A-01.31.2013-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED January 31, 2013
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-15405
AGILENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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| | |
DELAWARE | | 77-0518772 |
(State or other jurisdiction of | | (IRS employer |
incorporation or organization) | | Identification no.) |
| | |
5301 STEVENS CREEK BLVD., | | |
SANTA CLARA, CALIFORNIA | | 95051 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (408) 345-8886
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in rule 12b-2 of the exchange act.
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Large accelerated filer x | | Accelerated filer ¨ |
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Non-accelerated filer ¨ | | Smaller reporting company ¨ |
(do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the exchange act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | |
CLASS | | OUTSTANDING AT JANUARY, 31, 2013 |
COMMON STOCK, $0.01 PAR VALUE | | 347,159,281 SHARES |
AGILENT TECHNOLOGIES, INC.
TABLE OF CONTENTS
| |
PART I | — FINANCIAL INFORMATION |
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2013 | | 2012 |
Net revenue: | |
| | |
|
Products | $ | 1,380 |
| | $ | 1,342 |
|
Services and other | 300 |
| | 293 |
|
Total net revenue | 1,680 |
| | 1,635 |
|
Costs and expenses: | |
| | |
|
Cost of products | 637 |
| | 601 |
|
Cost of services and other | 163 |
| | 160 |
|
Total costs | 800 |
| | 761 |
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Research and development | 179 |
| | 162 |
|
Selling, general and administrative | 484 |
| | 441 |
|
Total costs and expenses | 1,463 |
| | 1,364 |
|
Income from operations | 217 |
| | 271 |
|
Interest income | 2 |
| | 3 |
|
Interest expense | (25 | ) | | (26 | ) |
Other income (expense), net | 1 |
| | 8 |
|
Income before taxes | 195 |
| | 256 |
|
Provision for income taxes | 16 |
| | 26 |
|
Net income | $ | 179 |
| | $ | 230 |
|
| | | |
Net income per share: | |
| | |
|
Basic | $ | 0.52 |
| | $ | 0.66 |
|
Diluted | $ | 0.51 |
| | $ | 0.65 |
|
| | | |
Weighted average shares used in computing net income per share: | |
| | |
|
Basic | 347 |
| | 348 |
|
Diluted | 352 |
| | 352 |
|
| | | |
Cash dividends declared per common share | $ | 0.22 |
| | $ | 0.10 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2013 | | 2012 |
| | | |
Net income | $ | 179 |
| | $ | 230 |
|
Other comprehensive income: | | | |
Change in unrealized gain on investments, net of tax expense (benefit) of $2 and $(8) | 3 |
| | 6 |
|
Change in unrealized gain on derivative instruments, net of tax expense of $2 and $2 | 6 |
| | 4 |
|
Amounts reclassified into earnings related to derivative instruments | (1 | ) | | (1 | ) |
Foreign currency translation | 56 |
| | (39 | ) |
Net defined benefit pension cost and post retirement plan costs: | | | |
Change in actuarial net loss, net of tax expense of $4 and $3 | 14 |
| | 12 |
|
Change in net prior service benefit, net of tax benefit of $(4) and zero | (8 | ) | | (11 | ) |
Other comprehensive income (loss) | 70 |
| | (29 | ) |
Total comprehensive income | $ | 249 |
| | $ | 201 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share amounts)
(Unaudited) |
| | | | | | | |
| January 31, 2013 | | October 31, 2012 |
ASSETS | |
| | |
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 2,450 |
| | $ | 2,351 |
|
Accounts receivable, net | 874 |
| | 923 |
|
Inventory | 1,040 |
| | 1,014 |
|
Other current assets | 348 |
| | 341 |
|
Total current assets | 4,712 |
| | 4,629 |
|
Property, plant and equipment, net | 1,163 |
| | 1,164 |
|
Goodwill | 3,071 |
| | 3,025 |
|
Other intangible assets, net | 1,069 |
| | 1,086 |
|
Long-term investments | 128 |
| | 109 |
|
Other assets | 510 |
| | 523 |
|
Total assets | $ | 10,653 |
| | $ | 10,536 |
|
LIABILITIES AND EQUITY | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable | $ | 454 |
| | $ | 461 |
|
Employee compensation and benefits | 318 |
| | 387 |
|
Deferred revenue | 465 |
| | 420 |
|
Short-term debt | 250 |
| | 250 |
|
Other accrued liabilities | 359 |
| | 375 |
|
Total current liabilities | 1,846 |
| | 1,893 |
|
Long-term debt | 2,111 |
| | 2,112 |
|
Retirement and post-retirement benefits | 554 |
| | 554 |
|
Other long-term liabilities | 791 |
| | 792 |
|
Total liabilities | 5,302 |
| | 5,351 |
|
Commitments and contingencies (Note 12) |
|
| |
|
|
Total equity: | |
| | |
|
Stockholders’ equity: | |
| | |
|
Preferred stock; $0.01 par value; 125 million shares authorized; none issued and outstanding | — |
| | — |
|
Common stock; $0.01 par value; 2 billion shares authorized; 598 million shares at January 31, 2013 and 595 million shares at October 31, 2012, issued | 6 |
| | 6 |
|
Treasury stock at cost; 251 million shares at January 31, 2013 and 249 million shares at October 31, 2012 | (8,786 | ) | | (8,707 | ) |
Additional paid-in-capital | 8,562 |
| | 8,489 |
|
Retained earnings | 5,607 |
| | 5,505 |
|
Accumulated other comprehensive loss | (41 | ) | | (111 | ) |
Total stockholders' equity | 5,348 |
| | 5,182 |
|
Non-controlling interest | 3 |
| | 3 |
|
Total equity | 5,351 |
| | 5,185 |
|
Total liabilities and equity | $ | 10,653 |
| | $ | 10,536 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2013 | | 2012 |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 179 |
| | $ | 230 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation and amortization | 94 |
| | 62 |
|
Share-based compensation | 31 |
| | 27 |
|
Excess tax benefit from share-based plans | (2 | ) | | — |
|
Deferred taxes | (2 | ) | | 10 |
|
Excess and obsolete inventory and inventory-related charges | 10 |
| | 6 |
|
Other non-cash expenses, net | 2 |
| | 1 |
|
Changes in assets and liabilities: | |
| | |
|
Accounts receivable | 53 |
| | 35 |
|
Inventory | (34 | ) | | (46 | ) |
Accounts payable | (7 | ) | | (42 | ) |
Employee compensation and benefits | (70 | ) | | (102 | ) |
Other assets and liabilities | (9 | ) | | (31 | ) |
Net cash provided by operating activities | 245 |
| | 150 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Investments in property, plant and equipment | (59 | ) | | (46 | ) |
Proceeds from lease receivable | — |
| | 80 |
|
Proceeds from sale of property, plant and equipment | 1 |
| | — |
|
Purchase of investments | (15 | ) | | — |
|
Proceeds from sale of investments | 11 |
| | 3 |
|
Acquisitions of businesses and intangible assets, net of cash acquired | (10 | ) | | (55 | ) |
Net cash used in investing activities | (72 | ) | | (18 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Issuance of common stock under employee stock plans | 52 |
| | 42 |
|
Payment of dividends | (35 | ) | | — |
|
Purchase of non-controlling interest | (3 | ) | | (5 | ) |
Excess tax benefit from share-based plans | 2 |
| | — |
|
Treasury stock repurchases | (79 | ) | | (34 | ) |
Net cash provided by (used in) financing activities | (63 | ) | | 3 |
|
| | | |
Effect of exchange rate movements | (11 | ) | | — |
|
| | | |
Net increase in cash and cash equivalents | 99 |
| | 135 |
|
| | | |
Cash and cash equivalents at beginning of period | 2,351 |
| | 3,527 |
|
Cash and cash equivalents at end of period | $ | 2,450 |
| | $ | 3,662 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
1. | OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Overview. Agilent Technologies, Inc. (“we”, “Agilent” or the “company”), incorporated in Delaware in May 1999, is a measurement company, providing core bio-analytical and electronic measurement solutions to the life sciences, chemical analysis, diagnostics and genomics, communications and electronics industries.
Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal quarters.
Acquisition of Dako A/S. On June 21, 2012, we completed the acquisition of Dako A/S through the acquisition of 100% of the share capital of Dako A/S, a limited liability company incorporated under the laws of Denmark (“Dako”), under the share purchase agreement dated May 16, 2012. As a result of the acquisition, Dako has become a wholly-owned subsidiary of Agilent. The consideration paid was approximately $2,143 million, of which $1,400 million was paid directly to the seller and $743 million was paid to satisfy the outstanding debt of Dako. Agilent funded the acquisition using our existing cash. The results of Dako are included in Agilent's condensed consolidated financial statements from the date of acquisition. For additional details related to the acquisition of Dako, see Note 3, "Acquisition of Dako".
Basis of Presentation. We have prepared the accompanying financial data for the three months ended January 31, 2013 and 2012 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our condensed consolidated balance sheet as of January 31, 2013 and October 31, 2012, condensed consolidated statement of comprehensive income for the three months ended January 31, 2013 and 2012, condensed consolidated statement of operations for the three months ended January 31, 2013 and 2012, and condensed consolidated statement of cash flows for the three months ended January 31, 2013 and 2012.
The preparation of condensed consolidated financial statements in accordance with GAAP in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, share-based compensation, retirement and post-retirement benefit plan assumptions, goodwill and purchased intangible assets and accounting for income taxes.
In the third quarter of 2012, we formed a new operating segment. The new diagnostics and genomics segment was formed from a portion of our pre-existing life sciences business plus the business of the recent acquisition of Dako. Following this reorganization, Agilent has four business segments comprised of the life sciences business, the chemical analysis business, the diagnostics and genomics business and the electronic measurement business. The historical segment numbers for both life sciences and diagnostics and genomics segments have been recast to conform to this new reporting structure in our financial statements.
Revision. The statement of cash flows for the three months ended January 31, 2012 has been revised to correct the presentation of the purchase of non-controlling interest from investing to financing activities and is not considered material. There was no impact on previously reported net income or the change in net cash for the three months ended January 31, 2012.
Update to Significant Accounting Policies. There have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012.
In the first quarter of 2013, we adopted the updated authoritative guidance that increase the prominence of items reported in other comprehensive income. For additional details related to the updated authoritative guidance, see Note 2, "New Accounting Pronouncements".
Fair Value of Financial Instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of long-term equity investments is determined using quoted market prices for those securities when available and are Level 1 inputs under the accounting guidance fair value hierarchy. For those long-term equity investments accounted for under the cost method, their carrying value approximates their estimated fair value. The fair value of our short-term and long-term debt, calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance fair value hierarchy, exceeds their carrying value by approximately $2 million and $176 million, respectively as of January 31, 2013. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 9, "Fair Value Measurements" for additional information on the fair value of financial instruments.
