Agilent Technologies, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended January 31, 2013; comparative period ended January 31, 2012. Amounts are in U.S. dollars unless stated otherwise. Financial statements are unaudited.
Business context
Agilent provides measurement products and services across life sciences, chemical analysis, diagnostics and genomics, and electronic measurement. Results include Dako, acquired in June 2012; its acquisition materially increased diagnostics and genomics revenue and expenses.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Orders | $1.710 billion | $1.623 billion | +5% |
| Revenue | $1.680 billion | $1.635 billion | +3% |
| Gross margin | 52.4% | 53.5% | −1.1 percentage points |
| Operating income / margin | $217 million / 12.9% | $271 million / 16.6% | Income −20%; margin −3.7 points |
| Net income | $179 million | $230 million | −22% |
| Diluted EPS | $0.51 | $0.65 | −22% |
| Operating cash flow | $245 million | $150 million | +$95 million |
| Capital expenditures | $59 million | $46 million | +$13 million |
Operating cash flow less capital expenditures was approximately $186 million, compared with $104 million in the prior-year quarter. Management attributed the lower operating margin primarily to Dako-related costs, including higher intangible amortization, and higher wages, partly offset by lower incentive compensation.
Segment trends and material changes
- Life sciences: Revenue $401 million, up 2%; segment operating income $61 million versus $58 million.
- Chemical analysis: Revenue $394 million, down 1%; segment operating income $81 million versus $88 million.
- Diagnostics and genomics: Revenue $163 million versus $66 million, up 145%; Dako accounted for 141 percentage points of revenue growth. Segment operating income was $21 million versus $8 million.
- Electronic measurement: Revenue $722 million, down 7%; segment operating income $125 million versus $160 million. Communications test revenue fell 15%, amid weak wireless handset testing demand.
Reported company revenue growth included a 6-percentage-point contribution from Dako; foreign currency movements reduced growth by approximately 1 percentage point. Total segment operating income fell to $288 million from $314 million. Dako-related amortization and integration costs contributed to the gap between segment and consolidated operating results.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $2.450 billion at January 31, 2013, up from $2.351 billion at October 31, 2012. Approximately $1.899 billion was held by foreign subsidiaries; repatriation could trigger additional U.S. taxes.
- Balance-sheet debt comprised $250 million short-term and $2.111 billion long-term. The $250 million 2013 senior notes mature July 15, 2013. The company also reported $46 million of Danish mortgage debt and an undrawn $400 million revolving credit facility.
- Management said available cash, operating cash generation, capital-market access and credit lines should meet foreseeable liquidity needs. It expected fiscal 2013 capital expenditures to be approximately in line with fiscal 2012’s $194 million.
- Agilent repurchased 2 million shares for $79 million during the quarter. A new authorization permits up to $500 million of repurchases. The board raised the quarterly dividend from $0.10 to $0.12 per share for the second quarter.
Outlook, risks and unusual items
- Management described a slow-growth environment, with uncertainty affecting demand and delivery timing. It expected near-term pressure from reduced U.S. government spending, particularly in aerospace and defense. Electronic measurement management also expected challenging conditions and soft communications test demand to persist near term.
- Agilent expected approximately $50 million of cost savings in fiscal 2013 from order-fulfillment and manufacturing optimization. It said it remained committed to investing approximately 10% of revenue in research and development. No specific revenue or EPS guidance was provided in the supplied filing text.
- The quarter’s 8.2% effective tax rate included an $11 million net discrete tax benefit, primarily from reinstated research and development tax credits. The IRS was auditing 2006–2007 federal returns; Agilent disputed adjustments, including one concerning the U.S. allocation of a business-disposition gain, and said an adverse outcome could materially affect results or financial condition.
- On March 4, 2013, Agilent reported pricing irregularities involving certain electronic measurement sales to U.S. government agencies to the Department of Defense Inspector General. The company said it would cooperate, but could not estimate the matter’s scope, cost, duration or outcome, or whether legal action would follow.
- Other principal risks include economic and market cyclicality, Dako integration and realization of expected benefits, foreign-exchange exposure, supply-chain execution, regulatory and product-approval requirements, pension funding, environmental matters, and debt and cash-location constraints. Management reported no pending ordinary-course legal matters it then believed probable of materially affecting the company.
Important facts for investors to verify
- Reconcile dividend disclosures: the income statement reports $0.22 per share declared for the quarter, the notes describe a $0.12-per-share declaration, and MD&A states $77 million was declared while $35 million was paid.
- Assess the July 2013 note maturity and funding plan, particularly given the concentration of cash outside the United States and potential tax costs of repatriation.
- Track organic demand and margins apart from Dako, especially continued weakness in electronic measurement and the performance of chemical analysis.
- Monitor the Department of Defense inquiry and IRS audit for developments, potential financial exposure, and any effect on government contracting or taxes.
- Evaluate Dako integration, expected synergies, and the recoverability of acquisition-related goodwill and intangible assets.