Agilent Technologies, Inc. — Q1 FY2016 Form 10-Q
Business context and period. The unaudited quarter covers the three months ended January 31, 2016. Agilent supplies instruments, software, services and consumables to life sciences, diagnostics and applied chemical markets. Results include Seahorse Bioscience, acquired in November 2015.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015, as revised |
|---|---|---|
| Net revenue | $1.028 billion | $1.026 billion |
| Gross margin | 52.2% | 50.0% |
| Operating income / margin | $155 million / 15.1% | $115 million / 11.2% |
| Continuing-operations income | $123 million; $0.37 diluted EPS | $93 million; $0.28 diluted EPS |
| Net income | $123 million | $63 million, including a $30 million discontinued-operations loss |
| Cash from operations | $104 million | Cash used of $20 million |
- Products revenue declined 2% to $795 million; services and other revenue rose 7% to $233 million.
- Revenue by segment: Life Sciences and Applied Markets $526 million, down 4%; Diagnostics and Genomics $158 million, up 7%; Agilent CrossLab $344 million, up 4%. Segment operating income was $114 million, $15 million and $76 million, respectively.
- Cash and cash equivalents were $1.931 billion at quarter-end, versus $2.003 billion at October 31, 2015. Total current assets were $3.399 billion and current liabilities $947 million.
- Debt comprised $80 million short-term debt and $1.653 billion long-term debt. The company had $700 million of revolving credit commitments, with $80 million drawn, and reported compliance with covenants.
- Investing cash flow was a $28 million outflow, including $235 million for acquisitions net of cash acquired; financing cash flow was a $132 million outflow, including $200 million of share repurchases and $38 million of dividends.
Changes, outlook and notable matters
- Revenue was essentially flat despite an approximately 5-percentage-point adverse foreign-exchange impact. Management said currency headwinds were expected to remain unfavorable in the near term.
- Margin improvement reflected lower costs, operating expense controls and a $16 million U.S. pension curtailment and settlement gain. Management also cited lower NMR-related expenses, lower logistics costs and reduced FDA-remediation costs; the FDA warning letter had been lifted.
- Management described strength in pharmaceutical and biotechnology demand, diagnostics and clinical research, and CrossLab services and consumables. Chemical and energy markets remained weak; government life-sciences research budgets were conservative.
- Management’s stated priorities included operating-margin growth, portfolio development, simpler operations and customer experience. It expected about $140 million in FY2016 capital expenditures and about $21 million in remaining FY2016 non-U.S. defined-benefit contributions. No specific revenue or earnings guidance was provided in the supplied filing text.
- Agilent expects to return a significant proportion of cash flow through dividends and repurchases. A new repurchase authorization had $1.04 billion remaining at January 31, 2016; future dividends remain subject to board approval.
- Approximately $1.879 billion of cash was held outside the U.S.; repatriation could generate additional U.S. taxes. The company said available cash, operating cash flow and access to capital and credit should meet liquidity needs for at least 12 months.
- Q1 FY2015 comparative figures were revised for out-of-period tax adjustments; net income was reduced by $9 million to $63 million. The filing also revised prior-period product/service revenue classifications, with no impact on previously reported operating results.
- A material weakness in income-tax accounting controls remained unresolved at quarter-end, although management reported progress on remediation. Ordinary-course legal matters were not believed probable to have a material impact; the company could not estimate the range of possible changes in uncertain tax benefits.
- On March 2, 2016, after quarter-end, Agilent acquired a 48% stake in Lasergen for $80 million and obtained an option to acquire the remaining shares for $105 million through March 2, 2018.
Most important facts for investors to verify
- Whether the tax-accounting material weakness is remediated and whether any tax-audit or uncertain-tax-benefit changes arise.
- Whether reported margin growth persists after the pension gain and other cost reductions, and how much FX continues to weigh on revenue.
- Demand trends in weak chemical and energy markets versus growth in diagnostics, life sciences and CrossLab.
- Cash availability and potential tax costs of repatriating overseas funds, alongside acquisition, repurchase and dividend commitments.