Goodwill and Purchased Intangible Assets. In September 2011, the FASB approved changes to the goodwill impairment guidance which are intended to reduce the cost and complexity of the annual impairment test. The changes provide entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The revised standard gives an entity the option to first assess qualitative factors to determine whether performing the current two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The revised guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We aggregated components of an operating segment that have similar economic characteristics into our reporting units. During the third quarter of fiscal year 2012, we formed a fourth segment, diagnostics and genomics, from a portion of our life sciences segment. As a result, Agilent now has four segments, life sciences, chemical analysis, diagnostics and genomics and electronic measurement, which are the same as our reporting units. In fiscal year 2012, we assessed goodwill impairment for our reporting units; life sciences, chemical analysis, diagnostics and genomics, and electronic measurement. Based on the results of our qualitative test for goodwill impairment, by reporting unit, as of September 30, 2012, we believe that it is more-likely-than-not that the fair value of each of our reporting units, life sciences, chemical analysis, diagnostics and genomics and electronic measurement is greater than their respective carrying values. There was no impairment of goodwill during the three months ended January 31, 2013 and 2012. In connection with our reporting unit change in the third quarter of fiscal year 2012, no goodwill impairment was recorded.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized over estimated useful lives ranging from 6 months to 15 years. In-process research and development ("IPR&D") is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible asset to Agilent's consolidated statement of operations in the period it is abandoned.
In July 2012, the FASB simplified the guidance for testing for impairment of indefinite-lived intangible assets other than goodwill. The changes are intended to reduce compliance costs. Agilent's indefinite-lived intangible assets are IPR&D intangible assets. The revised guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the recently issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more-likely-than-not (i.e. greater than 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. Agilent adopted this guidance for the year ended
October 31, 2012. There was no impairment related to an IPR&D project during the three months ended January 31, 2013 and 2012.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued guidance related to the presentation of comprehensive income. The guidance aims to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In the first quarter of 2013, we adopted the updated authoritative guidance that increases the prominence of items reported in other comprehensive income. The updated authoritative guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in equity and requires that changes in other comprehensive income be presented either as a single continuous statement of comprehensive income or in two but consecutive statements. The adoption of the updated authoritative guidance did impact the presentation of comprehensive income, as we have elected to present two separate but consecutive statements, but did not have an impact on our financial position or results of operations.
In December 2011, the FASB issued guidance related to the enhanced disclosures that will enable the users of financial statements to evaluate the effect or potential effect of netting arrangements of an entity's financial position. The amendments require improved information about financial instruments and derivative instruments that are either offset or subject to enforceable master netting arrangements or similar agreement. The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not expect a material impact to our consolidated financial statements due to the adoption of this guidance.
In February 2013, the FASB issued the guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The revised guidance requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance is effective prospectively for reporting periods beginning after December 15, 2012. Early adoption is permitted. We do not expect a material impact to our consolidated financial statements due to the adoption of this guidance.
On June 21, 2012, we completed the acquisition of Dako through the acquisition of 100% of the share capital of Dako, a limited liability company incorporated under the laws of Denmark, under the share purchase agreement dated May 16, 2012. As a result of the acquisition, Dako has become a wholly-owned subsidiary of Agilent. Accordingly, the results of Dako are included in Agilent's condensed consolidated financial statements from the date of the acquisition. The acquisition of Dako and its portfolio is another step to increase our growth in several rapidly expanding areas of diagnostics, including anatomic pathology and molecular diagnostics, as well as strengthen our existing offerings with a focus on product development to help in the fight against cancer.
The consideration paid was approximately $2,143 million, of which $1,400 million was paid directly to the seller and $743 million was paid to satisfy outstanding debt. Agilent funded the acquisition using our existing cash. In connection with the acquisition of Dako, Agilent entered into several foreign currency forward contracts to mitigate the currency exchange risk associated with the payment of the purchase price in Danish Krone and the repayment of debt in multiple currencies. The aggregate notional amount of the currencies hedged was $1.7 billion. These foreign exchange contracts did not qualify for hedge accounting treatment and were not designated as hedging instruments.
The acquired assets and assumed liabilities were recorded by Agilent at their estimated fair values. Agilent determined the estimated fair values with the assistance of appraisals or valuations performed by third party specialists, discounted cash flow analyses, and estimates made by management. We expect to realize revenue synergies, leverage and expand the existing sales channels and product development resources, and utilize the assembled workforce. The company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional products and capabilities. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Dako's net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.
Goodwill was allocated to the diagnostics and genomics operating segment and reporting unit. We do not expect the goodwill recognized to be deductible for income tax purposes.
A material portion of the overall purchase price was allocated to acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Therefore, approximately $185 million was established as a deferred tax liability for the future amortization of these intangibles.
The following table summarizes the final allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of June 21, 2012 (in millions):
|
| | | | |
Cash and cash equivalents | | $ | 11 |
|
Accounts receivable | | 96 |
|
Inventories | | 90 |
|
Other current assets | | 5 |
|
Property, plant and equipment | | 146 |
|
Long term investments | | 11 |
|
Intangible assets | | 738 |
|
Other assets | | 13 |
|
Goodwill | | 1,383 |
|
Total assets acquired | | 2,493 |
|
Accounts payable | | (24 | ) |
Employee compensation and benefits | | (24 | ) |
Other accrued liabilities | | (47 | ) |
Long-term debt | | (43 | ) |
Other long-term liabilities | | (212 | ) |
Net assets acquired | | $ | 2,143 |
|
The fair value of cash and cash equivalents, accounts receivable, other current assets, accounts payable and other accrued liabilities were generally determined using historical carrying values given the short-term nature of these assets and liabilities.
The fair values for acquired inventory, property, plant and equipment, and intangible assets were determined with the input from third party valuation specialists.
The fair values of certain other assets, investments, long-term debt, and certain other long-term liabilities were determined internally using historical carrying values and estimates made by management.
Valuations of intangible assets acquired
The components of intangible assets acquired in connection with the Dako acquisition were as follows (in millions):
|
| | | | | |
| Fair Value |
| Estimated Useful Life |
| | | |
Developed product technology | $ | 287 |
| | 8 - 9 yrs |
Customer relationships | 140 |
| | 4 yrs |
Tradenames and trademarks | 128 |
| | 12 yrs |
Total intangible assets subject to amortization | 555 |
| | |
In-process research and development | 183 |
| | |
Total intangible assets | $ | 738 |
| | |
As noted above, the intangible assets, including in-process research and development, were valued with input from valuation specialists. The In-Process Research and Development was valued using the multi-period excess earnings method under the income approach by discounting forecasted cash flows directly related to the products expecting to result from the projects, net of returns on contributory assets. The primary in-process project acquired relates to a major new product platform which will be released in the near future. Total costs to complete for all Dako In- Process Research and Development were estimated at approximately $49 million over time as of the close date.
Acquisition and integration costs directly related to the Dako acquisition totaled $3 million for the three months ended January 31, 2013 and were recorded in selling, general and administrative expenses. Such costs are expensed in accordance with the authoritative accounting guidance.
The following represents pro forma operating results as if Dako had been included in the company's condensed consolidated statements of operations as of the beginning of fiscal 2011(in millions, except per share amounts):
|
| | | |
| Three Months Ended |
| January 31, |
| 2012 |
|
|
Net revenue | $ | 1,731 |
|
Net income | $ | 211 |
|
Net income per share - basic | $ | 0.61 |
|
Net income per share - diluted | $ | 0.60 |
|
The pro forma financial information assumes that the companies were combined as of November 1, 2010 and include business combination accounting effects from the acquisition including amortization charges from acquired intangible assets, the impact on cost of sales due to the respective estimated fair value adjustments to inventory, changes to interest income for cash used in the acquisition, interest expense and currency losses associated with debt paid in connection with the acquisition and acquisition related transaction costs and tax related effects. The pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2011.
The unaudited pro forma financial information for the three months ended January 31, 2012 combine the historical results of Agilent for the three months ended January 31, 2012 and for Dako for the three months ended December 31, 2011 (due to differences in reporting periods).
4. SHARE-BASED COMPENSATION
Agilent accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our employee stock purchase plan (“ESPP”) and performance share awards granted to selected members of our senior management under the long-term performance plan (“LTPP”) based on estimated fair values.
The impact on our results for share-based compensation was as follows:
|
| | | | | | | | |
| Three Months Ended |
|
| January 31, |
|
| 2013 |
| 2012 |
|
| (in millions) |
Cost of products and services | $ | 8 |
|
| $ | 6 |
|
|
Research and development | 4 |
|
| 4 |
|
|
Selling, general and administrative | 19 |
|
| 17 |
|
|
Total share-based compensation expense | $ | 31 |
|
| $ | 27 |
|
|
At January 31, 2013 there was no share-based compensation capitalized within inventory. For the three months ended January 31, 2013 and 2012, the windfall tax benefit realized from exercised stock options and similar awards was $2 million and zero, respectively.
The following assumptions were used to estimate the fair value of the options and LTPP grants.
|
| | | | | |
| Three Months Ended |
| January 31, |
| 2013 | | 2012 |
Stock Option Plans: | |
| | |
|
Weighted average risk-free interest rate | 0.9 | % | | 0.9 | % |
Dividend yield | 1 | % | | 0 | % |
Weighted average volatility | 39 | % | | 38 | % |
Expected life | 5.8yrs |
| | 5.8yrs |
|
LTPP: |
| |
|
Volatility of Agilent shares | 37 | % | | 41 | % |
Volatility of selected peer-company shares | 6%-64% |
| | 17%-75% |
|
Price-wise correlation with selected peers | 49 | % | | 62 | % |
The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTPP were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock unit awards is determined based on the market price of Agilent’s common stock on the date of grant adjusted for expected dividend yield. On January 17, 2012, the company’s Board of Directors approved the initiation of quarterly cash dividends to the company’s shareholders. The fair value of all the awards granted prior to the declaration of quarterly cash dividend was measured based on an expected dividend yield of 0%. The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the purchase price and uses the purchase date to establish the fair market value.
We use historical volatility to estimate the expected stock price volatility assumption for employee stock option awards. In reaching the conclusion, we have considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. In estimating the expected life of our options granted we considered the historical option exercise behavior of our executives, which we believe is representative of future behavior.
The company's effective tax rate was 8.2 percent and 10.4 percent for the three months ended January 31, 2013 and 2012, respectively. Income tax expense was $16 million and $26 million for three months ended January 31, 2013 and 2012, respectively. The income tax provision for the three months ended January 31, 2013 included a net discrete tax benefit of $11 million primarily due to the recognition of research and development tax credits relating to the company's prior fiscal year. This resulted from U.S. legislation enacted in January 2013 that retroactively reinstated research and development tax credits for 2012.The income tax provision for the three months ended January 31, 2012 included a net discrete tax expense of $4 million.
