as discontinued operations. Comparisons below are with the three months ended January 31, 2014, unless noted.
Business context and reporting period
Agilent provides instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. After the Keysight separation, the company reported three segments: Life Sciences and Applied Markets, Diagnostics and Genomics, and Agilent CrossLab. Prior-period segment results were recast to the new structure.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $1,026 | $1,008 |
| Gross margin | 50.0% | 50.6% |
| Operating income | $115 | $124 |
| Operating margin | 11.2% | 12.3% |
| Continuing-operations income | $102 | $121 |
| Discontinued-operations income (loss) | $(30) | $74 |
| Net income | $72 | $195 |
| Diluted EPS | $0.21 | $0.58 |
| Operating cash flow | $(20) | $194 |
Revenue rose 2% as reported, while foreign currency movements reduced year-over-year revenue growth by approximately 4 percentage points. Products revenue was $815 (up 1%); services and other revenue was $211 (up 3%). Continuing-operations interest expense declined to $16 from $29; other income included $11 of Keysight service and lease income. The effective tax rate on continuing operations was 9.3%, versus a tax benefit and negative 24.7% rate in the prior-year quarter.
Segment revenue and operating results: Life Sciences and Applied Markets revenue was $547 (up 2%) and segment operating income was $107, versus $105. Diagnostics and Genomics revenue was $148 (down 6%) and operating income was $1, versus $19. Agilent CrossLab revenue was $331 (up 5%) and operating income was $68, versus $69.
Cash and cash equivalents were $2,118 at January 31, down from $2,218 at October 31, 2014. Long-term debt was $1,658; the company also reported $39 of Danish mortgage debt within its debt disclosures. The $400 five-year revolving credit facility was undrawn, and the company reported covenant compliance. Total assets were $7,519 and total liabilities were $3,279.
Material changes versus the prior comparable period
- Reported net income fell to $72 from $195, reflecting the loss from discontinued operations in the current quarter versus income from Keysight in the prior-year quarter. Continuing-operations income also declined, to $102 from $121.
- Operating margin decreased 1.1 percentage points; gross margin decreased 0.6 percentage points. Management cited lower Diagnostics and Genomics volume, remediation costs and wages, plus higher costs in other areas.
- Operating cash flow shifted to a $20 outflow from $194 provided. Management attributed the current-period outflow in part to separation-related costs and tax payments, as well as transformation and restructuring costs. The prior-year cash flow included Keysight operations.
- Cash flow from financing included a $796 transfer to Keysight. The separation also removed Keysight assets and liabilities from Agilent’s balance sheet; the prior-year balance sheet included them as discontinued operations.
- Foreign-currency translation contributed a $265 other comprehensive loss. Goodwill declined to $2,352 from $2,507, primarily from currency translation.
Outlook, management commentary, risks and unusual items
- Management expected approximately $50 of savings in 2015 from improvement initiatives, including the NMR restructuring. The NMR exit was expected to add approximately $15 to fiscal 2015 operating profit; restructuring was expected to be substantially completed by the end of fiscal 2016.
- Management anticipated continued unfavorable effects from a strong U.S. dollar, while expressing confidence in organic growth from analytical laboratory products, services and consumables. It cited pharmaceutical and life-sciences strength and near-term weakness in chemical and energy markets.
- Orders increased 2% overall. Segment order growth was flat in Life Sciences and Applied Markets, 1% in Diagnostics and Genomics, and 5% in CrossLab. Japan was a notable weak market in multiple businesses; management cited currency, macroeconomic conditions and delayed government funding.
- Diagnostics and Genomics revenue and margins were pressured by manufacturing issues and costs to address an FDA warning letter at Dako’s Glostrup facility. The filing warns of potential further FDA action and says remediation costs and business effects remain uncertain.
- The NMR exit involved an approximately 300-person workforce reduction; about 200 employees remained pending termination at quarter-end. The NMR-related accrual was $16, and approximately $5 had been paid to date.
- Agilent said cash, operating cash generation and access to capital and credit were expected to meet liquidity needs for at least 12 months. It also disclosed that $1,708 of cash was held outside the U.S.; repatriation could incur additional U.S. taxes.
- Other important exposures include tax audits and uncertain tax benefits, potential tax consequences if the Keysight distribution is deemed taxable, separation-related indemnities, foreign-exchange risk, and environmental, intellectual-property and product-regulatory contingencies. Management said no pending legal matter was then believed probable of having a material impact.
Most important facts for investors to verify
- Whether Diagnostics and Genomics manufacturing issues and FDA remediation are resolved, and whether the business recovers revenue and margins.
- Whether the projected 2015 savings and NMR operating-profit benefit are achieved, including associated restructuring costs and timing.
- How much reported growth and future performance are affected by currency, particularly in Japan and other international markets.
- Whether cash generation improves after separation-related payments, and how the company manages overseas cash, debt service, dividends and capital spending.
- Potential developments in tax audits, the tax treatment of the Keysight distribution, and separation-related claims or indemnification obligations.