filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
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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 condensed 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 growth opportunities, including for revenue and our end markets, strength and drivers of the markets into which we sell, sales funnels, our strategic direction, new product and service introductions and the position of our current products and services, market demand for and adoption of our products, the ability of our products and solutions to address customer needs and meet industry requirements, our focus on differentiating our product solutions, improving our customers’ experience and growing our earnings, future financial results, our operating margin, mix, our investments, including in manufacturing infrastructure, research and development and expanding and improving our applications and solutions portfolios, expanding our position in developing countries and emerging markets, our focus on balanced capital allocation, our contributions to our pension and other defined benefit plans, impairment and adjustments of goodwill and other intangible assets, the impact of foreign currency movements, our hedging programs and other actions to offset the effects of tariffs and foreign currency movements, our future effective tax rate, tax valuation allowance and unrecognized tax benefits, the impact of local government regulations on our ability to pay vendors or conduct operations, our ability to satisfy our liquidity requirements, including through cash generated from operations, the potential impact of adopting new accounting pronouncements, indemnification, source and supply of materials used in our products, our sales, our purchase commitments, our capital expenditures, the integration and effects of our acquisitions and other transactions, savings and headcount reduction recognized from our restructuring programs and other cost saving initiatives, our stock repurchase program and dividends, macroeconomic environment and geopolitical uncertainties, interest rate and inflationary pressures, 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 Part II 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 (loss) 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, these dates refer to our fiscal year and fiscal periods.
Executive Summary
Agilent Technologies, Inc. ("we," "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow.
New Segment Structure. In the first quarter of fiscal year 2024, we announced a change in our operating segments to move our cell analysis business from our life sciences and applied markets segment to our diagnostics and genomics operating segment in order to further strengthen growth opportunities for both organizations. Following this reorganization, we continue to have three business segments comprised of life sciences and applied markets, diagnostics and genomics and Agilent CrossLab, each of which continues to comprise a reportable segment. We are reporting under this new structure beginning with this Quarterly Report on Form 10-Q for the period ended January 31, 2024. All historical financial segment information has been recast to conform to this new presentation in our financial statements and accompanying notes. There was no change to our Agilent CrossLab business segment.
Actual Results
Net revenue of $1,658 million for the three months ended January 31, 2024 decreased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year. Net revenue for the three months ended January 31, 2024, declined in our life sciences and applied markets and diagnostics and genomics segments in both the Americas and the Asia Pacific regions, particularly in China, partially offset by revenue growth in our Agilent Crosslab segment. Revenue declined in most of the end markets we serve, most significantly in the pharmaceutical and chemical and advanced materials markets due to our customers' continued capital expenditure pressures compared to the same period last year. Revenue generated by our life sciences and applied markets business in the three months ended January 31, 2024 decreased 10 percent when compared to the same period last year. Foreign currency movements for the three months ended
January 31, 2024, had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year. Revenue generated by our diagnostics and genomics business for the three months ended January 31, 2024 decreased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year. Revenue generated by our Agilent CrossLab business in the three months ended January 31, 2024 increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year.
Net income for the three months ended January 31, 2024 was $348 million compared to net income of $352 million for the corresponding period last year. In the three months ended January 31, 2024, cash provided by operations was $485 million compared to cash provided by operations of $296 million in the same period last year.
Dividends. During the three months ended January 31, 2024, we paid cash dividends of $0.236 per common share or $69 million on the company's common stock. During the three months ended January 31, 2023, we paid cash dividends of $0.225 per common share or $67 million on the company's common stock.
On February 21, 2024, our board of directors declared a quarterly dividend of $0.236 per share of common stock or approximately $69 million which will be paid on April 24, 2024 to all shareholders of record at the close of business on April 2, 2024. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
2021 Repurchase Program. During the three months ended January 31, 2023, we repurchased and retired 499,000 shares for $75 million under this authorization. On March 1, 2023, the 2021 repurchase program was terminated and the remaining authorization of $339 million expired.
2023 Repurchase Program. On January 9, 2023, we announced that our board of directors had approved a share repurchase program (the "2023 repurchase program") designed, among other things, to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs. The 2023 repurchase program authorizes the purchase of up to $2.0 billion, excluding excise taxes, of our common stock at the company's discretion and has no fixed termination date. The 2023 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time. The 2023 repurchase program commenced on March 1, 2023, and also terminated and replaced the 2021 repurchase program. During the three months ended January 31, 2024, we repurchased and retired no shares under this authorization. As of January 31, 2024, we had remaining authorization to repurchase up to approximately $1.524 billion of our common stock under the 2023 repurchase program.