In the U.S., tax years remain open back to the year 2006 for federal income tax purposes and the year 2000 for significant states. Agilent's U.S. federal income tax returns for 2006 through 2007 are currently under audit by the IRS. During the three months ended July 31, 2012, we received a Revenue Agents Report (“RAR”) for these years and filed a protest to dispute certain adjustments, the most significant of which pertains to the amount of a gain from the disposition of a business that was allocated to the U.S. for income tax purposes. There can be no assurance that the outcome of this dispute will not have a material adverse effect on our operating results or financial condition. In other major jurisdictions where we conduct business, the tax years generally remain open back to the year 2003. With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
6. NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented below:
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2013 | | 2012 |
| (in millions) |
Numerator: | |
| | |
|
Net income | $ | 179 |
| | $ | 230 |
|
Denominator: |
| | |
Basic weighted-average shares | 347 |
| | 348 |
|
Potentially dilutive common stock equivalents — stock options and other employee stock plans | 5 |
| | 4 |
|
Diluted weighted-average shares | 352 |
| | 352 |
|
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense, the tax benefits or shortfalls recorded to additional paid-in capital and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense and tax benefits or shortfalls collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards.
We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. For the three months ended January 31, 2013, options to purchase 5,600 shares were excluded from the calculation of diluted earnings per share as compared to 1,700,000 shares for the three months ended January 31, 2012. In addition, we also exclude from the calculation of diluted earnings per share, stock options, ESPP, LTPP and restricted stock awards whose combined exercise price, unamortized fair value and excess tax benefits or shortfalls collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive. For the three months ended January 31, 2013 we excluded an additional 20,000 shares as compared to 2,000,000 shares for the three months ended January 31, 2012.
7. INVENTORY
|
| | | | | | | |
| January 31, 2013 | | October 31, 2012 |
| | | |
| (in millions) |
Finished goods | $ | 540 |
| | $ | 509 |
|
Purchased parts and fabricated assemblies | 500 |
| | 505 |
|
Inventory | $ | 1,040 |
| | $ | 1,014 |
|
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents goodwill balances and the movements for each of our reportable segments during the three months ended January 31, 2013:
|
| | | | | | | | | | | | | | | | | | | |
| Life Sciences | | Chemical Analysis | | Diagnostics and Genomics | | Electronic Measurement | | Total |
| (in millions) |
Goodwill as of October 31, 2012 | $ | 347 |
| | $ | 756 |
| | $ | 1,464 |
| | $ | 458 |
| | $ | 3,025 |
|
Foreign currency translation impact | 1 |
| | 1 |
| | 65 |
| | (31 | ) | | 36 |
|
Goodwill arising from acquisitions/adjustments | — |
| | — |
| | 11 |
| | (1 | ) | | 10 |
|
Goodwill as of January 31, 2013 | $ | 348 |
| | $ | 757 |
| | $ | 1,540 |
| | $ | 426 |
| | $ | 3,071 |
|
The components of other intangibles as of January 31, 2013 and October 31, 2012 are shown in the table below:
|
| | | | | | | | | | | |
| Purchased Other Intangible Assets |
| Gross Carrying Amount | | Accumulated Amortization and Impairments | | Net Book Value |
| (in millions) |
As of October 31, 2012: | |
| | |
| | |
|
Purchased technology | $ | 849 |
| | $ | 333 |
| | $ | 516 |
|
Backlog | 14 |
| | 14 |
| | — |
|
Trademark/Tradename | 168 |
| | 27 |
| | 141 |
|
Customer relationships | 391 |
| | 155 |
| | 236 |
|
Total amortizable intangible assets | 1,422 |
| | 529 |
| | 893 |
|
In-Process R&D | 193 |
| | — |
| | 193 |
|
Total | $ | 1,615 |
| | $ | 529 |
| | $ | 1,086 |
|
As of January 31, 2013: | |
| | |
| | |
|
Purchased technology | 885 |
| | 365 |
| | 520 |
|
Backlog | 14 |
| | 14 |
| | — |
|
Trademark/Tradename | 174 |
| | 31 |
| | 143 |
|
Customer relationships | 397 |
| | 170 |
| | 227 |
|
Total amortizable intangible assets | 1,470 |
| | 580 |
| | 890 |
|
In-Process R&D | 179 |
| | — |
| | 179 |
|
Total | $ | 1,649 |
| | $ | 580 |
| | $ | 1,069 |
|
During the three months ended January 31, 2013, we recorded additions to goodwill of $10 million primarily related to the acquisition of two businesses. During the three months ended January 31, 2012, we recorded additions to goodwill of $39 million. During the three months ended January 31, 2013, we recorded additions to other intangible assets of $1 million. During the three months ended January 31, 2012, we recorded additions to other intangible assets of $16 million. During the three months ended January 31, 2013, intangible assets increased by $33 million due to the impact of foreign exchange translation. During the three months ended January 31, 2013, we transferred $22 million from in-process R&D to purchased technology as projects were completed.
Amortization of intangible assets was $51 million for the three months ended January 31, 2013. Amortization of intangible assets was $27 million for the three months ended January 31, 2012. Future amortization expense related to existing finite-lived purchased intangible assets is estimated to be $149 million for the remainder of 2013, $192 million for 2014, $172 million for 2015, $138 million for 2016, $87 million for 2017, $49 million for 2018, and $103 million thereafter.
9. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1- applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2- applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
Level 3- applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of January 31, 2013 were as follows:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurement at January 31, 2013 Using |
| January 31, 2013 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in millions) |
Assets: | |
| | |
| | |
| | |
|
Short-term | |
| | |
| | |
| | |
|
Cash equivalents (money market funds) | $ | 1,884 |
| | $ | 1,884 |
| | $ | — |
| | $ | — |
|
Derivative instruments (foreign exchange contracts) | 23 |
| | — |
| | 23 |
| | — |
|
Long-term | | | | | | | |
Trading securities | 46 |
| | 46 |
| | — |
| | — |
|
Available-for-sale investments | 20 |
| | 20 |
| | — |
| | — |
|
Total assets measured at fair value | $ | 1,973 |
| | $ | 1,950 |
| | $ | 23 |
| | $ | — |
|
Liabilities: | |
| | |
| | |
| | |
|
Short-term | | | | | | | |
Derivative instruments (foreign exchange contracts) | $ | 10 |
| | $ | — |
| | $ | 10 |
| | $ | — |
|
Long-term | | | | | | | |
Deferred compensation liability | 45 |
| | — |
| | 45 |
| | — |
|
Total liabilities measured at fair value | $ | 55 |
| | $ | — |
| | $ | 55 |
| | $ | — |
|
Assets and liabilities measured at fair value on a recurring basis as of October 31, 2012 were as follows:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2012 Using |
| October 31, 2012 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in millions) |
Assets: | |
| | |
| | |
| | |
|
Short-term | |
| | |
| | |
| | |
|
Cash equivalents (money market funds) | $ | 1,834 |
| | $ | 1,834 |
| | $ | — |
| | $ | — |
|
Derivative instruments (foreign exchange and interest rate swap contracts) | 7 |
| | — |
| | 7 |
| | — |
|
Long-term | | | | | | | |
Trading securities | 50 |
| | 50 |
| | — |
| | — |
|
Available-for-sale investments | — |
| | — |
| | — |
| | — |
|
Total assets measured at fair value | $ | 1,891 |
| | $ | 1,884 |
| | $ | 7 |
| | $ | — |
|
Liabilities: | |
| | |
| | |
| | |
|
Short-term | | | | | | | |
Derivative instruments (foreign exchange contracts) | $ | 6 |
| | $ | — |
| | $ | 6 |
| | $ | — |
|
Long-term | | | | | | | |
Deferred compensation liability | 48 |
| | — |
| | 48 |
| | — |
|
Total liabilities measured at fair value | $ | 54 |
| | $ | — |
| | $ | 54 |
| | $ | — |
|
Our money market funds, trading securities investments and available-for-sale investments are generally valued using quoted market prices and therefore are classified within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred compensation liability is classified as level 2 because although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.
Trading securities and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Investments designated as available-for-sale and certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in other comprehensive income. Realized gains and losses from the sale of these instruments are recorded in net income.
Impairment of Investments. There were no impairments for investments for the three months ended January 31, 2013 and 2012.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-Lived Assets
For assets measured at fair value on a non-recurring basis, the following table summarizes the impairments included in net income during the three months ended January 31, 2013 and 2012:
|
| | | | | | | | |
| Three Months Ended | |
| January 31, | |
| 2013 | | 2012 | |
| (in millions) |
Long-lived assets held and used | $ | — |
| | $ | — |
| |
Long-lived assets held for sale | 1 |
| | — |
| |
There were no impairments of long-lived assets held and used for the three months ended January 31, 2013 and 2012. For the three months ended January 31, 2013, long-lived assets held for sale with a carrying value of $3 million were written down to their fair value of $2 million. For the three months ended January 31, 2012 there were no impairments of long-lived assets held for sale. Fair value for the impaired long-lived assets was measured using level 2 inputs and impairments were included in net income for the period stated.
Investments in Leases
In December 2011, we terminated our leasehold interest in certain municipal properties, received $80 million in cash and recognized a loss of approximately $2 million.
10. DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of risk management strategy, we use derivative instruments, primarily forward contracts, purchased options, and interest rate swaps, to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates and interest rates.
Fair Value Hedges
We are exposed to interest rate risk due to the mismatch between the interest expense we pay on our loans at fixed rates and the variable rates of interest we receive from cash, cash equivalents and other short-term investments. We have issued long-term debt in U.S. dollars at fixed interest rates based on the market conditions at the time of financing. The fair value of our fixed rate debt changes when the underlying market rates of interest change, and, in the past, we have used interest rate swaps to change our fixed interest rate payments to U.S. dollar LIBOR-based variable interest expense to match the floating interest income from our cash, cash equivalents and other short term investments. As of January 31, 2013, all interest rate swap contracts had either been terminated or had expired.
