Agilent Technologies, Inc. — Form 10-Q Summary
Reporting period: Third fiscal quarter and nine months ended July 31, 2013. Amounts are in U.S. dollars; financial statements are unaudited.
Business context and reporting period
Agilent provides measurement instruments, software, consumables and services across life sciences, chemical analysis, diagnostics and genomics, and electronic measurement. The 2012 acquisition of Dako materially affects year-over-year comparisons, particularly in diagnostics and genomics.
Key financial metrics
| Metric | Three months ended July 31, 2013 | Three months ended July 31, 2012 | Nine months ended July 31, 2013 | Nine months ended July 31, 2012 |
|---|---|---|---|---|
| Revenue | $1.652 billion | $1.723 billion | $5.064 billion | $5.091 billion |
| Gross margin | 51.8% | 51.7% | 51.9% | 52.7% |
| Operating income | $236 million | $270 million | $666 million | $841 million |
| Operating margin | 14.3% | 15.7% | 13.2% | 16.5% |
| Net income | $168 million | $243 million | $513 million | $728 million |
| Diluted EPS | $0.49 | $0.69 | $1.47 | $2.06 |
| Cash from operations | Not presented for the quarter | $775 million | $743 million |
For the nine-month period, investing activities used $197 million and financing activities used $560 million. Capital expenditures were $163 million. Cash and cash equivalents were $2.330 billion at July 31, 2013, down from $2.351 billion at October 31, 2012; approximately $2.255 billion was held outside the United States.
Total debt was $2.701 billion at July 31, 2013, comprising $2.656 billion of senior notes and approximately $45 million of secured mortgage debt; cash exceeded debt by approximately $371 million. The company had no borrowings under its $400 million revolving credit facility. Current assets were $4.584 billion and current liabilities $1.550 billion. Dividends paid were $117 million for the nine months.
Material changes versus the prior comparable period
- Third-quarter revenue declined 4%; nine-month revenue declined 1%. Product revenue fell 7% in the quarter, while services and other revenue rose 8%.
- Net income declined 31% in the quarter and 30% year to date. Nine-month operating margin fell 3 percentage points, reflecting higher Dako-related amortization and operating costs, restructuring, and wage increases.
- Electronic measurement was the principal area of weakness: revenue declined 17% for the quarter and 13% year to date. Management cited soft markets and the loss of business from a large wireless manufacturing-test customer after contract terms could not be agreed.
- Diagnostics and genomics revenue rose 54% in the quarter and 99% year to date, but Dako accounted for approximately 48 and 97 percentage points of those increases, respectively. Life sciences and chemical analysis revenue increased modestly.
- Nine-month operating cash flow increased to $775 million from $743 million. Financing cash use rose substantially, mainly reflecting $900 million of share repurchases, partially offset by $597 million of senior-note proceeds.
- Agilent issued $600 million principal amount of 3.875% senior notes due 2023 and repaid $250 million of notes that matured in July 2013. Long-term debt increased from $2.112 billion to $2.701 billion.
Outlook, management commentary, risks and unusual items
- Management described a slow-growth, challenging macroeconomic environment, particularly for electronic measurement, and cited reduced U.S. government spending as a near-term demand headwind. No company-wide earnings or revenue guidance is provided in the filing.
- Management expected near-term electronic-measurement revenue to decline year over year, with continued softness in communications, industrial, computer and semiconductor markets; modest fourth-quarter seasonal improvement was expected in aerospace and defense.
- A targeted restructuring and manufacturing streamlining plan is expected to eliminate approximately 700 positions in total. The company had accrued $56 million in restructuring charges, terminated about 200 employees and paid $15 million by July 31. Management estimated approximately $50 million in annual savings from the targeted program and expected most actions to be completed by fiscal year-end.
- Order-fulfillment initiatives are expected to generate approximately $200 million in savings over four years from fiscal 2012, including $50 million in fiscal 2013; management said the company remained on track. Agilent also remained committed to investing approximately 10% of revenue in R&D.
- Tax expense included discrete charges: $18 million in the quarter and a net $22 million for the nine months. The nine-month period also included a $12 million out-of-period tax adjustment related to foreign tax credits incorrectly claimed in prior years. The estimated annual effective tax rate, including discrete items to date, was 14.2%.
- Agilent reported pricing irregularities on certain electronic-measurement sales to U.S. government agencies and had accrued an amount based on its current understanding; it did not believe the matter was reasonably likely to have a material impact.
- A separate internal investigation concerns possible employee policy violations and sales through third-party intermediaries in China, including review under the Foreign Corrupt Practices Act. Agilent notified the SEC and Department of Justice on September 5, 2013, after quarter-end. The company had made no provision and could not estimate the investigation’s scope, cost or outcome; adverse findings could materially affect future results.
- The IRS was auditing U.S. federal tax years 2006–2007, including a disputed adjustment concerning the U.S. allocation of a business-disposition gain. Management could not estimate potential changes in unrecognized tax benefits; a material effect from the dispute could not be ruled out.
- Other key risks include weak or volatile customer markets, government and academic spending cuts, foreign-exchange exposure, acquisition integration and impairment risk, pension funding, supply-chain and manufacturing disruptions, and international compliance and regulatory matters. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether electronic-measurement demand stabilizes and whether the lost wireless customer business is replaced.
- How much diagnostics and genomics growth is organic versus attributable to Dako, and whether Dako integration improves profitability.
- Execution, cash costs and realized savings from the approximately 700-position restructuring and order-fulfillment programs.
- Potential financial, legal or regulatory consequences of the China investigation and the government-sales pricing matter.
- Outcomes of the IRS audit and other tax examinations, including potential effects on tax expense and cash taxes.
- Use of offshore cash, debt service, planned repurchases and dividends, and the company’s ability to sustain liquidity amid weak markets.