Agilent Technologies, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended July 31, 2012. Amounts are in millions of dollars except per-share data. The statements are unaudited.
Business context
Agilent supplies measurement instruments, software, consumables and services across life sciences, chemical analysis, diagnostics and genomics, and electronic measurement. In June 2012, it acquired Dako, a cancer-diagnostics company, for approximately $2.144 billion, funded with existing cash. Dako’s results were consolidated from June 21; its post-acquisition revenue through July 31 was $40 million. Agilent also reorganized reporting into four segments, recasting prior segment results.
Financial highlights
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Revenue | $1,723 | $1,691 | $5,091 | $4,887 |
| Operating income | $270 | $281 | $841 | $758 |
| Net income | $243 | $330 | $728 | $723 |
| Diluted EPS | $0.69 | $0.92 | $2.06 | $2.04 |
| Gross margin | 51.7% | 52.7% | 52.7% | 53.4% |
| Operating margin | 15.7% | 16.6% | 16.5% | 15.5% |
| Operating cash flow | Not separately presented for the quarter | $743 | $750 |
Quarterly revenue rose 2%, but operating income declined 4% and net income fell 26%. For the nine-month period, revenue increased 4%, operating income increased 11%, and net income was nearly flat. Quarterly earnings included a $14 million loss on settlement of acquisition-related foreign-exchange contracts, $29 million of acquisition and integration costs, and $15 million of accelerated depreciation. Other income and expense was a $10 million expense versus $17 million income a year earlier. The quarterly tax benefit was $5 million, compared with a $49 million benefit in the prior-year quarter.
Orders were down 1% in Q3 and up 2% for nine months. Segment revenue for Q3 was life sciences $391 million, chemical analysis $381 million, diagnostics and genomics $106 million, and electronic measurement $845 million. Dako contributed to reported growth; management said it represented 3% of total revenue growth for both the quarter and nine-month period.
Liquidity, debt and capital allocation
Cash and cash equivalents were $1.923 billion at July 31, down from $3.527 billion at October 31, 2011, primarily reflecting the Dako acquisition. Nine-month operating cash flow was $743 million. Investing cash outflow was $2.280 billion, including $2.227 billion for acquisitions and intangible assets; capital expenditures were $132 million. Agilent paid $70 million in dividends and repurchased $78 million of shares during the nine months.
Current assets were $4.211 billion and current liabilities $2.090 billion. Reported short-term debt was $500 million and long-term debt $1.714 billion. The short-term balance included $250 million of 2012 notes and $250 million of 2013 notes. Agilent had no borrowings under its $400 million revolving credit facility and reported compliance with its covenants. Approximately $1.8 billion of cash was held outside the U.S.; repatriation could trigger additional U.S. taxes. Management said cash, operating cash generation and access to capital markets and credit lines should meet foreseeable liquidity needs.
Outlook, commentary and risks
- Management described the environment as slow-growth and economically uncertain; it gave no specific consolidated revenue or earnings guidance in the provided filing text.
- Management remained focused on product innovation, operating efficiency, order-fulfillment improvements and leveraging purchasing, logistics and manufacturing. It expected R&D investment to remain 9%–10% of revenue and current-year capital spending to be approximately in line with FY2011’s $188 million.
- Near-term demand was uneven: Q3 orders declined in life sciences, chemical analysis and electronic measurement, while diagnostics and genomics growth was substantially acquisition-driven. Academic and government research, environmental, industrial, aerospace and defense demand showed weakness. Management expected uncertainty to continue; it also anticipated moderation in communications-test demand.
- Dako’s preliminary purchase-price allocation included $1.384 billion of goodwill, allocated to diagnostics and genomics, and $738 million of acquired intangible assets. Integration, realization of anticipated synergies and final valuation remain important uncertainties; the goodwill is not expected to be tax-deductible.
- Other disclosed exposures include foreign-currency and interest-rate movements, tax audits and uncertain tax positions, a $338 million tax valuation allowance, pension funding, regulatory and product-approval requirements, environmental matters, intellectual-property claims, and economic or market downturns. Management said no pending legal matter was expected to have a material impact. A hypothetical 10% adverse currency or interest-rate movement was not expected to have a material effect under its sensitivity analyses.
Important facts for investors to verify
- Whether Agilent repaid or refinanced the $250 million 2012 notes due in September 2012, and how it addressed the $250 million 2013 notes.
- Subsequent Dako integration results, the final purchase-price allocation, and whether anticipated revenue synergies and growth materialize.
- Underlying order and revenue trends excluding acquisitions, particularly in diagnostics and genomics and in weaker end markets.
- Cash conversion and working-capital trends: inventory was $1.036 billion, and inventory days on hand rose to 112 from 101 a year earlier.
- Potential effects of the IRS audit protest, other tax settlements, and any changes to the U.S. valuation allowance or overseas-cash tax position.