On November 25, 2008, we terminated two interest rate swap contracts associated with our 2017 senior notes that represented the notional amount of $400 million. The gain to be amortized at January 31, 2013 was $25 million. On June 6, 2011, we also terminated five interest rate swap contracts associated with our 2015 senior notes that represented the notional amount of $500 million. The gain to be amortized at January 31, 2013 was $17 million. On August 9, 2011, we terminated five interest rate swap contracts related to our 2020 senior notes that represented the notional amount of $500 million. The gain to be amortized at January 31, 2013 was $28 million.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. The changes in fair value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income. Amounts associated with cash flow hedges are reclassified to cost of sales in the consolidated statement of operations when the forecasted transaction occurs. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive income will be reclassified to other income (expense) in the current period. Changes in the fair value of the ineffective portion of derivative instruments are recognized in other income (expense) in the consolidated statement of operations in the current period. We record the premium paid (time value) of an option on the date of purchase as an asset. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in other income (expense) over the life of the option contract. Ineffectiveness in the three months ended January 31, 2013 and 2012 was not significant. For the three months ended January 31, 2013 and 2012 gains and losses recognized in other income (expense) due to de-designation of cash flow hedge contracts were not significant.
In July 2012, Agilent executed treasury lock agreements for $400 million in connection with future interest payments to be made on our 2022 senior notes issued on September 10, 2012. We designated the treasury lock as a cash flow hedge. The treasury lock contracts were terminated on September 10, 2012 and we recognized a deferred gain in accumulated other comprehensive income of $3 million to be amortized to interest expense over the life of the 2022 senior notes.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative are recognized in other income (expense) in the consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions which are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
A number of our derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on our corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of January 31, 2013, was $3 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of January 31, 2013.
There were 118 foreign exchange forward contracts and 8 foreign exchange option contracts open as of January 31, 2013 and designated as cash flow hedges. There were 175 foreign exchange forward contracts open as of January 31, 2013 not designated as hedging instruments. The aggregated U.S. Dollar notional amounts by currency and designation as of January 31, 2013 were as follows:
|
| | | | | | | | | | | | |
| | Derivatives in Cash Flow Hedging Relationships | | Derivatives Not Designated as Hedging Instruments |
| | Forward Contracts | | Option Contracts | | Forward Contracts |
Currency | | Buy/(Sell) | | Buy/(Sell) | | Buy/(Sell) |
| | (in millions) |
Euro | | $ | (33 | ) | | $ | — |
| | $ | 194 |
|
British Pound | | — |
| | — |
| | 29 |
|
Canadian Dollar | | (46 | ) | | — |
| | — |
|
Australian Dollars | | 17 |
| | — |
| | 50 |
|
Malaysian Ringgit | | 120 |
| | — |
| | 17 |
|
Japanese Yen | | (39 | ) | | (110 | ) | | 27 |
|
Other | | (12 | ) | | — |
| | (34 | ) |
Totals | | $ | 7 |
| | $ | (110 | ) | | $ | 283 |
|
Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet. The gross fair values and balance sheet location of derivative instruments held in the consolidated balance sheet as of January 31, 2013 and October 31, 2012 were as follows:
|
| | | | | | | | | | | | | | | | | | |
Fair Values of Derivative Instruments |
Asset Derivatives | | Liability Derivatives |
| | Fair Value | | | | Fair Value |
Balance Sheet Location | | January 31, 2013 | | October 31, 2012 | | Balance Sheet Location | | January 31, 2013 | | October 31, 2012 |
(in millions) |
Derivatives designated as hedging instruments: | | |
| | |
| | | | |
| | |
|
Cash flow hedges | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | | | |
Other current assets | | $ | 14 |
| | $ | 4 |
| | Other accrued liabilities | | $ | 4 |
| | $ | 2 |
|
Derivatives not designated as hedging instruments: | | |
| | |
| | | | |
| | |
|
Foreign exchange contracts | | |
| | |
| | | | |
| | |
|
Other current assets | | $ | 9 |
| | $ | 3 |
| | Other accrued liabilities | | $ | 6 |
| | $ | 4 |
|
Total derivatives | | $ | 23 |
| | $ | 7 |
| | | | $ | 10 |
| | $ | 6 |
|
The effect of derivative instruments for interest rate swap contracts and foreign exchange contracts designated as hedging instruments and not designated as hedging instruments in our consolidated statement of operations were as follows:
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2013 | | 2012 |
| (in millions) |
Derivatives designated as hedging instruments: | |
| | |
|
Fair Value Hedges | |
|
| |
|
Gain (loss) on interest rate swap contracts, including interest accrual, recognized in interest expense | $ | — |
| | $ | — |
|
Gain (loss) on hedged item, recognized in interest expense | $ | — |
| | $ | 1 |
|
Cash Flow Hedges | | | |
Foreign exchange contracts: | | | |
Gain recognized in accumulated other comprehensive income | $ | 8 |
| | $ | 6 |
|
Gain reclassified from accumulated other comprehensive income into cost of sales | $ | 1 |
| | $ | 1 |
|
Derivatives not designated as hedging instruments: | | | |
Gain (loss) recognized in other income (expense) | $ | 3 |
| | $ | (16 | ) |
The estimated amount of existing net gain at January 31, 2013 that is expected to be reclassified from other comprehensive income to cost of sales within the next twelve months is $10 million.
11. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS
Components of net periodic costs. For the three months ended January 31, 2013 and 2012, our net pension and post retirement benefit costs were comprised of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pensions | | |
| U.S. Plans | | Non-U.S. Plans | | U.S. Post Retirement Benefit Plans |
| Three Months Ended January 31, |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
| (in millions) |
Service cost—benefits earned during the period | $ | 11 |
| | $ | 10 |
| | $ | 9 |
| | $ | 8 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost on benefit obligation | 6 |
| | 7 |
| | 18 |
| | 18 |
| | 3 |
| | 4 |
|
Expected return on plan assets | (13 | ) | | (12 | ) | | (25 | ) | | (23 | ) | | (5 | ) | | (5 | ) |
Amortization: | | | | | | | | | | | |
Actuarial losses | 3 |
| | 2 |
| | 14 |
| | 11 |
| | 5 |
| | 4 |
|
Prior service cost | (3 | ) | | (3 | ) | | — |
| | — |
| | (9 | ) | | (9 | ) |
Total net plan costs | $ | 4 |
| | $ | 4 |
| | $ | 16 |
| | $ | 14 |
| | $ | (5 | ) | | $ | (5 | ) |
We contributed approximately zero to our U.S. defined benefit plans and $12 million to our non-U.S. defined benefit plans during the three months ended January 31, 2013. We contributed approximately zero to our U.S. defined benefit plans and $12 million to our non-U.S. defined benefit plans during the three months ended January 31, 2012. We expect to contribute $30 million our U.S. defined benefit plans during the remainder of 2013 and expect to contribute $48 million to our non-U.S. defined benefit plans during the remainder of 2013.
12. WARRANTIES AND CONTINGENCIES
Warranties
We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product shipments. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time products are sold. The standard warranty accrual balances are held in other accrued and other long-term liabilities on our condensed consolidated balance sheet. Our warranty terms typically extend for one year from the date of delivery.
A summary of the standard warranty accrual activity is shown in the table below:
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2013 | | 2012 |
| (in millions) |
Beginning balance as of November 1 | $ | 60 |
| | $ | 50 |
|
Accruals for warranties including change in estimate | 22 |
| | 20 |
|
Settlements made during the period | (20 | ) | | (18 | ) |
Ending balance as of January 31 | $ | 62 |
| | $ | 52 |
|
Contingencies
We are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters. There are no matters pending that we currently believe are probable of having a material impact to our business, consolidated financial condition, results of operations or cash flows.
On March 4, 2013, we made a report to the Inspector General of the Department of Defense regarding pricing irregularities relating to certain sales of electronic measurement products to U.S. government agencies. We will cooperate with any government investigation of this matter. At this point, we cannot predict or estimate the duration, scope, cost, or result of this matter or whether the government will commence any legal action.
13. SHORT-TERM DEBT
Credit Facilities
On October 20, 2011, we entered into a five-year credit agreement, which provides for a $400 million unsecured credit facility that will expire on October 20, 2016. The company may use amounts borrowed under the facility for general corporate purposes. As of January 31, 2013 the company had no borrowings outstanding under the facility. We were in compliance with the covenants for the credit facilities during the three months ended January 31, 2013.
As a result of the Dako acquisition, we have a credit facility in Danish Krone equivalent of $9 million with a Danish financial institution. No borrowings were outstanding under the facility as of January 31, 2013.
2013 Senior Notes
In July 2010, the company issued an aggregate principal amount of $250 million in senior notes ("2013 senior notes"). All notes issued are unsecured and rank equally in right of payment with all of Agilent’s other senior unsecured indebtedness. There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes in the three months ended January 31, 2013 as compared to the 2013 senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012. The notes will mature on July 15, 2013.
14. LONG-TERM DEBT
Senior Notes
The following table summarizes the company’s long-term senior notes and the related interest rate swaps:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2013 | | October 31, 2012 |
| Amortized Principal | | Swap | | Total | | Amortized Principal | | Swap | | Total |
| (in millions) |
2015 Senior Notes | $ | 499 |
| | $ | 17 |
| | $ | 516 |
| | $ | 499 |
| | $ | 18 |
| | $ | 517 |
|
2017 Senior Notes | 599 |
| | 25 |
| | 624 |
| | 599 |
| | 26 |
| | 625 |
|
2020 Senior Notes | 498 |
| | 28 |
| | 526 |
| | 498 |
| | 29 |
| | 527 |
|
2022 Senior Notes | 399 |
| | — |
| | 399 |
| | 399 |
| | — |
| | 399 |
|
Total | $ | 1,995 |
| | $ | 70 |
| | $ | 2,065 |
| | $ | 1,995 |
| | $ | 73 |
| | $ | 2,068 |
|
All notes issued are unsecured and rank equally in right of payment with all of Agilent’s other senior unsecured indebtedness. There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes in the three months ended January 31, 2013 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012. All swap contracts have been terminated and amounts to be amortized over the remaining life of the senior notes as of January 31, 2013 and October 31, 2012 are detailed above.
Other Debt
As of January 31, 2013, and as a result of the Dako acquisition, we have a mortgage debt, secured on buildings in Denmark, in Danish Krone equivalent of $46 million aggregate principal outstanding with a Danish financial institution. The loan has a variable interest rate based on 3 months Copenhagen Interbank Rate ("Cibor") and will mature on September 30, 2027. Interest payments are made in March, June, September and December of each year.
15. STOCKHOLDERS' EQUITY
Stock Repurchase Program
On November 19, 2009 our board of directors approved a share-repurchase program to reduce or eliminate dilution of basic outstanding shares in connection with issuances of stock under the company's equity incentive plans (the "2009 repurchase program"). The 2009 repurchase program did not require the company to acquire a specific number of shares and could be suspended or discontinued at any time. There was no fixed termination date for the 2009 repurchase program.