Looking forward, we continue to be focused on improving our customers’ experience, differentiating product solutions and productivity. While we anticipate a challenging macroeconomic environment, particularly in China, and an overall pressure on our customers' capital expenditures in the near-term, we remain optimistic about our long-term growth opportunities in all of our key end markets. We expect to continue to face inflationary pressures which we will continue to mitigate through targeted pricing and various other cost savings strategies.
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, retirement and post-retirement benefit plan assumptions, valuation of 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, 2023. 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.
Adoption of New Pronouncements
See Note 2, “New Accounting Pronouncements,” to the condensed consolidated financial statements for a description of new accounting pronouncements.
Restructuring and Other Related costs
In the fourth quarter of fiscal year 2023, we initiated a restructuring plan ("FY23 Plan") designed to reduce costs and expenses in response to the current macroeconomic conditions. The plan included a reduction of our total headcount by approximately 400 regular employees, representing approximately 2 percent of our global workforce, and the consolidation of our excess facilities, including some site closures.
In connection with this plan, we have recorded approximately $3 million in restructuring and other related costs in the three months ended January 31, 2024, for a total of $49 million since inception. The restructuring plan costs include severance and other personnel costs associated with the workforce reduction. The consolidation of excess facilities includes accelerated depreciation expenses of right-of-use ("ROU") and machinery and equipment assets, and other facilities-related costs. The timing and scope of the workforce reductions will vary based on local legal requirements. These actions impact all three of our business segments. The costs associated with this restructuring plan have not been allocated to our business segments' results; however, each business segment will benefit from the future cost savings from these actions. When completed, the restructuring program is expected to result in the reduction of $80 million in annual cost of sales and operating expenses over the three business segments. While the majority of the workforce reduction was completed in the first quarter of 2024, we expect to substantially complete the remaining restructuring activities by the end of fiscal year 2024.
A summary of total restructuring activity is shown in the table below:
| Workforce Reduction | Consolidation of Excess Facilities | Total | |||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Balance at October 31, 2023 | $ | 31 | $ | 5 | $ | 36 | |||||||||||||||||
| Income statement expense | 2 | 1 | 3 | ||||||||||||||||||||
| Accelerated depreciation expenses of right-of-use assets | — | (1) | (1) | ||||||||||||||||||||
| Cash payments | (25) | (2) | (27) | ||||||||||||||||||||
| Balance at January 31, 2024 | $ | 8 | $ | 3 | $ | 11 |
The restructuring and other related costs of $11 million at January 31, 2024, are recorded in other accrued liabilities on the condensed consolidated balance sheet and reflect estimated future cash outlays.
A summary of the charges in the condensed consolidated statement of operations resulting from the restructuring plan is shown below:
| Three Months Ended | ||||||||
| January 31, | ||||||||
| 2024 | ||||||||
| (in millions) | ||||||||
| Cost of products and services | $ | — | ||||||
| Research and Development | 2 | |||||||
| Selling, general and administrative | 1 | |||||||
| Total restructuring costs | $ | 3 |
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities and equity are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. Foreign currency movements for the three
months ended January 31, 2024 had an overall favorable impact on revenue of 1 percentage point when compared to the same period last year. When movements in foreign currency exchange rates have a positive impact on revenue, they will also have a negative impact by increasing our costs and expenses. We calculate the impact of movements in foreign currency exchange rates by applying the actual foreign currency exchange rates in effect during the last month of each quarter of the current year to both the applicable current and prior year periods. 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). We may also hedge equity balances denominated in foreign currency on a long-term basis. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we 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
Net Revenue
| Three Months Ended | Year over Year Change | ||||||||||||||||||||||||||||||||||
| January 31, | Three | ||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | |||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||||||||||||||
| Products | $ | 1,209 | $ | 1,323 | (9)% | ||||||||||||||||||||||||||||||
| Services and other | 449 | 433 | 4% | ||||||||||||||||||||||||||||||||
| Total net revenue | $ | 1,658 | $ | 1,756 | (6)% |
Net revenue of $1,658 million for the three months ended January 31, 2024 decreased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year.
Revenue from products for the three months ended January 31, 2024 decreased 9 percent when compared to the same period last year. The product revenue decline in the three months ended January 31, 2024 was primarily driven by decreases in our liquid chromatography, mass spectrometry and cell analysis businesses partially offset by increases in our consumables and pathology businesses when compared to the same period last year. Overall, product revenue declined due to our customers' continued capital expenditure pressures and mostly impacted the pharmaceutical market within our life sciences and applied markets and diagnostics and genomics segments.
Services and other revenue for the three months ended January 31, 2024 increased 4 percent when compared to the same period last year. Services and other revenue consist of contract repair, preventative maintenance, compliance services, relocation services, installation services and consulting services related to the companion diagnostics and nucleic acid solutions businesses. For the three months ended January 31, 2024, service revenue increases reflected strong growth from contract repair and preventative maintenance services partly offset by declines in installation services related to the decline of the product revenues.
