Business context and reporting period
Agilent Technologies, Inc. filed this unaudited Form 10-Q for its fiscal second quarter and six months ended April 30, 2010. The company provides measurement solutions across life sciences, chemical analysis, and electronic measurement. It reorganized its reporting segments in fiscal Q1 2010; prior-period segment figures were recast.
Financial performance and position
| Metric | Three months ended April 30, 2010 | Six months ended April 30, 2010 |
|---|---|---|
| Revenue | $1.271 billion, up 16% | $2.484 billion, up 10% |
| Orders | $1.346 billion, up 31% | $2.566 billion, up 20% |
| Gross margin | 55.9%, versus 48.6% | 55.2%, versus 49.6% |
| Operating income (loss) | $154 million, versus $(47) million | $248 million, versus $(23) million |
| Operating margin | 12.1%, versus (4.3)% | 10.0%, versus (1.0)% |
| Net income (loss) | $108 million, versus $(101) million | $187 million, versus $(37) million |
| Diluted earnings (loss) per share | $0.31, versus $(0.29) | $0.53, versus $(0.11) |
For the six months, operating cash flow was $255 million, compared with $154 million a year earlier; capital expenditures were $54 million, and cash used in financing was $56 million. Cash and cash equivalents were $2.646 billion at April 30, 2010, including $1.552 billion of restricted cash held in connection with the World Trade debt obligation. Current assets were $5.712 billion and current liabilities $2.709 billion.
Debt at April 30 comprised $1.501 billion of short-term debt and $1.393 billion of long-term debt. The $1.5 billion World Trade obligation was due January 27, 2011; management was considering options to extend, reduce, or eliminate it. Senior notes totaled approximately $1.393 billion. The company also had a $330 million revolving credit facility with no borrowings outstanding.
Material changes versus the prior comparable period
- Recovery across most key markets drove higher orders and revenue. Electronic measurement was the main growth driver: quarterly orders rose 44% and revenue 18%; its operating result improved to $100 million from a $22 million loss.
- Quarterly revenue increased in all three segments: life sciences to $334 million (+12%), chemical analysis to $238 million (+19%), and electronic measurement to $699 million (+18%).
- Higher volume, restructuring savings, and favorable currency helped lift company gross and operating margins. R&D expense fell 12% in both the quarter and half year; SG&A was flat for the quarter and up 3% for the half year.
- Six-month operating cash flow improved, although accounts receivable used $93 million of cash, compared with a $203 million source in the prior-year period.
Outlook, commentary, risks and unusual items
- Management said recovery was continuing in most key markets and expected electronic measurement recovery to continue, with sustained momentum in general-purpose test and improvement in communications test. No consolidated numerical earnings or revenue guidance was provided.
- Management planned to integrate Varian and pursue revenue and cost synergies. Agilent completed the $1.5 billion Varian acquisition on May 14, 2010, after the reporting date; approximately $225 million of Varian cash was acquired. Purchase accounting was incomplete. The acquisition was financed with previously issued senior-note proceeds and existing cash.
- On May 1, 2010, Agilent sold its Network Solutions Division for $165 million, subject to adjustments, and anticipated a significant gain in fiscal Q3. On May 19, it sold specified businesses to meet merger-approval commitments for approximately $40 million, subject to adjustments.
- Restructuring, asset impairment, and other special charges were $16 million for the quarter and $50 million for the half year, down from $86 million and $134 million, respectively. The remaining restructuring accrual was $50 million. About 150 electronic-measurement employees were still pending termination under the FY 2009 plan.
- Varian acquisition and integration costs were $10 million for the quarter and $27 million for the half year. The six-month results also included $14 million of impairment charges on assets held for sale and $8 million of net federal deficiency interest related to an IRS matter. The company reached a resolution in principle with the IRS Appeals Office on a significant proposed adjustment.
- Key risks include the still-evolving economic recovery, demand and pricing volatility, supply constraints, foreign-exchange exposure, acquisition integration and synergy execution, and the January 2011 debt obligation. Much of the company’s cash was held outside the U.S.; repatriation could trigger additional taxes. Tax audits and valuation allowances could also affect results. The company reported no pending legal matters it expected to be material, while certain litigation and environmental obligations remained outstanding.
- Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How Agilent will refinance, repay, or otherwise address the $1.5 billion World Trade obligation due January 27, 2011, and the availability and tax cost of cash needed in the U.S.
- Varian’s final purchase-price allocation, integration costs, realized synergies, and the effect of the acquisition on debt, cash, and earnings.
- The actual gain and final proceeds from the Network Solutions Division and antitrust-required business sales.
- Whether the reported order recovery converts into sustained revenue and margin growth, particularly in communications test.
- Developments in IRS audits, unrecognized tax benefits, valuation allowances, and the Varian shareholder-litigation settlement and related appeals.