On January 16, 2013, our board of directors terminated the 2009 repurchase program and approved a new share-repurchase program (the "2013 repurchase program"). The 2013 repurchase program authorizes the use of up to $500 million to repurchase shares of the company's common stock in open market transactions, inclusive of any amounts repurchased under the 2009 repurchase program since November 1, 2012. Unless terminated earlier by the board of directors, the 2013 repurchase program is designed to cover purchases during fiscal year 2013, and any unused portion may be used in fiscal year 2014. The 2013 repurchase program does not require the company to acquire a specific number of shares and may be suspended or discontinued at any time.
For the three months ended January 31, 2013, we repurchased 2 million shares for $79 million. For the three months ended January 31, 2012, we repurchased 1 million shares for $34 million. All such shares and related costs are held as treasury stock and accounted for using the cost method.
Cash Dividends on Shares of Common Stock
On November 16, 2012, we declared cash dividends of $0.10 per share or $35 million. The dividends were paid on January 23, 2013 to shareholders of record as of close of business on December 31, 2012.
On January 16, 2013, our board of directors authorized a 20 percent increase in the quarterly dividend from $0.10 per share to $0.12 per share payable in the second quarter of 2013. The second quarter dividend will be paid on April 24, 2013 to all shareholders of record as of the close of business on April 2, 2013. For the three months ended January 31, 2013, cash dividends of $0.12 per share or $42 million were declared on the company's common stock and recorded in other accrued liabilities.
For the three months ended January 31, 2012, cash dividends of $0.10 per share, or $35 million were declared on the company's common stock and recorded in other accrued liabilities.
The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
16. SEGMENT INFORMATION
Description of segments. We are a measurement company providing core bio-analytical and electronic measurement solutions to the life sciences, chemical analysis, communications and electronics, diagnostics and genomics industries. In the third fiscal quarter of 2012, we formed a new operating segment. The new diagnostics and genomics segment was formed from a portion of our pre-existing life sciences business plus the business of our recent acquisition of Dako. Following this reorganization, Agilent has four business segments comprised of the life sciences business, the chemical analysis business, diagnostics and genomics business and the electronic measurement business. The four operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and services and manufacturing are considered in determining the formation of these operating segments.
A description of our four reportable segments is as follows:
Our life sciences business provides application-focused solutions that include instruments, software, consumables, and services that enable customers to identify, quantify and analyze the physical and biological properties of substances and products. Key product categories in life sciences include: liquid chromatography ("LC") systems, columns and components; liquid chromatography mass spectrometry ("LCMS") systems; laboratory software and informatics systems; laboratory automation and robotic systems; dissolution testing; nucleic acid solutions; nuclear magnetic resonance ("NMR"), magnetic resonance imaging ("MRI"), and x-ray diffraction (“XRD”) systems; and services and support for the aforementioned products.
Our chemical analysis business provides application-focused solutions that include instruments, software, consumables, and services that enable customers to identify, quantify and analyze the physical and biological properties of substances and products. Key product categories in chemical analysis include: gas chromatography (GC) systems, columns and components; gas chromatography mass spectrometry (GC-MS) systems; inductively coupled plasma mass spectrometry (ICP-MS) instruments; atomic absorption (AA) instruments; inductively coupled plasma optical emission spectrometry (ICP-OES) instruments; molecular spectroscopy instruments; software and data systems; vacuum pumps and measurement technologies; services and support for our products.
Our diagnostics and genomics business provides solutions that include reagents, instruments, software and consumables that enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. With the acquisition of Dako, a new group of solutions have been added that extend our product offerings to cancer diagnostics with anatomic pathology workflows. Our broad portfolio of offerings include immunohistochemistry (“IHC”), In Situ Hybridization (“ISH”), Hematoxylin and Eosin Staining, special staining, DNA mutation detection, genotyping, gene copy number determination, identification of gene rearrangements, DNA methylation profiling, gene expression profiling, as well as automated gel electrophoresis-based sample analysis systems. We also collaborate with a number of major pharmaceutical companies to develop new potential pharmacodiagnostics, also called companion diagnostics, which may be used to identify patients most likely to benefit from a specific targeted therapy.
Our electronic measurement business provides electronic measurement instruments and systems, software design tools and related services that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment, and microscopy products. Related services include start-up assistance, instrument productivity and application services and instrument calibration and repair. We also offer customization, consulting and optimization services throughout the customer's product lifecycle.
The historical segment numbers for both the life sciences and diagnostics and genomics segments have been recast to conform to this new reporting structure in our financial statements.
A significant portion of the segments' expenses arise from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, real estate, insurance services, information technology services, treasury and other corporate infrastructure expenses. Charges are allocated to the segments, and
the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. Beginning in fiscal year 2012, we created the Agilent Order Fulfillment ("AOF") organization to centralize all order fulfillment and supply organizations and operations. AOF provides resources for manufacturing, engineering, strategic sourcing and logistics to life sciences, chemical analysis and electronic measurement businesses. In general, AOF employees are dedicated to specific businesses and the associated costs are directly allocated to businesses.
The following tables reflect the results of our reportable segments under our management reporting system. These results are not necessarily in conformity with U.S. GAAP. The performance of each segment is measured based on several metrics, including adjusted income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.
The profitability of each of the segments is measured after excluding restructuring and asset impairment charges, investment gains and losses, interest income, interest expense, acquisition and integration costs, non-cash amortization and other items as noted in the reconciliations below.
|
| | | | | | | | | | | | | | | | | | | |
| Life Sciences | | Chemical Analysis | | Diagnostics and Genomics | | Electronic Measurement | | Total |
| (in millions) |
Three months ended January 31, 2013: | |
| | |
| | | | |
| | |
|
Total net revenue | $ | 401 |
| | $ | 394 |
| | $ | 163 |
| | $ | 722 |
| | $ | 1,680 |
|
Segment income from operations | $ | 61 |
| | $ | 81 |
| | $ | 21 |
| | $ | 125 |
| | $ | 288 |
|
Three months ended January 31, 2012: | |
| | |
| | | | |
| | |
|
Total net revenue | $ | 395 |
| | $ | 396 |
| | $ | 66 |
| | $ | 778 |
| | $ | 1,635 |
|
Segment income from operations | $ | 58 |
| | $ | 88 |
| | $ | 8 |
| | $ | 160 |
| | $ | 314 |
|
The following table reconciles reportable segments’ income from operations to Agilent’s total enterprise income before taxes:
|
| | | | | | | |
| Three Months Ended |
| January 31, |
| 2013 | | 2012 |
| (in millions) |
Total reportable segments’ income from operations | $ | 288 |
| | $ | 314 |
|
Asset impairments | (1 | ) | | — |
|
Transformational initiatives | (3 | ) | | (8 | ) |
Amortization of intangibles | (52 | ) | | (27 | ) |
Acquisition and integration costs | (10 | ) | | (7 | ) |
Other | (5 | ) | | (1 | ) |
Interest income | 2 |
| | 3 |
|
Interest expense | (25 | ) | | (26 | ) |
Other income (expense), net | 1 |
| | 8 |
|
Income before taxes, as reported | $ | 195 |
| | $ | 256 |
|
The following table reflects segment assets under our management reporting system. Segment assets include allocations of corporate assets, including deferred tax assets, goodwill, other intangibles and other assets. Unallocated assets primarily consist of cash, cash equivalents, accumulated amortization of other intangibles, the valuation allowance relating to deferred tax assets and other assets.
|
| | | | | | | | | | | | | | | | | | | |
| Life Sciences | | Chemical Analysis | | Diagnostics and Genomics | | Electronic Measurement | | Total |
| (in millions) |
Assets: | |
| | |
| | | | |
| | |
|
As of January 31, 2013 | $ | 1,392 |
| | $ | 1,721 |
| | $ | 2,841 |
| | $ | 1,962 |
| | $ | 7,916 |
|
As of October 31, 2012 | $ | 1,477 |
| | $ | 1,768 |
| | $ | 2,595 |
| | $ | 2,157 |
| | $ | 7,997 |
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality, cyclicality and growth in, and drivers of, the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance, earnings from our foreign subsidiaries, remediation activities, new product and service introductions, the ability of our products to meet market needs, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, savings and headcount reduction recognized from our restructuring programs and other cost saving initiatives, uncertainties relating to Food and Drug Administration ("FDA") and other regulatory approvals, the integration of our acquisitions and other transactions, our stock repurchase program, our declared dividends, our transition to lower-cost regions, and the existence of economic instability, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Item 1A and elsewhere in this Form 10-Q.
Basis of Presentation
The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations, comprehensive income or cash flows. Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.
Executive Summary
Agilent is the world’s premier measurement company, providing core bio-analytical and electronic measurement solutions to the life sciences, chemical analysis, diagnostic and genomics, communications and electronics industries.
Total orders for the three months ended January 31, 2013 increased 5 percent compared to the same period last year. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable impact of approximately 1 percentage point compared to the same period last year. The order increase associated with the Dako acquisition accounted for 6 percentage points of order growth in the three months ended January 31, 2013. For the three months ended January 31, 2013, life sciences orders increased 1 percent, chemical analysis orders decreased 1 percent, diagnostics and genomics increased 139 percent and electronic measurement orders decreased 1 percent when compared to the same period last year. Dako orders within the diagnostics and genomics business accounted for 135 percentage points of the order increase for the three months ended January 31, 2013.
Net revenue of $1,680 million for the three months ended January 31, 2013 increased 3 percent compared with the same period last year. The revenue associated with the Dako acquisition accounted for 6 percentage points of revenue growth in the three months ended January 31, 2013. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable impact of approximately 1 percentage point compared to the same period last year. Revenue grew 2 percent in the life sciences business, for the three months ended January 31, 2013 when compared to the same period last year. Increased revenue was led by demand for products in pharmaceutical and biotechnology markets; academic and government research markets were flat. Revenue decreased 1 percent in the three months ended January 31, 2013 within the chemical analysis business when compared to the same period last year. Revenue generated within forensics markets increased strongly, but environmental markets declined amid lower government spending in the three months ended January 31, 2013. In the three months ended January 31, 2013, total diagnostics and genomics revenue increased 145 percent when compared to the same period last year. The Dako acquisition accounted for 141 percentage points of revenue increase for the three months ended January 31, 2013. Electronic measurement revenue decreased 7 percent in the three months ended January 31, 2013 compared with the same period last year. Within electronic measurement, revenue from general purpose test market decreased 3 percent in the three months ended January 31, 2013. Revenue from aerospace and defense markets increased, but the remainder of the general purpose market declined. Also within electronic measurement, communications test business revenues decreased 15 percent in the three months ended January 31, 2013. There was weakness in the wireless handset test market in the three months ended January 31, 2013 when compared to the same period last year.