Net Revenue By Segment
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Net revenue by segment: | ||||||||||||||||||||||||||||||||||||||
| Life sciences and applied markets | $ | 846 | $ | 943 | (10)% | |||||||||||||||||||||||||||||||||
| Diagnostics and genomics | 407 | 432 | (6)% | |||||||||||||||||||||||||||||||||||
| Agilent CrossLab | 405 | 381 | 6% | |||||||||||||||||||||||||||||||||||
| Total net revenue | $ | 1,658 | $ | 1,756 | (6)% |
Revenue in the life sciences and applied markets business for the three months ended January 31, 2024 decreased 10 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year. For the three months ended January 31, 2024, revenue declined in most of our end markets. We saw a significant decline in revenue in the pharmaceutical and chemical and advanced materials markets and a moderate decline in the diagnostics and clinical markets when compared to the same period last year. We saw modest revenue growth in the academia and government market when compared to the same period last year.
Revenue in the diagnostics and genomics business for the three months ended January 31, 2024, decreased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had a favorable impact on revenue growth of 1 percentage point when compared to the same period last year. For the three months ended January 31, 2024, we saw a significant decline in revenue in the pharmaceutical market due to lower sales in our cell analysis and nucleic acid solutions businesses when compared to the same period last year.
Revenue generated by Agilent CrossLab in the three months ended January 31, 2024, increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year. For the three months ended January 31, 2024, we saw strong revenue growth across all of our end markets led by the diagnostics and clinical, pharmaceutical, chemicals and advanced materials and academia and government markets when compared to the same period last year.
Operating Results
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions, except margin data) | ||||||||||||||||||||||||||||||||||||||
| Total gross margin | 54.8 | % | 55.1 | % | — | |||||||||||||||||||||||||||||||||
| Research and development | $ | 128 | $ | 123 | 4% | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 396 | $ | 419 | (5)% | |||||||||||||||||||||||||||||||||
| Operating margin | 23.2 | % | 24.3 | % | (1) ppt | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 384 | $ | 426 | (10)% |
Total gross margin for the three months ended January 31, 2024 was relatively flat when compared to the same period last year. Gross margin for the three months ended January 31, 2024 was impacted by targeted price increases, lower shipping costs, favorable impact of currency movements, and intangible amortization expense offset by lower sales volume, higher wages and inventory charges.
Research and development expenses for the three months ended January 31, 2024 increased 4 percent when compared to the same period last year. Research and development expenses for the three months ended January 31, 2024 increased primarily due to an impairment of in-process research and development and restructuring and other related costs.
Selling, general and administrative expenses for the three months ended January 31, 2024 decreased 5 percent when compared to the same period last year. The decrease in the three months ended January 31, 2024, was due to lower intangible amortization expenses, transformational initiatives and variable pay partially offset by higher wages and the unfavorable impact of currency movements. In addition, selling, general and administrative expenses decreased due to savings from restructuring and business exit activities that occurred in the fourth quarter of fiscal year 2023.
Total operating margin for the three months ended January 31, 2024 decreased 1 percentage point when compared to the same period last year. Operating margin for the three months ended January 31, 2024 decreased primarily due to lower sales volume.
Income from operations for the three months ended January 31, 2024, decreased $42 million or 10 percent on a corresponding revenue decrease of $98 million.
Interest income for the three months ended January 31, 2024 and 2023 was $18 million and $9 million, respectively. The increase in interest income in 2024 was primarily due to higher cash balances and increases in interest rates related to our cash and cash equivalents.
At January 31, 2024, our headcount was approximately 17,700 as compared to approximately 18,300 at January 31, 2023.
Other income (expense), net
In the three months ended January 31, 2024, other income and expense, net includes a net gain of $3 million on equity securities. In the three months ended January 31, 2024, other income and expense, net also includes $8 million of income related to foreign currency translation reclassified out of accumulated comprehensive income (loss) and $7 million of income related to the defined benefit retirement and post-retirement benefit plans (interest cost, expected return on assets, amortization of net actuarial (gain) loss and prior service credits). In the three months ended January 31, 2024, other income and expense, net also includes income of $3 million related to the provision of site service costs to, and lease income from Keysight Technologies, Inc. The costs associated with these services are reported within income from operations.
In the three months ended January 31, 2023, other income and expense, net includes a net loss on equity securities of $10 million. In the three months ended January 31, 2023 other income and expense, net also includes income of $3 million related to the provision of site service costs to, and lease income from Keysight Technologies, Inc. The costs associated with these services are reported within income from operations.
Income Taxes
For the three months ended January 31, 2024, our income tax expense was $55 million with an effective tax rate of 13.6 percent. For the three months ended January 31, 2024, there were no significant discrete items.
