Agilent Technologies, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended April 30, 2013; unaudited. Agilent supplies measurement products and services across life sciences, chemical analysis, diagnostics and genomics, and electronic measurement. Dako, acquired in June 2012, is included in current-period results but not the prior-year reported results.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $1.732 billion | $1.733 billion | $3.412 billion | $3.368 billion |
| Income from operations | $213 million | $300 million | $430 million | $571 million |
| Net income | $166 million | $255 million | $345 million | $485 million |
| Diluted EPS | $0.48 | $0.72 | $0.98 | $1.37 |
| Gross margin | 51.4% | 53.0% | 51.9% | 53.2% |
| Operating margin | 12.3% | 17.3% | 12.6% | 17.0% |
| Operating cash flow | Not separately reported for the quarter | $560 million | $503 million |
- Quarterly revenue was essentially flat; six-month revenue rose 1%. Dako contributed approximately 6 percentage points to revenue growth in both periods, while foreign exchange reduced growth by about 2 percentage points.
- Orders fell 8% in Q2 and 2% for the first half. Management cited slow growth and challenging macroeconomic conditions.
- Quarterly operating income fell 29% and net income fell 35% year over year. Management attributed lower operating margins mainly to Dako-related costs and amortization, restructuring charges, and higher wages, partly offset by lower variable and incentive pay.
- Six-month cash from operations increased to $560 million. Investing used $143 million and financing used $228 million; cash ended the period at $2.519 billion, up from $2.351 billion at October 31, 2012.
Liquidity, debt and capital allocation
- At April 30, cash and cash equivalents were $2.519 billion; current assets were $4.818 billion and current liabilities $1.908 billion. Approximately $2.140 billion of cash was held outside the U.S.; repatriation could trigger additional U.S. taxes.
- Balance-sheet debt was $250 million short term and $2.106 billion long term. The $250 million 2013 senior notes mature July 15, 2013. The company reported no borrowings under its $400 million revolving credit facility or its Dako-related Danish facility.
- Six-month capital expenditures were $110 million; management expected approximately $220 million for the full fiscal year. The company paid $76 million in dividends and repurchased $219 million of stock during the first half.
- After quarter-end, the board increased the buyback authorization to $1 billion; $781 million remained as of May 14, 2013. A $0.12-per-share dividend was declared for payment in July.
Segment trends and material changes
| Segment | Q2 revenue | Year-over-year change | Notable context |
|---|---|---|---|
| Life sciences | $405 million | Up 2% | Pharma and biotech demand and recurring services supported growth; academic and government markets weakened. |
| Chemical analysis | $401 million | Up 3% | Services, spectroscopy and food-related demand helped; orders were flat. |
| Diagnostics and genomics | $166 million | Up 124% | Growth was driven primarily by Dako; excluding Dako, results were mixed. |
| Electronic measurement | $760 million | Down 13% | Weak communications and general-purpose test demand; lost business from a large customer after contract terms could not be agreed. |
Electronic measurement was the principal source of weakness: its Q2 orders declined 27%, and management expected the market to remain challenging. Across the company, Dako-related growth partly masked weakness in underlying demand.
Outlook, unusual items and risks
- Management described a slow-growth environment, with continued macroeconomic pressure, reduced U.S. government spending and uncertain order timing. No company-wide numerical revenue or earnings guidance is provided in the filing text.
- The company accrued $55 million for restructuring in the first half. Actions target approximately 600 positions, with most expected to be completed by fiscal year-end; management expected the targeted program to reduce annual expenses by approximately $50 million. Separately, order-fulfillment initiatives were expected to generate approximately $200 million of savings over four years, including $50 million in FY2013.
- Q2 tax expense included a $12 million out-of-period charge for deferred tax assets related to foreign tax credits incorrectly claimed in prior years. The six-month effective tax rate was 12.3%; management estimated an 11.5% annual rate including discrete items to date.
- Agilent reported pricing irregularities involving certain electronic measurement sales to U.S. government agencies to the Department of Defense Inspector General on March 4, 2013. The company said it would cooperate; scope, cost, duration and outcome could not be estimated.
- The IRS is auditing 2006–2007 federal returns, including a disputed adjustment concerning the U.S. allocation of gain from a business disposition. The filing warns that an adverse outcome could materially affect results or financial condition.
- Other principal risks include weak or volatile customer markets, government and research funding reductions, foreign-exchange exposure, Dako integration and goodwill/intangible recoverability, supply-chain and manufacturing execution, regulatory and product-clearance requirements, and pension funding volatility. Management reported no pending ordinary-course legal matter it currently believes is probable of having a material impact.
- Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting reported during the quarter.
Key facts for investors to verify
- Whether orders and underlying revenue stabilize, particularly in electronic measurement, and whether Dako delivers expected growth and synergies.
- Whether the $55 million restructuring produces the expected recurring savings and is completed on schedule.
- How Agilent funds the July 2013 $250 million note maturity and U.S. cash needs given the substantial overseas cash balance.
- Developments in the Department of Defense pricing matter and the IRS audit, including any change in potential exposure.
- Whether lower margins, inventory days of 112 versus 105 a year earlier, and increased buybacks and dividends remain supportable by operating cash generation.