Net income for the three months ended January 31, 2013 was $179 million compared to $230 million for the corresponding period last year. In the three months ended January 31, 2013, we generated $245 million of cash from operations compared with $150 million generated in the same period last year.
For the three months ended January 31, 2013, cash dividends of $77 million were declared and $35 million was paid on the company's outstanding common stock. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Looking forward, we are in a slow-growth environment where continued uncertainty will dampen demand and impact the timing of delivery for our products and services. In the near term, our results are impacted by decreases in U.S. government spending particularly in the area of aerospace/defense and to a lesser extent in areas of health and safety. We expect to continue to introduce innovative technologies and deliver market-leading products, while we make progress in optimizing our order fulfillment and manufacturing operations resulting in approximately $50 million of cost savings in the current fiscal year.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. The preparation of condensed consolidated financial statements in conformity with GAAP in the U.S. requires management to make estimates, judgments and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, share-based compensation, retirement and post-retirement benefit plan assumptions, goodwill and purchased intangible assets and accounting for income taxes. There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012. A number of our critical accounting policies are described in the following paragraphs. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements.
Share-based compensation. We estimate the stock price volatility using the historical volatility of Agilent's stock options over the most recent historical period equivalent to the expected life of stock options. In reaching this conclusion, we have considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. A 10 percent increase in our estimated historical volatility from 39 percent to 49 percent for our most recent employee stock option grant would generally increase the value of an award and the associated compensation cost by approximately 23 percent if no other factors were changed. In estimating the expected life of our options granted we considered the historical option exercise behavior of our executive employees, which we believe is representative of future behavior.
Goodwill and purchased intangible assets. Agilent reviews goodwill for impairment annually during our fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We aggregated components of an operating segment that have similar economic characteristics into our reporting units. At the time of an acquisition, we assign goodwill to the reporting unit that is expected to benefit from the synergies of the combination. During the third quarter of fiscal 2012, we formed a fourth segment, diagnostics and genomics, from a portion of our life sciences segment. As a result, Agilent now has four segments, life sciences, chemical analysis, diagnostics and genomics and electronic measurement, which are the same as our reporting units
In September 2011, the FASB approved changes to the goodwill impairment guidance which are intended to reduce the cost and complexity of the annual impairment test. The changes provide entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The revised standard gives an entity the option to first assess qualitative factors to determine whether performing the current two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. > 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The revised guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price
on either an absolute basis or relative to peers.
The qualitative indicators replace those previously used to determine whether an interim goodwill impairment test is required.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit.
In fiscal year 2012, we assessed goodwill impairment for our four reporting units: life sciences, chemical analysis, diagnostics and genomics and electronic measurement. Based on our results of our qualitative test for goodwill impairment, by reporting unit, as of September 30, 2012, we believe that it is more-likely-than-not that the fair value of each of our four reporting units, life sciences, chemical analysis, diagnostics and genomics and electronic measurement, is greater than their respective carrying values. There was no impairment of goodwill during the three months ended January 31, 2013 and 2012. Each quarter we review the events and circumstances to determine if goodwill impairment is indicated.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized using the straight-line method over estimated useful lives ranging from 6 months to 15 years. In-process research and development (IPR&D) is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible asset to Agilent's consolidated statement of operations in the period it is abandoned.
In July 2012, the FASB simplified the guidance for testing for impairment of indefinite-lived intangible assets other than goodwill. The changes are intended to reduce compliance costs. Agilent's IPR&D intangible assets are indefinite-lived intangible assets. The revised guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the recently issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible assets to determine whether it is more-likely-than-not (i.e. > 50% chance) that the indefinite lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Agilent adopted this guidance for the year ended October 31, 2012. No impairments of indefinite-lived intangible assets were recorded during the three months ended January 31, 2013 or 2012.
We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets, including purchased intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Based on the analyses, there were no impairments of purchased intangible assets but we recorded impairments of $1 million for long-lived assets held for sale for the three months ended January 31, 2013. There were no impairments of long-lived assets, including purchased intangible assets for the three months ended January 31, 2012.
Accounting for income taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more-likely-than-not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of losses in recent years and our forecast of future taxable income. In the fourth quarter of fiscal 2012 we released the valuation allowance for the majority of our U.S. deferred tax assets. At January 31, 2013, we provided a valuation allowance for certain U.S. state and foreign deferred tax assets. We intend to maintain a valuation allowance in these jurisdictions until sufficient positive evidence exists to support its reversal.
We have not provided for all U.S. federal income and foreign withholding taxes on the undistributed earnings of some of our foreign subsidiaries because we intend to reinvest such earnings indefinitely. Should we decide to remit this income to the U.S. in a future period, our provision for income taxes will increase materially in that period.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations.
As a part of our accounting for business combinations, intangible assets are recognized at fair values and goodwill is measured as the excess of consideration transferred over the net estimated fair values of assets acquired. Impairment charges associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the period that any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally not tax deductible and therefore deferred tax liabilities have been recorded for non-deductible amortization expenses as a part of the accounting for business combinations.
Adoption of New Pronouncements
See Note 2, “New Accounting Pronouncements,” to the condensed consolidated financial statements for a description of new accounting pronouncements.
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the condensed consolidated statement of operations and balance sheet because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (up to a rolling twelve month period). Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, Agilent may enter into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction.
Results from Operations
Orders and Net Revenue
|
| | | | | | | | | | | |
| Three Months Ended |
| Year over Year Change |
|
| January 31, |
| Three |
|
| 2013 |
| 2012 |
| Months |
|
| (in millions) | | | |
Orders | $ | 1,710 |
| | $ | 1,623 |
| | 5 | % |
|
Net revenue: | | | | | |
|
Products | $ | 1,380 |
| | $ | 1,342 |
| | 3 | % |
|
Services and other | 300 |
| | 293 |
| | 2 | % |
|
Total net revenue | $ | 1,680 |
|
| $ | 1,635 |
|
| 3 | % |
|
Total orders for the three months ended January 31, 2013 increased 5 percent compared to the same period last year. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable impact of approximately 1 percentage point compared to the same period last year. The order increase associated with the Dako acquisition accounted for 6 percentage points of order growth in the three months ended January 31, 2013. For the three months ended January 31, 2013, life sciences orders increased 1 percent, chemical analysis orders decreased 1 percent, diagnostics and genomics increased 139 percent and electronic measurement orders decreased 1 percent when compared to the same period last year. Dako orders within the diagnostics and genomics business accounted for 135 percentage points of the order increase for the three months ended January 31, 2013.
Net revenue of $1,680 million for the three months ended January 31, 2013 increased 3 percent compared with the same period last year. The revenue associated with the Dako acquisition accounted for 6 percentage points of revenue growth in the three months ended January 31, 2013. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable impact of approximately 1 percentage point compared to the same period last year. Revenue grew 2 percent in the life sciences business, for the three months ended January 31, 2013 when compared to the same period last year. Increased revenue was led by demand for products in pharmaceutical and biotechnology markets; academic and government research markets were flat. Revenue decreased 1 percent in the three months ended January 31, 2013 within the chemical analysis business when compared to the same period last year. Revenue generated within forensics markets increased strongly, but environmental markets declined amid lower government spending in the three months ended January 31, 2013. In the three months ended January 31, 2013, total diagnostics and genomics revenue increased 145 percent when compared to the same period last year. The Dako acquisition accounted for 141 percentage points of revenue increase for the three months ended January 31, 2013. Electronic measurement revenue decreased 7 percent in the three months ended January 31, 2013 compared with the same period last year. Within electronic measurement, revenue from general purpose test market decreased 3 percent in the three months ended January 31, 2013. Revenue from aerospace and defense markets increased, but the remainder of the general purpose market declined. Also within electronic measurement, communications test business revenues decreased 15 percent in the three months ended January 31, 2013. There was weakness in the wireless handset test market in the three months ended January 31, 2013 when compared to the same period last year.
Services and other revenue include revenue generated from servicing our installed base of products, warranty extensions and consulting. Services and other revenue increased 2 percent in the three months ended January 31, 2013 as compared to the same period in 2012. Approximately 1 percentage point of growth was attributable to the Dako acquisition. The service and other revenue growth is impacted by a portion of the revenue being driven by the current and previously installed product base.
Operating Results
|
| | | | | | | | | | | |
|
| Three Months Ended |
| Year over Year Change |
|
| January 31, |
| Three |
|
| 2013 |
| 2012 |
| Months |
Total gross margin |
| 52.4 | % |
| 53.5 | % |
| (1)ppt |
|
Operating margin |
| 12.9 | % |
| 16.6 | % |
| (4)ppt |
|
|
| |
| |
| |
(in millions) |
| |
|
| |
|
| |
Research and development |
| $ | 179 |
|
| $ | 162 |
|
| 11 | % |
Selling, general and administrative |
| $ | 484 |
|
| $ | 441 |
|
| 10 | % |
Total gross margins for the three months ended January 31, 2013 decreased 1 percentage point compared to the same period last year. Operating margins decreased 4 percentage points in the three months ended January 31, 2013 compared to the same period last year. The decrease in operating margin in the three months ended January 31, 2013 is due to increased operating expenses associated with the Dako acquisition, including increased intangible amortization, and higher wages offset by reductions in variable and incentive pay compared to the same period last year.
Research and development expenses increased 11 percent in the three months ended January 31, 2013 compared to the same period last year. Increased expenditures, compared to the same period last year, were mostly due to the Dako acquisition and investments in new products and technologies partially offset by lower variable and incentive pay. We remain committed to invest approximately 10 percent of revenues in research and development and have focused our development efforts on key strategic opportunities in order to align our business with available markets and position ourselves to capture market share.
Selling, general and administrative expenses increased 10 percent for the three months ended January 31, 2013 compared to the same period last year. Increased expenditures were due to the higher wages, the Dako acquisition and investment in sales channel coverage offset by lower variable and incentive pay.
At January 31, 2013, our headcount was approximately 20,500 as compared to approximately 18,700 at January 31, 2012. The increase was mostly due to the acquisition of Dako.
Income Taxes
Our effective tax rate was 8.2 percent and 10.4 percent for the three months ended January 31, 2013 and 2012, respectively. Income tax expense was $16 million and $26 million for the three months ended January 31, 2013 and 2012, respectively. The income tax provision for the three months ended January 31, 2013 included net discrete tax benefits of $11 million primarily due to the recognition of research and development tax credits relating to our prior fiscal year. This resulted from U.S. legislation enacted in January 2013 that retroactively reinstated research and development tax credits for 2012. The income tax provision for the three months ended January 31, 2012 included a net discrete tax expense of $4 million.