For the three months ended January 31, 2023, our income tax expense was $58 million with an effective tax rate of 14.1 percent. For the three months ended January 31, 2023, our effective tax rate and the resulting provision for income taxes were impacted by the excess tax benefits from stock-based compensation of $12 million along with the expiration of various foreign statutes of limitations which resulted in the recognition of previously unrecognized tax benefits of $7 million.
In the U.S., tax years remain open back to the year 2020 for federal income tax purposes and 2019 for significant states. In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2014.
With these jurisdictions and the U.S., it is reasonably possible that some tax audits may be completed over the next twelve months. However, management is not able to provide a reasonably reliable estimate of the timing of any other future tax payments or change in unrecognized tax benefits, if any.
Segment Overview
In the first quarter of fiscal year 2024, we announced a change in our operating segments to move our cell analysis business from our life sciences and applied markets segment to our diagnostics and genomics operating segment in order to further strengthen growth opportunities for both organizations. Following this reorganization, we continue to have three business segments comprised of life sciences and applied markets, diagnostics and genomics and Agilent CrossLab, each of which continues to comprise a reportable segment. We are reporting under this new structure beginning with this Quarterly Report on Form 10-Q for the period ended January 31, 2024. All historical financial segment information has been recast to conform to this new presentation in our financial statements and accompanying footnotes. There was no change to our Agilent CrossLab business segment.
Life Sciences and Applied Markets
Our life sciences and applied markets business provides application-focused solutions that include instruments, consumables and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular and cellular level. Key product categories include: liquid chromatography ("LC") systems and components; liquid chromatography mass spectrometry ("LCMS") systems; gas chromatography ("GC") systems and components; gas chromatography mass spectrometry ("GCMS") systems; inductively coupled plasma mass spectrometry ("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave plasma-atomic emission spectrometry ("MP-AES") instruments; inductively coupled plasma optical emission spectrometry ("ICP-OES") instruments; raman spectroscopy; laboratory software for sample tracking; information management and analytics; laboratory automation and robotic systems; dissolution testing; vacuum pumps and measurement technologies. Our consumables portfolio is designed to improve customer outcomes. Most of the portfolio is vendor neutral, meaning Agilent can serve and supply customers regardless of their instrument purchase choices. Solutions range from chemistries to supplies. Key product categories in consumables include GC and LC columns, sample preparation products, custom chemistries, and a large selection of laboratory instrument supplies.
Net Revenue
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 846 | $ | 943 | (10)% |
Life sciences and applied markets business revenue for the three months ended January 31, 2024 decreased 10 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year.
Geographically, revenue for the three months ended January 31, 2024 decreased 15 percent in the Americas with no currency impact, decreased 6 percent in Europe with a 4 percentage point favorable currency impact and decreased 10 percent in Asia Pacific with a 1 percentage point unfavorable currency impact. The revenue decline in the Americas was driven by weakness in our liquid chromatography, liquid chromatography mass spectrometry and gas chromatography mass spectrometry businesses partially offset by strength in the consumables business when compared to the same period last year. The revenue decline in Asia Pacific was also driven by lower demand in China within our liquid chromatography, liquid chromatography mass spectrometry and gas chromatography mass spectrometry businesses partially offset by strength in the consumables business when compared to the same period last year. The revenue decline in Europe was driven by weakness in our liquid chromatography business partially offset by strength in the consumables business when compared to the same period last year.
For the three months ended January 31, 2024, revenue declined across all end markets except academia and government. Revenue in the pharmaceutical market declined significantly due to weakness in our liquid chromatography and liquid chromatography mass spectrometry businesses partially offset by strength in our consumables business when compared to the same period last year. Revenue in the chemicals and advanced materials market declined significantly due to weakness in our spectroscopy and liquid chromatography businesses partially offset by strength in our consumables businesses when compared to the same period last year. Revenue in the diagnostics and clinical market declined significantly due to weakness in our liquid chromatography mass spectrometry, and liquid chromatography businesses partially offset by strength in our consumables business when compared to the same period last year. Modest revenue growth in the academia and government market was driven by strength in our spectrometry and remarketed instruments businesses partially offset by weakness in our liquid chromatography mass spectrometry and liquid chromatography businesses when compared to the same period last year.
Looking forward, despite the challenging macroeconomic environment, our customers' capital expenditure pressures and geopolitical uncertainties, we are optimistic about our long-term growth opportunities in the life sciences and applied markets as our broad portfolio of products and solutions are well suited to address customer needs. While we anticipate continued volatility in our markets, we expect long term growth across our end markets as we continue to invest in expanding and improving our applications and solutions portfolio.
