Agilent Technologies, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended October 31, 2012; quarterly data includes the quarter ended October 31, 2012. Agilent provides measurement instruments, software, consumables and services across life sciences, chemical analysis, diagnostics and genomics, and electronic measurement. The company acquired Dako in June 2012 and reorganized reporting into four segments.
Financial performance and condition
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $6.858 billion | $6.615 billion |
| Operating income | $1.119 billion | $1.071 billion |
| Operating margin | 16.3% | 16.2% |
| Net income | $1.153 billion | $1.012 billion |
| Diluted EPS | $3.27 | $2.85 |
| Cash from operations | $1.228 billion | $1.260 billion |
| Cash and cash equivalents | $2.351 billion | $3.527 billion |
| Working capital | $2.736 billion | $3.732 billion |
Product gross margin was 53.9% versus 54.9%; services and other gross margin was 46.1% versus 45.9%; total gross margin was 52.6% versus 53.3%. Capital expenditures were $194 million, implying approximate operating cash flow less capital expenditures of $1.034 billion. Inventory rose to $1.014 billion from $898 million, and inventory days on hand increased to 108 from 100.
Reported net income included a non-recurring, non-cash $280 million tax benefit from reversing most U.S. federal and state deferred-tax valuation allowances. The income tax provision was a benefit of $110 million, equivalent to a reported effective tax rate of negative 11%. Other notable tax items included an $88 million expense related to expected U.S. tax on certain foreign earnings and a $68 million benefit from reassessing foreign uncertain tax positions.
At year-end, balance-sheet debt was $250 million short-term and $2.112 billion long-term; cash was $2.351 billion. The company also disclosed $2.25 billion aggregate principal of senior notes and a $44 million secured Danish mortgage. A $250 million senior-note maturity was due in July 2013. The $400 million revolving credit facility had no borrowings outstanding, and Agilent reported compliance with its covenants. Approximately $2.245 billion of cash was held outside the U.S.
Segments and changes versus prior year
- Life sciences: Revenue $1.582 billion, up 4%; operating margin 14.5%, versus 13.3%. Pharmaceutical, biotechnology, services and informatics demand supported growth, while academic and government spending was weak.
- Chemical analysis: Revenue $1.559 billion, up 3%; operating margin 21.7%, versus 20.6%. Services, consumables, food safety and forensics were stronger; environmental and petrochemical demand was comparatively soft.
- Diagnostics and genomics: Revenue $402 million, up 45%; operating margin 16.1%, versus 12.5%. Dako contributed $126 million of revenue after acquisition; reported segment growth was largely acquisition-driven.
- Electronic measurement: Revenue $3.315 billion, essentially flat; operating margin 22.7%, versus 22.9%. Wireless manufacturing and computer/semiconductor test helped offset weaker wireless R&D, aerospace and defense, and regional softness.
Total orders increased 2% to $6.877 billion; management attributed approximately 2 percentage points of order growth to Dako. Foreign currency reduced reported revenue growth by about 1 percentage point. Revenue grew 4%, with services and other revenue up 6% and product revenue up 3%. The fourth-quarter results were revenue of $1.767 billion, operating income of $278 million and net income of $425 million.
Acquisition, outlook, risks and unusual items
- Agilent paid approximately $2.143 billion for Dako, including $743 million to repay Dako debt, using existing cash. Dako recorded $126 million revenue and a $37 million net loss for its post-acquisition period in FY2012. Acquisition and integration costs were $15 million directly attributed to Dako; total acquisition and integration costs across the company were $74 million.
- Management described a slow-growth environment with continued uncertainty expected to dampen demand. It anticipated cautious customer spending, particularly in electronic measurement, and near-term macroeconomic weakness in life sciences and chemical analysis. No specific consolidated revenue or earnings guidance was provided in the supplied filing text.
- Management cited opportunities to improve operating performance through value engineering, purchasing, logistics and manufacturing, alongside variable-cost actions and continued product introductions.
- Key risks include cyclical and uncertain demand, customer order cancellations, pricing pressure, supply constraints and excess inventory; dependence on outsourced manufacturing and IT; international, foreign-exchange and geopolitical exposures; integration and expected-return risks from Dako; regulatory requirements affecting certain diagnostic products; pension-market sensitivity; and tax audits and changes to tax incentives.
- The IRS was auditing U.S. federal tax returns for 2006–2007. Agilent disputed adjustments, particularly the U.S. allocation of a gain on a business disposition, and stated the outcome could materially affect results or financial condition. Other ordinary-course litigation was not believed reasonably likely to have a material impact.
- Agilent repurchased approximately 5 million shares for $172 million and paid $104 million in dividends during FY2012. Its first quarterly dividend was initiated during the year at $0.10 per share.
- Goodwill impairment testing identified no impairment. The company recorded a $1 million impairment related to an abandoned in-process R&D project and $15 million accelerated depreciation on an abandoned building.
Investor verification priorities
- Assess underlying growth excluding Dako, acquisitions and foreign-exchange effects; much of diagnostics and genomics growth was acquisition-related.
- Normalize earnings and EPS for the $280 million non-recurring valuation-allowance reversal and other tax items; review the sustainability of the unusually low reported tax rate and tax-holiday benefits.
- Review Dako’s post-acquisition loss, integration progress, purchase-price allocation, goodwill and intangible-asset amortization, and the assumptions behind anticipated synergies.
- Evaluate cash reduction following the Dako purchase, the location and potential tax cost of overseas cash, and the July 2013 note repayment and refinancing plan.
- Monitor segment demand, backlog conversion, rising inventory days, gross-margin pressure, and management’s slow-growth outlook.
- Track the IRS dispute, pension underfunding and contribution assumptions, regulatory compliance, and environmental indemnification exposures.