At January 31, 2013, our estimate of the annual effective tax rate including discrete items to date was 12.5 percent. We determine our interim tax provision using an estimated annual effective tax rate methodology except in jurisdictions where we anticipate or have a year-to-date ordinary loss for which no tax benefit can be recognized. In these jurisdictions, tax expense is computed based on an actual or discrete method. Our effective tax rate differs from the U.S. statutory rate primarily due to the impact of research and development credits, foreign tax credits, business acquisitions and dispositions, changes to valuation allowances and mix of earnings in non-U.S. jurisdictions taxed at lower statutory rates.
In the U.S., tax years remain open back to the year 2006 for federal income tax purposes and the year 2000 for significant states. Agilent's U.S. federal income tax returns for 2006 through 2007 are currently under audit by the IRS. During the three months ended July 31, 2012, we received a Revenue Agents Report (“RAR”) for these years and filed a protest to dispute certain adjustments, the most significant of which pertains to the amount of a gain from the disposition of a business that was allocated to the U.S. for income tax purposes. There can be no assurance that the outcome of this dispute will not have a material adverse effect on our operating results or financial condition. In other major jurisdictions where we conduct business, the tax years generally remain open back to the year 2003. With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, we are unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
Segment Overview
Agilent is a measurement company providing core bio-analytical and electronic measurement solutions to the life sciences, chemical analysis, communications and electronics, diagnostics and genomics industries. In the third fiscal quarter of 2012, we formed a new operating segment. The new diagnostics and genomics segment was formed from a portion of our pre-existing life sciences business plus the business of our recent acquisition of Dako. Following this reorganization, Agilent has four business segments comprised of the life sciences business, the chemical analysis business, diagnostics and genomics business and the electronic measurement business. The historical segment numbers for both the life sciences and diagnostics and genomics segments have been recast to conform to this new reporting structure in our financial statements.
Life Sciences
Our life sciences business provides application-focused solutions that include instruments, software, consumables, and services that enable customers to identify, quantify and analyze the physical and biological properties of substances and products. Key product categories in life sciences include: liquid chromatography ("LC") systems, columns and components; liquid chromatography mass spectrometry ("LCMS") systems; laboratory software and informatics systems; laboratory automation and robotic systems; dissolution testing; nucleic acid solutions; nuclear magnetic resonance ("NMR"), magnetic resonance imaging ("MRI"), and x-ray diffraction (“XRD”) systems; and services and support for the aforementioned products.
Orders and Net Revenue
|
| | | | | | | | | | |
|
| Three Months Ended |
| Year over Year Change |
|
| January 31, |
| Three |
|
| 2013 |
| 2012 |
|
| Months |
|
| (in millions) | |
|
Orders |
| $ | 397 |
| | $ | 394 |
| | 1% |
Net revenue |
| $ | 401 |
| | $ | 395 |
| | 2% |
Life sciences orders for the three months ended January 31, 2013 increased 1 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable currency impact of 1 percentage point on the growth in orders when compared to the same period last year. Order results were led by demand in the LC, LCMS, informatics, nucleic acid, consumables, and services portfolios. We saw solid performance in key products among the LCMS family, with Single Quadrupole and Single Time-of-Flight LCMS instruments posting strong growth. Geographically, results were mixed as orders grew 12 percent in the Americas and 7 percent in Asia Pacific excluding Japan and declined 8 percent in Europe and 33 percent in Japan for the three months ended January 31, 2013 when compared to the same period last year. Government spending restrictions and cautious behavior in response to regional economic conditions in Europe and Japan moderated demand.
Life sciences net revenues for the three months ended January 31, 2013 increased 2 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable currency impact of 1 percentage point on the growth in revenues when compared to the same period last year. Revenue growth in the three months ended January 31, 2013 was led by the LC, nucleic acid solutions, consumables, and services portfolios. LCMS revenue declined compared to last year due to higher order backlog clearing and revenue conversion in the first quarter of the prior year. LC revenue growth was driven by strong order conversion this quarter and consumables results were boosted by growth in both generic and proprietary instrument supplies. Geographically, revenues grew 12 percent in Asia Pacific excluding Japan, declined 1 percent in the Americas and 15 percent in Japan, and were relatively flat in Europe for the three months ended January 31, 2013 when compared to the same period last year. Order and delivery timing within the current quarter contributed to the mixed regional growth profile.
End market performance reflected moderate growth. The pharmaceutical and biotech market held steady with moderate growth as the interim U.S. budget and debt ceiling solutions temporarily allayed macroeconomic concerns, while concern with the negative sales impact of patent expirations appeared to soften. Academic and Government spending remains soft, but steady, as we saw modest growth in this market. On-going lack of clarity on specific government budget cuts in both the public and private sector worldwide is keeping capital replacement and service contract extensions in check. Applied markets had mixed results, reflecting some positive momentum in China and the United States.
The overall macroeconomic weakness has affected demand for our instruments and application solutions. Despite this weakness, we continue to invest in expanding and improving our life sciences applications and solutions portfolio. In this quarter, we began shipment of a new laser-based 1290 Infinity Evaporative Light-Scattering Detector (ELSD) system, which is suited for the analysis of non- and semi-volatile compounds in pharmaceutical, drug discovery, food quality testing, nutraceutical and fine chemical analysis. We also announced the Encore Multispan Liquid Handling System, which will enable new automation capabilities for life science research applications. In addition, we continue to focus on application-specific solutions in emerging countries and markets.
Operating Results
|
| | | | | | | | | | |
|
| Three Months Ended |
| Year over Year Change |
|
| January 31, |
| Three |
|
| 2013 |
| 2012 |
| Months |
Gross margin |
| 51.9 | % | | 50.9 | % | | 1 ppt |
Operating margin |
| 15.2 | % | | 14.6 | % | | 1 ppt |
|
| | | | | |
(in millions) |
| | | | | |
Research and development |
| $ | 35 |
| | $ | 34 |
| | 1% |
Selling, general and administrative |
| $ | 112 |
| | $ | 109 |
| | 3% |
Gross margins for products and services for the three months ended January 31, 2013 increased 1 percentage point compared to the same period last year. Favorable revenue volume, lower variable pay and infrastructure expenses were partially offset by wage increases.
Research and development expenses for the three months ended January 31, 2013 increased 1 percent compared to the same period last year. The increase was mainly due to continued investment in new products and technologies.
Selling, general and administrative expenses for the three months ended January 31, 2013 increased 3 percent compared to the same period last year. The increase was due to wage increases and investments in sales channel coverage with a focus on emerging markets, partially offset by lower variable pay.
Operating margins for products and services for the three months ended January 31, 2013 increased 1 percentage point compared to the same period last year. The increase was mainly due to favorable gross profit from higher revenue outpacing operating expense growth.
Income from Operations
Income from operations for the three months ended January 31, 2013 increased $3 million or 6 percent on a corresponding revenue increase of $6 million. The resultant year-over-year operating margin incremental was 50 percent. Operating margin incremental is measured by the increase in income from operations compared to the prior period divided by the increase in revenue compared to the prior period.
Chemical Analysis
Our chemical analysis business provides application-focused solutions that include instruments, software, consumables, and services that enable customers to identify, quantify and analyze the physical and biological properties of substances and products. Key product categories in chemical analysis include: gas chromatography (GC) systems, columns and components; gas chromatography mass spectrometry (GC-MS) systems; inductively coupled plasma mass spectrometry (ICP-MS) instruments; atomic absorption (AA) instruments; inductively coupled plasma optical emission spectrometry (ICP-OES) instruments; molecular spectroscopy instruments; software and data systems; vacuum pumps and measurement technologies; services and support for our products.
Orders and Net Revenue
|
| | | | | | | | | | |
| | Three Months Ended | | Year over Year Change |
| | January 31, | | Three |
| | 2013 | | 2012 |
| | Months |
| | (in millions) | | |
Orders | | $ | 399 |
| | $ | 403 |
| | (1)% |
Net revenue | | $ | 394 |
| | $ | 396 |
| | (1)% |
Chemical analysis orders for the three months ended January 31, 2013 decreased 1 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable currency impact of 1 percentage point on the growth in orders when compared to the same period last year. Order results were led by solid performance in atomic spectroscopy instruments and services. Growth in atomic spectroscopy orders featured our AA, ICP-OES, and Microwave Plasma instruments. Service orders were driven by higher point-of-instrument-sale activities, as well as aftermarket services including new contracts and renewals. Growth was largely offset by declines in the vacuum pump portfolio and a pause in GC-MS orders as customers anticipate the rollout of new GC-MS instruments in our second quarter. Geographically, orders grew 1 percent in the Americas, were relatively flat in Europe, declined 22 percent in Japan, and grew 2 percent in other Asia Pacific for the three months ended January 31, 2013 when compared to the same period last year. In the Americas, orders in the United States declined slightly as government spending tightened and private customers remained cautious with capital spending. However, Latin America delivered growth, driven by sales in Brazil and Mexico.
Chemical analysis revenues for the three months ended January 31, 2013 decreased 1 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable currency impact of 1 percentage point on the growth in revenues when compared to the same period last year. Similar to orders, revenues were led by solid performance in atomic spectroscopy instruments and services. Growth was largely offset by declines in the vacuum pump portfolio. We continue to face challenges in the vacuum pump portfolio as weakness in semiconductor and industrial markets affected results. Geographically, revenues grew 1 percent in the Americas, grew 1 percent in Europe, declined 20 percent in Japan, and grew 2 percent in other Asia Pacific for the three months ended January 31, 2013 when compared to the same period last year. While the economic situation in Europe is still fragile, we saw some improvement and momentum this quarter. Japan declined due to macroeconomic weakness.
Growth was mixed in core end markets. Growth in the food market was driven by private sector demand in the United States and continued investment in China. Continued testing demand for pesticides and veterinary medicine residues in foods remains strong. Emerging applications such as mycotoxins, dioxins, and metal speciation are showing growth. Forensics growth was strong; increasing demand for screening and identification of abused prescription pharmaceuticals and designer drugs is driving purchasing of new, high resolution mass spectrometry technologies. The overall petrochemical market declined year-on-year due to lower industrial demand, but has stabilized from recent quarters. Demand in materials and mining remains solid, although investments have been tempered from prior quarters due to lower commodity prices. Environmental is still down on weak government spending, but results have improved modestly from recent trends, partially due to shale gas testing in the Americas. Other applied markets showed net growth as growth in the pharmaceutical and biotech markets was partially offset by decline in the academic and government markets.
While the economic environment is still challenging, there are signs of improvement in many chemical analysis core markets. Despite the current weakness, we will continue to invest in research and development and seek to expand our position in developing countries and emerging markets. In addition, we are focusing on improvements in profitability of our portfolio by refreshing products and consolidating supply chain activities.