Operating Results
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions, except margin data) | ||||||||||||||||||||||||||||||||||||||
| Gross margin | 60.2 | % | 61.5 | % | (1) ppt | |||||||||||||||||||||||||||||||||
| Research and development | $ | 67 | $ | 67 | — | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 206 | $ | 213 | (3)% | |||||||||||||||||||||||||||||||||
| Operating margin | 27.9 | % | 31.8 | % | (4) ppts | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 236 | $ | 300 | (22)% |
Gross margin for products and services for the three months ended January 31, 2024, decreased 1 percentage point when compared to the same period last year. Gross margin for the three months ended January 31, 2024 was impacted by lower sales volume, unfavorable business mix and warranty costs which were partially offset by lower logistics costs and the favorable impact of currency movements when compared to the same period last year.
Research and development expenses for the three months ended January 31, 2024, were flat when compared to the same period last year. Research and development expenses for the three months ended January 31, 2024 were flat due to higher program investments in our digital lab offset by lower consumables and travel expenses when compared to the same period last year.
Selling, general and administrative expenses for the three months ended January 31, 2024, decreased 3 percent when compared to the same period last year. Selling, general and administrative expenses for the three months ended January 31, 2024, decreased due to lower marketing expenses and share-based compensation expenses partially offset by the unfavorable impact of currency movements and higher wages when compared to the same period last year.
Operating margin for products and services for the three months ended January 31, 2024 decreased 4 percentage points when compared to the same period last year. Operating margin for the three months ended January 31, 2024 was impacted by lower sales volume partially offset by lower logistics costs, marketing and consumables when compared to the same period last year.
Income from operations for the three months ended January 31, 2024, decreased $64 million or 22 percent on a corresponding revenue decrease of $97 million.
Diagnostics and Genomics
Our diagnostics and genomics business includes the cell analysis, nucleic acid contract manufacturing and research and development, pathology, companion diagnostics, reagent partnership, genomics and biomolecular analysis businesses.
Our diagnostics and genomics business is comprised of seven areas of activity providing active pharmaceutical ingredients ("APIs") for oligo-based therapeutics as well as solutions that include reagents, instruments, software and consumables, which enable customers in the clinical and life sciences research areas to interrogate samples at the cellular and molecular level. First, our cell analysis business includes instruments, reagents, software, and labware associated with unique live-cell analysis platforms in addition to mainstream flow cytometers, plate-readers, and plate washers/dispensers which are used across a broad range of applications. Second, our nucleic acid solutions business is a contract and development manufacturing organization that provides services related to and the production of synthesized oligonucleotides under pharmaceutical good manufacturing practices ("GMP") conditions for use as API in a class of drugs that utilize nucleic acid molecules for disease therapy. Third, our pathology solutions business is focused on product offerings for cancer diagnostics and anatomic pathology workflows. The broad portfolio of offerings includes immunohistochemistry ("IHC"), in situ hybridization ("ISH"), hematoxylin and eosin ("H&E") staining and special staining. Fourth, we also collaborate with a number of major pharmaceutical companies to develop new potential tissue pharmacodiagnostics, also known as companion diagnostics, which may be used to identify patients most likely to benefit from a specific targeted therapy. Fifth, the reagent partnership business provides clinical flow cytometry reagents for routine cancer diagnostics. This business also provides bulk antibodies as raw materials and associated assay development services to IVD manufacturers, biotechnology and pharmaceutical companies. Sixth, our genomics business includes arrays and next generation sequencing ("NGS"). This business also includes solutions that enable clinical labs to identify DNA variants associated with genetic disease and help direct cancer therapy. Finally, our biomolecular analysis business provides complete workflow solutions, including instruments,
consumables and software, for quality control analysis of nucleic acid samples. Samples are analyzed using quantitative and qualitative techniques to ensure accuracy in further genomics analysis techniques including NGS, utilized in clinical and life science research applications.
Net Revenue
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 407 | $ | 432 | (6)% |
Diagnostics and genomics business revenue for the three months ended January 31, 2024 decreased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had a favorable impact on revenue growth of 1 percentage point when compared to the same period last year.
Geographically, revenue for the three months ended January 31, 2024 decreased 10 percent in the Americas with no currency impact, increased 2 percent in Europe with a 3 percentage point favorable currency impact and decreased 5 percent in Asia Pacific with a 1 percentage point unfavorable currency impact compared to the same period last year. For the three months ended January 31, 2024, the revenue decline in the Americas was driven by our cell analysis, genomics and nucleic acid solutions businesses. Revenue increased in Europe due to strong performance in our pathology and biomolecular analysis businesses partially offset by a decline in our cell analysis business. The revenue decline in Asia Pacific was driven by our cell analysis business.
For the three months ended January 31, 2024, revenue performance in the pharmaceutical market declined significantly due to our cell analysis and nucleic acid solutions businesses. We also saw revenue decline in the diagnostics and clinical markets primarily from our cell analysis and genomics businesses when compared to the same period last year. Revenue in the academia and government markets grew modestly due to our biomolecular analysis and cell analysis businesses.
