Agilent Technologies, Inc. — FY2011 Form 10-K
Business context and reporting period. Agilent supplies electronic measurement and bio-analytical instruments, software, consumables and services to communications, electronics, life sciences and chemical analysis markets. This annual report covers the fiscal year ended October 31, 2011; quarterly figures below are for the three months ended that date. Agilent reported three segments: Electronic Measurement, Chemical Analysis and Life Sciences. FY2011 included the full-year contribution of Varian, acquired in May 2010, and acquisitions of A2 Technologies, Lab901 and Biocius; the Network Solutions and Hycor businesses had been divested in 2010.
Financial performance and position
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net revenue | $6.615 billion | $5.444 billion | Up 22% |
| Income from operations | $1.071 billion | $566 million | Up $505 million |
| Operating margin | 16.2% | 10.3% | Up 5.9 percentage points |
| Net income | $1.012 billion | $684 million | Up 48% |
| Diluted EPS | $2.85 | $1.94 | Up 47% |
| Operating cash flow | $1.260 billion | $718 million | Up $542 million |
| Cash and cash equivalents | $3.527 billion | $2.649 billion | Up $878 million |
| Working capital | $3.732 billion | $3.086 billion | Up $646 million |
| Long-term debt, carrying value | $1.932 billion | $2.190 billion | Down $258 million |
FY2011 total gross margin was 53.3%, versus 53.8% in FY2010. Product gross margin was 54.9% (55.7% prior year); services and other gross margin was 45.9% (45.1%). Net revenue comprised $5.482 billion of products and $1.133 billion of services and other. Orders totaled $6.769 billion, up 18%.
Segment revenue and operating results: Electronic Measurement revenue was $3.316 billion, up 19%, with operating income of $760 million and a 22.9% operating margin. Chemical Analysis revenue was $1.518 billion, up 27%, with operating income of $313 million and a 20.6% margin. Life Sciences revenue was $1.792 billion, up 21%, with operating income of $237 million and a 13.2% margin. Reported revenue growth includes acquisition effects; excluding acquisitions and relevant divestitures, management cited organic revenue growth of 13% in Life Sciences and 8% in Chemical Analysis. Electronic Measurement growth reflected stronger communications and general-purpose test demand.
In Q4 FY2011, revenue was $1.728 billion, operating income $313 million, net income $289 million and diluted EPS $0.82. Revenue and operating income increased sequentially from Q3; net income and EPS declined from Q3.
Capital and liquidity: current assets were $5.569 billion and current liabilities $1.837 billion at year-end. Short-term debt was $253 million and long-term debt $1.932 billion; the $250 million 2012 notes were classified as short-term. The company had a $400 million revolving credit facility with no borrowings outstanding. Approximately $3.4 billion of cash was held outside the U.S.; repatriation could trigger additional U.S. taxes. Capital expenditures were $188 million. Agilent repurchased approximately 12 million shares for $497 million and paid no regular cash dividend.
Material changes versus prior period
- Revenue rose 22% and operating margin expanded nearly six percentage points, with improvement in all three segments. The operating income comparison also reflects lower restructuring charges than in FY2010.
- Gross margin fell by 0.5 percentage point. Management cited Varian portfolio effects, including acquisition-related fair-value adjustments, and higher variable and incentive compensation; volume and lower restructuring costs provided offsets.
- Operating cash flow increased to $1.260 billion, mainly reflecting improved operating results. Inventory used $208 million of cash, and inventory days on hand increased to 100 from 87.
- Cash increased partly because $1.545 billion of restricted cash became unrestricted following settlement of the World Trade repurchase obligation. Financing cash flow was a $1.693 billion outflow, including repayment of that $1.5 billion obligation.
- FY2011 included $54 million of acquisition and integration costs, $51 million of transformational program costs, $113 million of intangible amortization and $9 million of Varian-related fair-value adjustments in the reconciliation to pretax income.
Outlook, commentary and risks
Management expected moderating growth rates against strong FY2011 comparisons. It anticipated continued solid communications-test demand from smartphones, 3G expansion and LTE adoption, but near-term moderation in general-purpose test amid global economic uncertainty and relatively flat U.S. aerospace and defense demand. Management described reasonable momentum in Life Sciences and continued strength in chemical, energy and food-related markets, while noting a slowdown in pharmaceutical growth toward year-end and weaker government spending in some markets.
Agilent targeted approximately $100 million of net cost savings from Varian integration. About one-third had been generated by FY2011-end, primarily in general and administrative costs; remaining savings, primarily in product and service costs, were expected by the end of FY2013. The filing does not provide a consolidated numerical revenue or earnings forecast for FY2012.
Key risks include economic and market cyclicality; order timing and cancellations; competition and the need to introduce products successfully; supplier, contract-manufacturer and outsourced IT dependence; international, foreign-exchange and geopolitical exposures; integration and synergy execution; regulatory and product-compliance requirements; pension funding and investment risks; and environmental and intellectual-property contingencies. The company disclosed $2.1 billion of senior-note principal, including $250 million due in September 2012, and significant cash concentration outside the U.S. Environmental matters related to legacy HP sites and Varian were discussed; management considered a material adverse effect unlikely. The filing stated that no pending legal matters were expected to be material.
FY2011’s 2% effective tax rate included a $97 million net tax benefit, largely related to a Canadian refund and reassessment of uncertain tax positions, as well as substantial tax-holiday benefits. The company maintained a $369 million tax valuation allowance, including $308 million relating to U.S. jurisdictions, and noted possible reassessment as U.S. results improve. These items make the reported effective tax rate potentially non-recurring. The independent auditor gave an unqualified opinion on the financial statements and internal controls.
Most important facts for investors to verify
- How much of FY2011 growth was organic versus attributable to Varian and other acquisitions, divestitures, and currency movements.
- Whether the targeted $100 million Varian savings are achieved by FY2013 and whether integration improves acquired-business margins.
- The sustainability of the 2% effective tax rate, tax holidays, and valuation-allowance assumptions; also review the $469 million of unrecognized tax benefits.
- Liquidity and cash accessibility: the timing and funding of the 2012 note maturity and the tax cost or constraints associated with repatriating overseas cash.
- Whether inventory growth, higher inventory days and supplier commitments result in further working-capital use or excess-inventory charges.
- How pension assumptions, environmental indemnities and other contingencies may affect future cash requirements and reported results.