Agilent Technologies, Inc. — Q1 FY2010 Form 10-Q
Reporting period: Three months ended January 31, 2010; comparison is the three months ended January 31, 2009. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Business context and results
Agilent supplies measurement instruments, software, consumables and services to life sciences, chemical analysis, communications and electronics markets. It reorganized reporting into three segments: Life Sciences, Chemical Analysis and Electronic Measurement; prior-period segment figures were recast.
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Orders | $1,220 | $1,115 | +9% |
| Revenue | $1,213 | $1,166 | +4% |
| Income from operations | $94 | $24 | +$70 |
| Net income | $79 | $64 | +$15 |
| Diluted EPS | $0.22 | $0.18 | +$0.04 |
| Gross margin | 54.4% | 50.5% | +3.9 percentage points |
| Operating margin | 7.8% | 2.1% | +5.7 percentage points |
| Operating cash flow | $30 | $17 | +$13 |
Revenue, segments and material changes
- Product revenue was $976 million, up 4%; services and other revenue was $237 million, up 3%. Foreign currency accounted for 3 percentage points of total revenue growth.
- Life Sciences revenue was $340 million (+10%) and segment operating income was $55 million, versus $309 million and $44 million. Chemical Analysis revenue was $244 million (+13%) and segment operating income was $67 million, versus $216 million and $57 million. Electronic Measurement revenue was $629 million (-2%) and segment operating income was $58 million, versus $641 million and a $6 million loss. Segment income is management’s adjusted measure, not GAAP operating income.
- Management attributed improved consolidated margins principally to restructuring savings, favorable volume and currency. R&D expense fell 12% to $149 million; SG&A rose 5% to $417 million, reflecting acquisition costs, wage restoration, variable pay and currency.
- The tax line shifted from a $37 million benefit in Q1 FY2009 to a $4 million provision in Q1 FY2010. The prior-year benefit included a $42 million discrete tax and interest benefit; the current quarter included $9 million of net discrete tax benefits.
Cash, debt and liquidity
- Cash and cash equivalents were $2.481 billion at January 31, 2010, compared with $2.479 billion at October 31, 2009. An additional $1.553 billion of short-term restricted cash was held in commercial paper in connection with the World Trade debt obligation.
- Operating cash flow was $30 million; investing cash flow was negative $31 million and financing cash flow was positive $3 million. Capital expenditures were $25 million, and Agilent repurchased $100 million of shares during the quarter.
- Short-term debt was $1.501 billion, due January 27, 2011; long-term debt was $1.410 billion. The $1.5 billion World Trade obligation was classified as short-term, with associated restricted cash. Agilent said it was considering refinancing and other options. The $330 million revolving facility had no borrowings outstanding.
- Management planned to fund the proposed Varian acquisition using part of the proceeds from its 2009 senior-note offering and existing cash. Much of Agilent’s cash was held outside the U.S.; repatriation could generate additional U.S. taxes.
Outlook, transactions and notable items
- Management reported signs of recovery in most key markets and expected general-purpose test markets to sustain growth momentum. It described wireless handset test and network-equipment manufacturing outlooks as mixed. The filing gives no specific consolidated revenue or EPS guidance.
- The proposed Varian acquisition had an estimated total purchase price of about $1.5 billion. European Commission clearance was conditional on divestitures; U.S. FTC clearance remained pending at the filing date. Agilent subsequently announced divestitures of affected measurement businesses, subject to approvals and other closing conditions.
- On February 11, 2010, Agilent agreed to sell its Network Solutions Division to JDSU for $165 million in cash, subject to a working-capital adjustment and closing conditions.
- The FY2009 restructuring plan was expected to involve approximately $315 million of aggregate pretax restructuring and other charges, reduce the workforce by about 3,800 positions, and generate approximately $525 million in annual operating savings when complete. Most actions were completed in 2009; remaining actions were expected by the end of Q2 FY2010.
- Restructuring and other special charges were $34 million for the quarter. The filing also reports $19 million of asset impairment charges in operating cash-flow adjustments, including write-downs associated with a business expected to be divested. No goodwill impairment was recorded in the quarter.
- Tax audits remain ongoing, including U.S. federal audits for 2000–2002 and 2003–2007. One significant issue from the earlier audit remained unresolved; management said any adjustment was expected to be offset by available tax attributes and was not expected to materially harm financial position, results or liquidity.
- Varian shareholder litigation had a proposed settlement with no payment to class members, subject to closing and court approval. An appeal remained pending in a separate IPO-related securities class action; Agilent stated insurers would fund its settlement share. Management reported no other pending legal matters expected to be material.
Key risks and investor verification points
- Verify the status, financing and integration costs of the Varian acquisition, required divestitures and the JDSU sale, including regulatory approvals and final proceeds.
- Track refinancing or repayment of the $1.5 billion World Trade obligation due January 2011, the availability of restricted cash, and the effects of overseas cash repatriation and taxes.
- Assess whether order growth converts into sustained revenue and cash generation, particularly given weakness in wireless manufacturing test and uncertain economic recovery.
- Monitor delivery of the restructuring plan’s expected savings and workforce reductions, while considering risks to talent, product development and capacity if demand rebounds.
- Review tax audit outcomes and valuation allowances, potential goodwill or other asset impairments, foreign-exchange exposure, pension contributions, and exposure to supplier, counterparty and broader market risks.
- Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.