Looking forward, despite the challenging macroeconomic environment, geopolitical uncertainties and the short-term unfavorable market conditions affecting our genomics and cell analysis businesses, we are optimistic about our long-term growth opportunities in our end markets and continue to invest in expanding and improving our applications and solutions portfolio. We remain positive about our growth in our end markets as our product portfolio around OMNIS and PD-L1 assays continues to gain strength with our customers in clinical oncology applications, and our next generation sequencing related solutions continue to be adopted. Market demand in the nucleic acid solutions business related to therapeutic oligo programs continues, and with the expansion of our nucleic acid solutions production facility in Frederick, Colorado, we are well positioned to serve more of the market demand. We will also continue to invest in research and development and seek to expand our position in developing countries and emerging markets.
Operating Results
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions, except margin data) | ||||||||||||||||||||||||||||||||||||||
| Gross margin | 52.8 | % | 52.6 | % | — | |||||||||||||||||||||||||||||||||
| Research and development | $ | 44 | $ | 47 | (7)% | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 101 | $ | 107 | (6)% | |||||||||||||||||||||||||||||||||
| Operating margin | 17.3 | % | 16.9 | % | — | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 70 | $ | 73 | (4)% |
Gross margin for products and services for the three months ended January 31, 2024, was flat when compared to the same period last year. Gross margin for the three months ended January 31, 2024 remained flat due to growth in average selling prices, favorable product mix and the favorable impact of currency movements offset by higher wages and infrastructure costs.
Research and development expenses for the three months ended January 31, 2024, decreased 7 percent when compared to the same period last year. Research and development expenses for the three months ended January 31, 2024 decreased primarily due to savings from the exit of our resolution bioscience business and the restructuring activities that occurred in the fourth quarter of fiscal year 2023.
Selling, general and administrative expenses for the three months ended January 31, 2024, decreased 6 percent when compared to the same period last year. Selling, general and administrative expenses for the three months ended January 31, 2024 decreased due to less expenses attributed to the exit of our resolution bioscience business and lower commissions in our cell analysis business partially offset by higher wages. In addition, selling, general and administrative expenses decreased due to savings from restructuring activities that occurred in the fourth quarter of fiscal year 2023.
Operating margin for products and services for the three months ended January 31, 2024 was relatively flat when compared to the same period last year. Operating margin for products and services for the three months ended January 31, 2024, increased due to savings from restructuring and business exit activities that occurred in the fourth quarter of fiscal year 2023; these savings were offset by lower revenue, higher wages and higher infrastructure costs.
Income from operations for the three months ended January 31, 2024 decreased $3 million or 4 percent on a corresponding revenue decrease of $25 million.
Agilent CrossLab
The Agilent CrossLab business spans the entire lab with its extensive services portfolio, which is designed to improve customer outcomes. The majority of the portfolio is vendor neutral, meaning we can serve and supply customers regardless of their instrument purchase choices. The services portfolio includes repairs, parts, maintenance, installations, training, compliance support, software as a service, asset management, consulting and various other custom services to support the customers' laboratory operations. Custom services are tailored to meet the specific application needs of various industries and to keep instruments fully operational and compliant with the respective industry requirements.
Net Revenue
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 405 | $ | 381 | 6% |
Agilent CrossLab business revenue for the three months ended January 31, 2024 increased 6 percent when compared to the same period last year. Foreign currency movements for the three months ended January 31, 2024 had an overall favorable impact on revenue growth of 1 percentage point when compared to the same period last year.
Geographically, revenue for the three months ended January 31, 2024 increased 6 percent in the Americas with a 1 percentage point favorable currency impact, increased 14 percent in Europe with a 6 percentage point favorable currency impact and increased 1 percent in Asia Pacific with a 1 percentage point unfavorable currency impact compared to the same period last year. For the three months ended January 31, 2024, revenue growth in all three regions reflected consistent high demand for repair, maintenance and compliance services across the entire portfolio. The revenue growth was partially offset by weakness in installation revenue, mostly in the Asia Pacific region.
For the three months ended January 31, 2024, we saw strong revenue growth across all of the end markets, mainly driven by our spectroscopy, gas chromatography and liquid chromatography businesses, when compared to the same period last year.
Looking forward, Agilent CrossLab services are well positioned to continue their success in our key end markets by supporting a growing installed base of instruments. Digital and remote capabilities will continue to be a key factor in improving the service quality and the customers' experience. Geographically, the business is well diversified across all regions to take advantage of local market opportunities and to hedge against weakness in any one region.