Operating Results
|
| | | | | | | | | | |
| | Three Months Ended | | Year over Year Change |
| | January 31, | | Three |
| | 2013 | | 2012 | | Months |
Gross margin | | 51.2 | % | | 51.7 | % | | (1) ppt |
Operating margin | | 20.6 | % | | 22.2 | % | | (2) ppts |
| | | | | | |
(in millions) | | | | | | |
Research and development | | $ | 24 |
| | $ | 23 |
| | 4% |
Selling, general and administrative | | $ | 97 |
| | $ | 94 |
| | 3% |
Gross margins for products and services for the three months ended January 31, 2013 declined 1 percentage point compared to the same period last year. The change was mostly due to higher product discounts and logistics costs partially offset by lower variable pay and infrastructure expenses.
Research and development expenses for the three months ended January 31, 2013 increased 4 percent when compared to the same period last year. The increase was due to wage increases and investments in product R&D, partially offset by lower variable pay.
Selling, general and administrative expenses for the three months ended January 31, 2013 increased 3 percent compared to the same period last year. The increase was due to wage increases and investments in sales channel coverage with a focus on emerging markets, partially offset by lower variable pay.
Operating margins for products and services for the three months ended January 31, 2013 declined 2 percentage points compared to the same period last year. The decrease was due to lower gross profit coupled with incremental expense growth.
Income from Operations
Income from operations for the three months ended January 31, 2013 decreased $7 million on a corresponding revenue decrease of $2 million.
Diagnostics and Genomics
Our diagnostics and genomics business provides solutions that include reagents, instruments, software and consumables that enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. With the acquisition of Dako, a new group of solutions have been added that extend our product offerings to cancer diagnostics with anatomic pathology workflows. Our broad portfolio of offerings include immunohistochemistry (“IHC”), In Situ Hybridization (“ISH”), Hematoxylin and Eosin Staining, special staining, DNA mutation detection, genotyping, gene copy number determination, identification of gene rearrangements, DNA methylation profiling, gene expression profiling, as well as automated gel electrophoresis-based sample analysis systems. We also collaborate with a number of major pharmaceutical companies to develop new potential pharmacodiagnostics, also called companion diagnostics, which may be used to identify patients most likely to benefit from a specific targeted therapy.
Orders and Net Revenue
|
| | | | | | | | | | |
| | Three Months Ended | | Year over Year Change |
| | January 31, | | Three |
| | 2013 | | 2012 |
| | Months |
| | (in millions) | | |
Orders | | $ | 165 |
| | $ | 69 |
| | 139% |
Net revenue | | $ | 163 |
| | $ | 66 |
| | 145% |
Diagnostics and genomics orders for the three months ended January 31, 2013, increased 139 percent when compared to the same period last year. The incremental orders associated with the Dako acquisition accounted for 135 percentage points of the
order growth. Excluding the impact of the Dako acquisition, order growth was led by SureSelect, HaloPlex, CGH microarrays, Bioanalyzer chips and reagents and Tapestation products. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable impact of 2 percentage point on orders when compared to the same period last year. Geographically, excluding the impact of the Dako acquisition, orders grew in all regions except Japan when compared to the same period last year. Japan declined 6 percent due to the impact of currency movements, while the Americas grew 7 percent and Europe grew 6 percent helped by strong order growth in SureSelect, HaloPlex and CGH microarrays. Other Asia Pacific saw order growth of 14 percent with all product portfolios either flat or showing growth compared the same period last year.
Diagnostic and genomics revenue for three months ended January 31, 2013, increased 145 percent when compared to the same period last year. The incremental revenue associated with the Dako acquisition accounted for 57 percent of our diagnostics and genomics business for the three months ended January 31, 2013, and 141 percentage points of the revenue growth compared to the same period last year. Foreign currency movements for the three months ended January 31, 2013 had an unfavorable currency impact of 2 percentage points when compared to the same period last year. Product performance, excluding the impact of the Dako acquisition, was led by SureSelect, HaloPlex, Bioanalyzer consumables and TapeStation products. Revenue associated with the Dako acquisition consisted primarily of IHC product offerings. On a regional basis, excluding the impact of the Dako acquisition, revenue grew in all regions with the exception of the Americas, which declined 4 percent. Revenue grew 8 percent in Europe, 3 percent in Japan and 33 percent in Other Asia Pacific.
We saw positive revenue growth in the pharmaceutical and biotech market, as well as strong growth in the clinical, diagnostics and academia and government markets, excluding the impact of the Dako acquisition. Positive growth in the pharmaceutical and biotech market reflects worldwide outsourcing demand for preclinical research and development as patents expire and generic drugs expand rapidly. Strong growth in the clinical market reflected continued adoption of next generation sequencing testing, as well as program development in Europe to optimize prognosis and diagnostic approaches using next generation sequencing and microarrays. The cancer diagnostics market remained robust within pathology staining as the fundamental socio-demographic growth drivers continued to increase test volumes, while the more efficient automation solutions and test procedure standardization drove demand due to its cost and labor reduction advantages. Pharma partnerships have continued to see high growth, including the recently announced collaboration with Eli Lilly and Company for the development of companion diagnostic tests to identify patients who may be more likely to benefit from an investigational oncology medicine currently under development by Eli Lilly and Company. The academia and government market continues to remain soft due to the U.S. and European cautious funding environments. However, next generation sequencing continues to attract government funding in many fields, including medical science, microbiology, and bio-agriculture, resulting in continued health of consumables budgets for genomics products in A&G end markets.
Looking forward, we are optimistic about our growth opportunities in the clinical market as our broad portfolio of products are well suited to address customer needs. Strong adoption of HaloPlex continues with growing customer base and nice ramp-up of re-order rates and we have plans to continue investing in target enrichment. On the microarray front, we have plans to file our CGH arrays with the FDA. Having signed an agreement with a former competitor who has exited the microarray business, we are already realizing conversion of their customers onto Agilent's microarray platform. These new customers have ordered both gene expression and CGH arrays, as well as other products in the genomics portfolio. Our Dako business will be boosted by a new advanced staining platform which is launching this year, bringing both IHC and ISH capabilities to one integrated platform. Additionally, we continue to work with pharmaceutical partners to develop companion diagnostic solutions.
Operating Results
|
| | | | | | | | | | |
| | Three Months Ended | | Year over Year Change |
| | January 31, | | Three |
| | 2013 | | 2012 | | Months |
Gross margin | | 60.5 | % | | 62.6 | % | | (2) ppts |
Operating margin | | 13.1 | % | | 11.9 | % | | 1 ppts |
| | | | | | |
(in millions) | | | | | | |
Research and development | | $ | 22 |
| | $ | 10 |
| | 123% |
Selling, general and administrative | | $ | 55 |
| | $ | 24 |
| | 131% |
Gross margins for products and services for the three months ended January 31, 2013, declined 2 percentage points compared to the same period last year. The change in gross margins was due to the impact of the Dako acquisition, first quarter 2012 hedging gain, temporarily higher period costs in microarray fab operations, higher discounts and unfavorable currency impacts partially
offset by favorable revenue volume.
Research and development expenses for the three months ended January 31, 2013, increased 123 percent when compared to the same period last year. The increase was due to the acquisition of Dako.
Selling, general and administrative expenses for the three months ended January 31, 2013, increased 131 percent compared to the same period last year. The increase was due to the acquisition of Dako.
Operating margins for products and services for the three months ended January 31, 2013, increased 1 percentage point compared to the same period last year. Factors which led to operating margin improvement over the prior year have been explained in the above discussions.
Income from Operations
Income from operations for the three months ended January 31, 2013, increased $13 million on a corresponding revenue increase of $97 million. The resultant year-over-year operating margin incremental was 14 percent.
Electronic Measurement
Our electronic measurement business provides electronic measurement instruments and systems, software design tools and related services that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment, and microscopy products. Related services include start-up assistance, instrument productivity and application services and instrument calibration and repair. We also offer customization, consulting and optimization services throughout the customer's product lifecycle.
Orders and Net Revenue
|
| | | | | | | | | | |
| | Three Months Ended | | Year over Year Change |
| | January 31, | | Three |
| | 2013 | | 2012 |
| | Months |
| | (in millions) | | |
Orders | | $ | 749 |
| | $ | 757 |
| | (1)% |
Net revenue | | $ | 722 |
| | $ | 778 |
| | (7)% |
Electronic measurement orders for the three months ended January 31, 2013, decreased 1 percent when compared to the same period last year due to the unfavorable impact of foreign currency movements. A decline in our general purpose test business, particularly for industrial, computers, and semiconductor applications, was partially offset by growth in wireless manufacturing demand. On a geographical basis, orders increased 1 percent year-over-year in the Americas and were flat in Japan. Orders declined 2 percent in Asia Pacific excluding Japan and 3 percent in Europe compared to the same period last year.
Electronic measurement revenues for the three months ended January 31, 2013, decreased 7 percent when compared to the same period last year. Foreign currency movements had an unfavorable impact of 1 percentage point year-over-year. Declines in the communications and industrial test businesses were partially offset by growth in aerospace and defense. Regionally, the Americas declined 3 percent compared to the same period last year. Europe was 8 percent lower reflecting weaker industrial, computers, and semiconductor demand partially offset by strength in aerospace and defense. Asia Pacific excluding Japan declined 10 percent year-over-year primarily due to weak communications test revenue, and Japan decreased 11 percent on lower industrial, computer, and semiconductor test demand.
General purpose test, representing approximately 69 percent of electronic measurement revenue, reflected solid growth in aerospace and defense business, slightly lower computers and semiconductor related demand, and lower industrial test revenue compared to the same period last year. Aerospace and defense revenue was relatively flat in the Americas but increased on stronger spending in Asia Pacific excluding Japan and Europe. Investments in new semiconductor technology moderated and manufacturing capacity expansion remained weak. Uncertain global economic conditions contributed to lower industrial related business.
Communications test, representing approximately 31 percent of electronic measurement revenue, declined year-over-year primarily due to lower wireless manufacturing and R&D test business. Following a period of strong investment in smartphone
production capacity, wireless manufacturing demand moderated. A more cautious spending environment drove lower wireless R&D investment though industry fundamentals remain intact, with continued interest in high data rate applications such as long-term evolution (LTE). Demand for broadband communications test decreased compared to the same period last year reflecting lower optical network investments.
Looking forward, we expect challenging market conditions to persist in the near term. There continues to be downward pressure on the aerospace and defense market with uncertainty relating to the budget for the United States government. Communications test demand is expected to remain soft on decelerating smartphone capacity expansion and conservative spending in R&D. We anticipate continued interest in high-speed digital test applications and gradual improvement in semiconductor related investments later in the year.
Operating Results
|
| | | | | | | | | | |
| | Three Months Ended | | Year over Year Change |
| | January 31, | | Three |
| | 2013 | | |