Agilent Technologies, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Three and nine months ended July 31, 2011. Unaudited results. Agilent provides measurement products and services across life sciences, chemical analysis, and electronic measurement.
Financial and operating highlights
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Orders | $1.687 billion | $1.491 billion | $5.017 billion | $4.057 billion |
| Net revenue | $1.691 billion | $1.384 billion | $4.887 billion | $3.868 billion |
| Income from operations | $281 million | $115 million | $758 million | $363 million |
| Net income | $330 million | $205 million | $723 million | $392 million |
| Diluted EPS | $0.92 | $0.58 | $2.04 | $1.11 |
| Gross margin | 52.7% | 52.4% | 53.4% | 54.2% |
| Operating margin | 16.6% | 8.3% | 15.5% | 9.4% |
| Operating cash flow | Not reported for quarter | Not reported for quarter | $750 million | $345 million |
Q3 revenue increased 22% year over year; nine-month revenue rose 26%. Acquisitions contributed approximately 2 percentage points of Q3 growth and, net of divestitures, 6 percentage points of nine-month growth. Currency also supported segment revenue growth. Products generated $1.406 billion of Q3 revenue and services and other generated $285 million.
Q3 operating margin expanded 8 percentage points, supported by higher volume, lower restructuring expense, and prior restructuring savings; Varian integration effects and higher variable and incentive pay partly offset improvement. Nine-month gross margin fell 1 percentage point, primarily due to the Varian acquisition and related fair-value adjustments. The 2010 comparison includes a $127 million gain on sale of the Network Solutions division, making reported profit comparisons less directly comparable.
All three segments reported year-over-year revenue growth in Q3: Life Sciences $453 million (+21%), Chemical Analysis $383 million (+17%), and Electronic Measurement $856 million (+24%). Electronic Measurement operating margin increased to 23.8% from 18.3%; margins declined in Life Sciences and Chemical Analysis, reflecting costs, mix, and acquisition effects.
Cash, debt, and liquidity
- Cash and cash equivalents were $3.101 billion at July 31, 2011, versus $2.649 billion at October 31, 2010. The prior balance included $1.550 billion of restricted cash, reclassified after settlement of the World Trade obligation; therefore, the balance movement is not directly comparable.
- Nine-month operating cash flow was $750 million. Investing activities provided $1.342 billion, including a $1.545 billion net release of restricted cash; financing activities used $1.663 billion, including $1.500 billion of debt repayment and $462 million of share repurchases. Capital expenditures were $138 million.
- Current assets were $5.223 billion and current liabilities $1.505 billion. No short-term debt was outstanding. Long-term debt carrying value was $2.168 billion, including $2.095 billion of note principal. The $330 million revolving credit facility had no borrowings outstanding and was due to expire in May 2012.
- Inventory increased to $897 million from $716 million; inventory days on hand rose to 101 from 94 a year earlier. Management attributed the build to expected revenue growth.
Outlook, commentary, and risks
- Management reported growth across segments and expected continued demand in pharmaceutical and biotech markets, petrochemicals, and selected electronic measurement markets. It cautioned that Electronic Measurement growth rates could moderate amid economic uncertainty and difficult comparisons; aerospace and defense demand depended partly on resolution of U.S. government budget issues.
- Agilent expected $100 million in net cost savings from Varian integration: approximately one-third in general and administrative expense by fiscal year-end and the remainder in product and service costs by the end of fiscal 2013. Management identified integration, synergy delivery, and revenue growth as priorities.
- Management expected full-year capital expenditures to be significantly above FY2010’s $121 million. It planned to invest about 10% of revenue in R&D.
- Q3 included a $49 million income tax benefit, including $72 million of net discrete tax benefits, primarily from reassessment of certain foreign uncertain tax positions. Nine-month tax expense included $55 million of net discrete tax benefits and a $29 million out-of-period adjustment reducing U.K. deferred tax assets. The company reported a $334 million tax valuation allowance, including $269 million for U.S. jurisdictions, and said a significant portion of the U.S. allowance might no longer be needed within the next year if sufficient positive evidence emerged.
- Key stated risks include economic and market cyclicality, order volatility and cancellations, inventory and supply-chain constraints, foreign-exchange exposure, acquisition integration and synergy execution, tax audits and uncertain tax positions, pension-market risk, regulatory and intellectual-property matters, and reliance on international operations. Management said no pending legal matters were expected to be material; an appeal remained pending in the historical IPO class-action matter, with the settlement allocation for Agilent covered by insurers under the approved settlement.
- Management concluded disclosure controls were effective and reported no materially affecting changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much revenue and order growth persists excluding acquisitions, divestitures, and favorable currency effects, and whether orders continue to support revenue.
- Whether Agilent achieves the stated $100 million Varian savings on schedule without disrupting growth or margins.
- Whether higher inventory converts into sales and cash, given the increase in inventory days on hand and the cash used to build inventory.
- The sustainability of earnings excluding discrete tax benefits and the resolution or potential reversal of valuation allowances and uncertain tax positions.
- Cash availability for U.S. obligations, including the $250 million senior notes due in 2012, given substantial overseas cash and possible tax costs of repatriation.
- Whether market moderation, segment margin pressures, and planned higher capital expenditures affect cash generation and returns.