Operating Results
| Three Months Ended | Year over Year Change | |||||||||||||||||||||||||||||||||||||
| January 31, | Three | |||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | Months | ||||||||||||||||||||||||||||||||||||
| (in millions, except margin data) | ||||||||||||||||||||||||||||||||||||||
| Gross margin | 50.5 | % | 48.5 | % | 2 ppts | |||||||||||||||||||||||||||||||||
| Research and development | $ | 9 | $ | 9 | — | |||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 74 | $ | 73 | — | |||||||||||||||||||||||||||||||||
| Operating margin | 30.2 | % | 27.0 | % | 3 ppts | |||||||||||||||||||||||||||||||||
| Income from operations | $ | 122 | $ | 103 | 19% |
Gross margin for the three months ended January 31, 2024 increased 2 percentage points when compared to the same period last year. Gross margin for the three months ended January 31, 2024 was impacted by targeted price increases, well-controlled variable service delivery costs and the favorable impact of currency movements which were partially offset by higher wages.
Research and development expenses for the three months ended January 31, 2024 were flat when compared to the same period last year. Research and development expenses for the three months ended January 31, 2024 were flat due to the unfavorable impact of currency offset by lower travel costs and other discretionary spending.
Selling, general and administrative expenses for the three months ended January 31, 2024 were flat when compared to the same period last year. Selling, general and administrative expenses for the three months ended January 31, 2024 were flat mainly due to higher wages, commissions and the unfavorable impact of currency, offset by lower travel costs and other discretionary spending.
Operating margin for products and services for the three months ended January 31, 2024 increased 3 percentage points when compared to the same period last year. Operating margin for the three months ended January 31, 2024 increased mostly driven by targeted price increases that improved margins in addition to flat expenses.
Income from operations for the three months ended January 31, 2024 increased $19 million or 19 percent on a corresponding revenue increase of $24 million.
FINANCIAL CONDITION
Liquidity and Capital Resources
We believe our cash and cash equivalents, cash generated from operations, and ability to access capital markets and credit lines will satisfy, for at least the next twelve months and beyond, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, business acquisitions, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations.
Our financial position as of January 31, 2024 consisted of cash and cash equivalents of $1,748 million as compared to $1,590 million as of October 31, 2023.
We may, from time to time, retire certain outstanding debt of ours through open market cash purchases, privately-negotiated transactions or otherwise. Such transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Net Cash Provided by Operating Activities
Net cash inflow from operating activities was $485 million for the three months ended January 31, 2024 compared to cash inflow of $296 million for the same period in 2023. Net cash paid for income taxes in the three months ended January 31, 2024 was $24 million compared to net cash paid for income taxes of $17 million for the same period in 2023.
In the three months ended January 31, 2024, accounts receivable provided cash of $10 million compared to cash used of $5 million for the same period in 2023. Days’ sales outstanding ("DSO") as of January 31, 2024 was 70 days when compared to 75 days as of January 31, 2023. Cash used for inventory was $9 million for the three months ended January 31, 2024 compared to cash used of $69 million for the same period in 2023. Inventory days on-hand was 124 days as of January 31, 2024 compared to 127 days as of January 31, 2023 mainly due to focused inventory optimization efforts. In the three months ended January 31, 2024, accounts payable provided cash of $84 million compared to cash used of $27 million for the same period in 2023. This was mainly due to less expenditures for direct materials as we continue optimizing our inventory levels and to timing of payments. The employee compensation and benefits liability used cash of $104 million for the three months ended January 31, 2024 compared to cash used of $174 million for the same period in 2023. This was largely due to a decrease in variable and incentive payments which were $105 million in 2024 compared to $185 million in 2023.
We contributed approximately $6 million and $5 million to our defined benefit plans in the three months ended January 31, 2024 and 2023, respectively. Our annual contributions are highly dependent on the relative performance of our assets versus our projected liabilities, among other factors. We expect to contribute approximately $12 million to our defined benefit plans during the remainder of 2024.
Net Cash Used in Investing Activities
Net cash used in investing activities was $95 million for the three months ended January 31, 2024 as compared to net cash used in investing activities of $104 million in the same period of 2023. In the three months ended January 31, 2024, we had no acquisitions compared to cash used of $30 million related to one acquisition in the three months ended January 31, 2023.
Investments in property, plant and equipment were $90 million for the three months ended January 31, 2024 compared to $76 million in the same period of 2023. We expect that total capital expenditures for the current year will be approximately $400 million. These continued investments in property plant and equipment are primarily due to the planned expansion of our manufacturing capacity for production of nucleic acid based therapeutics in Frederick, Colorado. Some of our investment may be eligible to qualify for reimbursement incentives, which will not fully be known until the expansion is substantially complete.
Net Cash Used in Financing Activities
Net cash used in financing activities for the three months ended January 31, 2024 was $240 million compared to net cash used in financing activities of $17 million for the same period of 2023.
