Agilent Technologies, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended April 30, 2016. Agilent provides instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. Comparative FY2015 figures are marked as revised where applicable.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $1.019 billion | $963 million | $2.047 billion | $1.989 billion |
| Operating income | $131 million | $107 million | $286 million | $222 million |
| Income from continuing operations | $91 million | $92 million | $214 million | $185 million |
| Net income | $91 million | $87 million | $214 million | $150 million |
| Diluted EPS | $0.28 | $0.26 | $0.65 | $0.45 |
| Gross margin | 52.0% | 49.8% | 52.1% | 49.9% |
| Operating margin | 12.9% | 11.1% | 14.0% | 11.2% |
Revenue increased 6% in Q2 and 3% for the first half year over year. Foreign exchange reduced revenue growth by approximately 1 and 3 percentage points, respectively. Q2 product revenue rose 5% and services and other revenue rose 9%; first-half growth was 1% and 8%, respectively.
By segment, Q2 revenue increased 5% in Life Sciences and Applied Markets, 5% in Diagnostics and Genomics, and 8% in Agilent CrossLab. First-half changes were flat, up 6%, and up 6%, respectively. First-half segment operating income was $208 million, $42 million and $150 million, respectively.
For the six months, operating cash flow was $360 million versus $163 million in the prior year. Investing activities used $136 million and financing activities used $102 million; capital expenditures were $63 million. Cash and cash equivalents were $2.139 billion at April 30, 2016, up from $2.003 billion at October 31, 2015. Current assets were $3.488 billion and current liabilities $1.133 billion.
Balance-sheet debt included $235 million of short-term borrowings and $1.654 billion of long-term debt. The company had $700 million of revolving-credit commitments, with $235 million drawn, and reported compliance with facility covenants. Cash dividends paid in the first half were $75 million, and share repurchases totaled $294 million. A quarterly dividend of $0.115 per share was declared in May.
Changes, outlook and notable items
- Margin improvement reflected, among other factors, the U.S. pension-plan curtailment gain, exit from the NMR business, lower FDA-remediation costs after the warning letter was lifted, lower logistics costs, and reduced R&D expense in the first half.
- Q2 continuing-operations income was slightly below prior year despite higher revenue and operating income; the effective tax rate rose to 22.2% from 4.2%. First-half rates were 17.4% and 11.5%, respectively. Prior-year comparisons were revised for certain out-of-period tax adjustments; management said the adjustments were not material to the periods presented.
- Agilent acquired Seahorse Bioscience for approximately $242 million in November 2015. In March 2016 it invested $80 million in Lasergen for a 48% initial stake and an option, exercisable through March 2, 2018, to acquire the remaining shares for an additional $105 million.
- Management expects approximately $140 million of capital expenditures for FY2016 and believes available cash, operating cash generation and access to credit and capital markets can meet liquidity needs for at least twelve months. No specific revenue or earnings guidance is stated in the provided filing text.
- Management’s priorities include operating-margin growth, simplifying operations, product differentiation and customer experience, while returning a significant proportion of cash flow through dividends and repurchases. It expected currency movements to become favorable in the near term, while noting continuing concern about chemical and energy markets.
- U.S. retirement-plan benefit accruals were frozen effective April 30, 2016. The plan changes generated a $15 million curtailment gain and a $1 million settlement gain in the first half.
- Disclosure controls remained ineffective because of a material weakness in income-tax accounting controls. Remediation work had progressed but had not operated long enough for management to conclude the weakness was resolved.
Risks and contingencies
Management cited uncertain and potentially seasonal customer demand, economic and market weakness (including chemical and energy), foreign-exchange exposure, competition and product-introduction risk, supply-chain and manufacturing constraints, acquisition integration, regulatory and FDA compliance, tax examinations and changes in tax law. Approximately $1.960 billion of cash was held outside the U.S.; repatriation could result in additional U.S. taxes. The company said significant changes to unrecognized tax benefits were reasonably possible within twelve months but could not estimate a range. Ordinary-course lawsuits and claims were disclosed, with no pending matter believed probable to have a material impact.
Investor verification priorities
- Assess whether revenue growth and margin gains are sustainable after the pension gain, NMR exit and lower FDA-remediation costs.
- Track the tax-control material weakness, tax-rate variability, uncertain tax positions and potential repatriation costs.
- Review cash generation against acquisition spending, buybacks, dividends, capital expenditures and debt obligations.
- Monitor end-market trends, especially chemical and energy, and the effects of foreign exchange across segments.
- Evaluate Seahorse integration and the Lasergen investment and purchase option, including associated risks and future funding needs.