An advanced degree in financial engineering…

Taking a quick skim of the 10-K that Agilent (A) filed yesterday — at 243 pages, that’s about all I could handle — takes me back to the roots of this blog, which really started as a way to teach individual investors about ways to foucs on quality of earnings issues. Sure, the lush severance packages, outrageous perks and sweetheart deals are fun to read about — not to mention the fact that they’re one of the best indicators of whether the company is working for investors or working for themselves. But quality of earnings remains key.

For example, buried in Agilent’s footnotes is the fact that while they reported 72 cents in earnings, once options were accounted for, that number fell to 27 cents. And the 27 cents would likely have been even lower if the company hadn’t monkeyed around with some of the assumptions it used to calculate that number. Then, there’s the income tax footnote, which shows that the company’s effective tax rate in fiscal 2004 was 20.7% compared with 159.5% in fiscal 2003. Both numbers are outside the normal rate of 30% to 40% and should serve as another warning sign to investors that some financial engineering is going on. And then there’s the pages and pages of pension disclosure that shows that even with the market rebound this past year and the generous gift from the government in the form of a Medicare drug plan, Agilent’s obligations of $718 million are well below the fair value of its assets of $564 million. Throw in the health care obligations — OPRB in accounting-speak — and soon we’re talking about real money.