Treasury Stock Repurchases. Our 2021 repurchase program authorized the purchase of up to $2.0 billion of our common stock at the company's discretion and had no fixed termination date. During the three months ended January 31, 2023, we repurchased and retired 499,000 shares for $75 million under this authorization. On March 1, 2023, the 2021 repurchase program was terminated and the remaining authorization of $339 million expired.
Our 2023 repurchase program authorizes the purchase of up to $2.0 billion, excluding excise taxes, of our common stock at the company's discretion and has no fixed termination date. The 2023 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time. The 2023 repurchase program commenced on March 1, 2023, and also terminated and replaced the 2021 repurchase program. During the three months ended January 31, 2024, we repurchased and retired no shares under this authorization. As of January 31, 2024, we had remaining authorization to repurchase up to approximately $1.524 billion of our common stock under the 2023 repurchase program.
Dividends. During the three months ended January 31, 2024 and 2023, we paid cash dividends of $0.236 per common share or $69 million, and $0.225 per common share or $67 million, respectively, on the company's common stock.
On February 21, 2024, our board of directors declared a quarterly dividend of $0.236 per share of common stock or approximately $69 million which will be paid on April 24, 2024 to all shareholders of record at the close of business on April 2, 2024. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Contingent Consideration Payment. During the three months ended January 31, 2023, we paid $65 million related to the achievement of a certain technical milestone associated with our acquisition of Resolution Bioscience. Of the $65 million payment, $3 million was included as an outflow in cash from operations.
Credit Facilities and Short-Term Debt. On June 7, 2023, we entered into a credit agreement with a group of financial institutions which provides for a $1.5 billion five-year unsecured credit facility that will expire on June 7, 2028 and an incremental revolving credit facility in an aggregate amount of up to $750 million. The credit facility replaced the existing credit facility which was terminated on the closing date of the new facility. During the three months ended January 31, 2024, we had no borrowings or repayments under these credit facilities. As of January 31, 2024, we had no borrowings outstanding under both the credit facility and the incremental revolving credit facility. We were in compliance with the covenants for the credit facility during the three months ended January 31, 2024.
On June 2, 2023, we entered into an Uncommitted Money Market Line Credit agreement with Societe Generale which provides for an aggregate borrowing capacity of $300 million. The credit facility is an uncommitted short-term cash advance facility where each request must be at least $1 million. The interest rate is set by the lender at the time of the borrowing and is fixed for the duration of the advance. During the three months ended January 31, 2024, we had no borrowings or repayments under this credit facility. As of January 31, 2024, we had no borrowings outstanding under the credit facility.
Commercial Paper. Under our U.S. commercial paper program, the company may issue and sell unsecured, short-term promissory notes in the aggregate principal amount not to exceed $1.5 billion with up to 397-day maturities. At any point in time, the company intends to maintain available commitments under its revolving credit facility in an amount at least equal to the amount of the commercial paper notes outstanding. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The proceeds from issuances under the program may be used for general corporate purposes. During the three months ended January 31, 2024, we had no borrowings or repayments under our commercial paper program compared to borrowings of $527 million and repayments of $324 million in the same period in 2023. As of January 31, 2024 we had no borrowings outstanding under our U.S. commercial paper program.
Long-Term Debt. On April 15, 2022, we entered into a term loan agreement with a group of financial institutions, which provided for a $600 million delayed draw term loan that will mature on April 15, 2025. During the three months ended January 31, 2024, we prepaid a total of $180 million on our term loan. As of January 31, 2024, we had $420 million borrowings outstanding under the term loan facility and had a weighted average interest rate of 6.18 percent.
There have been no changes to the principal, maturity, interest rates and interest payment terms of the Agilent outstanding senior notes in the three months ended January 31, 2024 as compared to the senior notes as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023.
Other. Our commitments for indirect material and services decreased by $11 million from $123 million as reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023. These commitments are related to a variety of suppliers including IT support service providers. Our commitments to contract manufacturers and suppliers decreased by $66 million as supply chain issues improved from $707 million as reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2023. These commitments are related to a variety of suppliers, and we use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. These open purchase orders with our suppliers have not yet been received, and our agreements usually provide us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the firm orders being placed. There were no other substantial changes from our Annual Report on Form 10-K for the fiscal year ended October 31, 2023 to our contractual commitments in the first three months of fiscal year 2024. We have no other material non-cancelable guarantees or commitments.
Other long-term liabilities as of January 31, 2024 and October 31, 2023 include $159 million and $162 million, respectively, related to long-term income tax liabilities. Of these amounts, $65 million and $68 million related to uncertain tax positions as of January 31, 2024 and October 31, 2023, respectively. We are unable to accurately predict when these amounts
will be realized or released. However, 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 limitations or a tax audit settlement. As of January 31, 2024 the remaining $94 million in other long-term liabilities relates to the U.S. transition tax payment which is due in installments over the next two years.
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