Agilent Technologies, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended January 31, 2012; unaudited. Agilent provides measurement solutions across life sciences, chemical analysis, and electronic measurement.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Orders | $1.623 billion | $1.627 billion | Flat |
| Net revenue | $1.635 billion | $1.519 billion | +8% |
| Operating income | $271 million | $211 million | +28% |
| Operating margin | 16.6% | 13.9% | +2.7 percentage points |
| Gross margin | 53.5% | 53.8% | -0.3 percentage points |
| Income before taxes | $256 million | $198 million | +29% |
| Income tax provision | $26 million | $5 million | +$21 million |
| Net income | $230 million | $193 million | +19% |
| Diluted EPS | $0.65 | $0.54 | +20% |
| Cash from operations | $150 million | $120 million | +$30 million |
Product revenue rose 7% to $1.342 billion; services and other revenue rose 12% to $293 million. Management attributed the higher operating margin mainly to revenue growth and lower variable and incentive pay, while gross margin was essentially flat.
Segments
- Life sciences: Revenue of $461 million, up 14%; orders up 5%. Segment operating income was $66 million versus $48 million.
- Chemical analysis: Revenue of $396 million, up 14%; orders up 4%. Segment operating income was $88 million versus $65 million.
- Electronic measurement: Revenue of $778 million, up 1%; orders down 5%. Segment operating income was $160 million versus $156 million.
Financial position and cash flow
- Cash and cash equivalents were $3.662 billion at January 31, 2012, up from $3.527 billion at October 31, 2011. Approximately $3.3 billion was held outside the United States; repatriation could trigger material U.S. taxes.
- Total current assets were $5.715 billion and current liabilities were $1.705 billion. Accounts receivable was $814 million; inventory was $937 million.
- Short-term debt was $252 million and long-term debt was $1.929 billion. The company also reported $2.1 billion of aggregate senior-note principal, including notes due September 2012. Its $400 million revolving credit facility had no borrowings outstanding; the company reported covenant compliance.
- Operating cash flow was $150 million. Investing activities used $23 million, including $46 million of capital expenditures and $55 million for acquisitions and intangible assets; an $80 million lease-receivable collection partly offset outflows. Financing activities provided $8 million, including $34 million of share repurchases.
- Agilent declared its first quarterly dividend, $0.10 per share, or approximately $35 million, payable April 25, 2012. Future dividends remain subject to board approval.
Changes, outlook, and risks
- Revenue and earnings increased year over year, but orders were flat overall. Life sciences and chemical analysis were stronger; electronic measurement orders declined amid reduced wireless infrastructure, components, and semiconductor investment.
- Management expected continued opportunities in emerging markets and operational improvement from design, supply-chain, and manufacturing capabilities. It expected modest electronic-measurement growth, citing cautious communications-test demand and comparison with strong prior-year results; it anticipated possible improvement in computer and semiconductor demand later in the year.
- Agilent continued integrating Varian and targeted $100 million in net cost savings. About one-third had been generated in general and administrative expenses by fiscal year-end 2011; remaining savings, mainly in product and service costs, were expected by 2014.
- Management believed cash, operating cash generation, capital-market access, and credit lines would meet foreseeable liquidity needs. It expected 2012 capital expenditures to be approximately in line with fiscal 2011’s $188 million and approximately $70 million of pension contributions during the remainder of 2012.
- The income-tax provision included a $4 million net discrete expense, compared with $15 million of net discrete tax benefits in the prior-year quarter. The $349 million tax valuation allowance included $287 million related to U.S. jurisdictions; management said reversal of the U.S. allowance could become supportable within the year, but was not assured. Tax audits and settlements could change unrecognized tax benefits.
- Key risks include economic and market cyclicality, uncertain order timing and cancellations, foreign exchange exposure, acquisition and Varian integration execution, supply-chain and manufacturing dependencies, international operations, tax uncertainty, pension-market exposure, and environmental or regulatory matters. Approximately $250 million of senior notes were due in September 2012.
- Agilent reported no pending legal matters it expected to be material; the IPO-related class action was resolved. The 2009 restructuring program was substantially complete, with an immaterial remaining lease obligation expected to conclude by fiscal 2014. No goodwill or long-lived-asset impairment was recorded in the quarter.
Important facts for investors to verify
- Whether flat orders and weaker electronic-measurement demand persist, particularly in communications, wireless infrastructure, and semiconductor-related markets.
- Progress toward Varian’s $100 million net cost-savings target, including the timing and costs of integration and manufacturing changes.
- Repayment or refinancing plans for the senior notes due September 2012, and the availability and geographic accessibility of cash held overseas.
- Whether operating cash flow, inventory levels, and receivables continue to support liquidity and planned capital returns.
- Developments in U.S. tax valuation allowances, tax audits, and any costs associated with repatriating foreign cash.