Business context and reporting period
Agilent Technologies, Inc. is a measurement-solutions company serving life sciences, chemical analysis, communications and electronics markets. This unaudited Form 10-Q covers the three months ended January 31, 2011, the first quarter of fiscal 2011; comparisons are to the three months ended January 31, 2010 unless noted. Varian, acquired May 14, 2010, is included in current-period results but not in the prior-year reported results.
Financial performance and position
| Metric | Q1 FY2011 | Q1 FY2010 / prior balance date |
|---|---|---|
| Orders | $1.627 billion, up 33% | $1.220 billion |
| Net revenue | $1.519 billion, up 25% | $1.213 billion |
| Operating income | $211 million | $94 million |
| Net income | $193 million | $79 million |
| Diluted EPS | $0.54 | $0.22 |
| Gross margin | 53.8% | 54.4% |
| Operating margin | 13.9% | 7.8% |
| Operating cash flow | $120 million | $30 million |
| Cash and cash equivalents | $2.638 billion | $2.649 billion at October 31, 2010 |
| Total debt | $2.139 billion | $3.691 billion at October 31, 2010 |
| Total assets | $8.044 billion | $9.696 billion at October 31, 2010 |
Products revenue rose 29% to $1.258 billion; services and other revenue rose 10% to $261 million. Gross margin slipped mainly because of Varian and acquisition-related fair-value adjustments. Higher volume and lower restructuring costs helped lift operating margin.
Cash from investing activities was $1.500 billion, largely reflecting a $1.533 billion decrease in restricted cash after the World Trade financing obligation was settled. Financing activities used $1.634 billion, including $1.500 billion of debt repayment and $270 million of share repurchases. The company reported $17 million of short-term restricted cash at quarter-end, compared with $1.550 billion at October 31, 2010. Inventory was $797 million, up from $716 million; management attributed the build partly to anticipated growth. Days inventory on hand rose to 102 from 89 a year earlier, and days sales outstanding rose to 51 from 47.
Current liabilities were $1.406 billion, including $1 million of short-term debt. Long-term debt was $2.138 billion. Agilent had no borrowings under its $330 million revolving credit facility and reported compliance with its covenants. The company repurchased 6.6 million shares during the quarter for approximately $270 million.
Material changes and segment trends
Reported revenue growth includes the Varian acquisition and is partly offset by divested businesses. Management said Varian net of divestitures contributed 6 percentage points of total revenue growth; on an organic basis, growth was broad-based. The following segment revenues are reported amounts; segment operating income is a management measure that excludes specified items and is not directly comparable to consolidated operating income.
| Segment | Revenue and change | Orders and change | Management commentary |
|---|---|---|---|
| Life sciences | $404 million, up 19%; up 7% excluding Varian and Hycor | $442 million, up 32%; up 11% excluding Varian and Hycor | Varian quote-to-cash integration caused shipment and invoicing delays. Segment operating income was $48 million versus $55 million; operating margin fell to 11.8% from 16.3%. |
| Chemical analysis | $349 million, up 43%; up 8% excluding Varian | $388 million, up 60%; up 16% excluding Varian | Integration also delayed shipments and invoicing. Segment operating income was $65 million versus $67 million; operating margin declined to 18.7% from 27.5%. |
| Electronic measurement | $771 million, up 23%; up 31% excluding the network solutions divestiture | $797 million, up 24% | Demand was strong across semiconductor, computer and wireless test markets. Segment operating income rose to $156 million from $58 million; operating margin increased to 20.3% from 9.3%. |
Outlook, risks and unusual items
- Management committed to achieving $100 million of net savings from integrating Varian. It expected the quote-to-cash issues that delayed life sciences and chemical analysis shipments to be corrected in Q2 FY2011. These statements are forward-looking; the filing provides no specific consolidated revenue or EPS guidance.
- Agilent planned to increase electronic-measurement manufacturing capacity in response to demand and expected current-year capital expenditures to exceed FY2010’s $121 million. Management expected electronic-measurement growth rates to moderate against stronger prior-year comparisons, cautioned about aerospace and defense demand, and noted that long production cycles for research products could constrain life-sciences growth for the year.
- Management described demand recovery across several markets, including pharmaceutical and biotech, chemical analysis end markets, semiconductor and computer, and wireless communications. It also identified parts shortages, supply and capacity constraints, cyclical customer demand, and inventory risk as operating concerns.
- The quarter’s $5 million income tax provision included $15 million of net discrete tax benefits, primarily from a foreign tax settlement; the reported effective tax rate was 2.5%. Unrecognized tax benefits fell to $555 million from $656 million following IRS agreements, while U.S. federal returns for 2006–2007 remained under audit. Management could not estimate the range of possible tax changes in the next 12 months.
- Varian integration, including potential cost overruns or failure to achieve expected synergies, is a material execution risk. Other disclosed risks include economic and market cyclicality, foreign-exchange exposure, component shortages, regulatory and intellectual-property matters, and the availability of overseas cash for U.S. needs. Management said it expected no pending legal matter to be material to the company’s financial condition, results or cash flows.
- Agilent adopted updated multiple-deliverable revenue-recognition rules prospectively on November 1, 2010; adoption had no material first-quarter effect. The quarter also included $2 million of restructuring and special charges, compared with $34 million in the prior-year quarter.
Most important facts for investors to verify
- Whether Varian integration resolves shipment and invoicing delays as expected and delivers the stated $100 million net savings target.
- How much reported growth reflects organic demand versus acquisitions and divestitures, particularly given strong orders and the different segment growth rates.
- Whether inventory growth, higher inventory days and increased manufacturing capacity convert into revenue and cash without creating excess or obsolete stock.
- Debt repayment and liquidity trends, including the timing and funding of the $250 million 2012 senior notes maturity and the extent to which overseas cash can be used in the United States.
- Developments in tax audits, valuation allowances and unrecognized tax benefits, which may affect future tax expense and cash flows.
- Whether electronic-measurement growth moderates as management expects and whether supply constraints, market cyclicality and integration costs affect margins.