Agilent Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended April 30, 2011 (fiscal Q2 and first half of fiscal 2011). Agilent provides measurement instruments, software, consumables and services through Life Sciences, Chemical Analysis and Electronic Measurement. Results include Varian from its May 14, 2010 acquisition; prior-year comparisons therefore include different acquisition-period coverage.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Orders | $1.703B | $1.346B | $3.330B | $2.566B |
| Revenue | $1.677B | $1.271B | $3.196B | $2.484B |
| Operating income | $266M | $154M | $477M | $248M |
| Net income | $200M | $108M | $393M | $187M |
| Diluted EPS | $0.56 | $0.31 | $1.11 | $0.53 |
| Operating margin | 15.9% | 12.1% | 14.9% | 10.0% |
| Gross margin | 53.7% | 55.9% | 53.7% | 55.2% |
Revenue increased 32% in Q2 and 29% year to date; acquisitions, net of divestitures, contributed 11 and 9 percentage points, respectively. Q2 segment revenue was Life Sciences $463M, Chemical Analysis $380M and Electronic Measurement $834M. Segment order growth was broad-based: 45% in Life Sciences, 65% in Chemical Analysis and 8% in Electronic Measurement.
Operating margin improved on higher volume and lower restructuring costs, partly offset by Varian-related effects and higher variable compensation. Gross margin fell, primarily due to the Varian portfolio and its purchase accounting adjustments. Operating expenses rose, including R&D of $165M and SG&A of $469M in Q2.
Cash flow, balance sheet and debt
- First-half operating cash flow was $498M, versus $255M a year earlier. Capital expenditures were $89M; acquisitions and intangible asset purchases used $96M.
- Cash and cash equivalents were $2.975B at April 30, 2011, up from $2.649B at October 31, 2010. First-half investing cash flow was $1.374B, including a $1.545B inflow from the release of restricted cash after settlement of the World Trade obligation. Financing used $1.566B, including $1.5B debt repayment and $270M share repurchases.
- Long-term debt was $2.144B; no short-term debt or credit-facility borrowings were outstanding. The $330M revolving credit facility expires May 2012; Agilent reported covenant compliance. The next listed senior-note maturity is $250M in September 2012.
- Inventory increased to $853M from $716M; inventory days on hand rose to 99 from 88 a year earlier as the company built inventory for expected demand. Days’ sales outstanding were 49, two days higher year over year.
Outlook, commentary and notable items
- Management reported strong orders and demand across many markets, while expecting Electronic Measurement growth rates to moderate against stronger prior-year comparisons. It expected industrial/general-purpose demand to remain solid, with wireless manufacturing and digital test strength continuing, and planned increased manufacturing capacity and capital spending. Full-year capital expenditures were expected to be significantly above fiscal 2010’s $121M; no specific earnings or revenue guidance was provided.
- Agilent was integrating Varian and expected $100M in net savings from the integration. It also acquired A2 Technologies, Lab901 and Biocius Life Sciences for $96M in total, net of cash acquired.
- Q2 tax provision included a $29M out-of-period adjustment to reduce U.K. deferred tax assets. First-half tax results also included a $16M discrete benefit from a foreign tax settlement. The reported annual effective tax-rate estimate, including discrete items, was 13%.
- Changes to the U.S. post-retirement plan reduced the accumulated benefit obligation by $194M, with the offset recorded in accumulated other comprehensive income. After quarter-end, on June 6, Agilent terminated swaps related to $500M of 2015 notes; the approximately $31M gain will be amortized over the notes’ remaining term.
- Management said pending ordinary-course lawsuits and proceedings were not expected to be material. Key risks include economic and market cyclicality, forecasting demand and inventory exposure, component shortages and manufacturing capacity, foreign exchange and international operations, successful Varian integration and synergy delivery, tax uncertainty, debt and cash-location needs, and environmental, regulatory and intellectual-property matters.
- Management stated disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth and margin performance is organic versus acquisition-related, and whether Varian integration can deliver the expected $100M net savings.
- Whether higher inventory and planned capacity expansion convert into sales and cash flow without excess or obsolete stock.
- The sustainability of operating-margin improvement given lower gross margins, integration costs and variable compensation.
- The timing and cash impact of the 2012 senior-note maturity, debt service, overseas cash access and potential repatriation taxes.
- Resolution of tax audits and valuation allowances, including the U.K. deferred-tax adjustment and possible U.S. valuation-allowance release.