Agilent Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended July 31, 2016. Unless otherwise stated, dollar amounts are in millions. Prior-year comparisons are to revised 2015 figures.
Business context and performance
Agilent supplies instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. Its reportable segments are Life Sciences and Applied Markets, Diagnostics and Genomics, and Agilent CrossLab.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,044 | $1,014 | $3,091 | $3,003 |
| Operating income | $146 | $144 | $432 | $366 |
| Continuing-operations income | $124 | $113 | $336 | $298 |
| Net income | $124 | $111 | $336 | $261 |
| Diluted EPS | $0.38 | $0.33 | $1.02 | $0.78 |
| Gross margin | 51.9% | 50.6% | 52.1% | 50.2% |
| Operating margin | 14.0% | 14.2% | 14.0% | 12.2% |
Revenue increased 3% in both comparison periods. Services and other revenue rose 8%; product revenue rose 1%. Q3 margin improvement in gross margin did not translate into a higher operating margin, with acquisition and integration costs, wage increases and R&D costs offsetting gains. Nine-month operating margin improved, aided by gross-margin gains and a pension curtailment gain.
Segment results and notable comparisons
- Life Sciences and Applied Markets: Q3 revenue was $504, down 1%; nine-month revenue was $1,525, flat. Chemical and energy markets were weak, while pharmaceutical and biotechnology, food and environmental demand showed strength. Segment operating income was $96 in Q3 and $304 for nine months.
- Diagnostics and Genomics: Q3 revenue was $180, up 8%; nine-month revenue was $516, up 7%. Growth reflected diagnostics and clinical research demand. Segment operating income was $34 in Q3 and $76 for nine months.
- Agilent CrossLab: Q3 revenue was $360, up 7%; nine-month revenue was $1,050, up 6%. Segment operating income was $82 in Q3 and $232 for nine months. Pharmaceutical and biotechnology demand was a key growth driver.
Currency reduced revenue growth by approximately 1 percentage point in Q3 and 2 points for the nine-month period. The 2015 comparison was revised for revenue classification and prior-period tax adjustments; the filing says these revisions did not materially affect previously reported results.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $559, compared with $271 in revised 2015 results. Investing activities used $160; financing activities used $212.
- Cash and cash equivalents were $2,199 at July 31, 2016, versus $2,003 at October 31, 2015. Approximately $2,075 was held outside the United States and could be subject to additional U.S. taxes if repatriated.
- Balance-sheet debt included $235 of short-term borrowings and $1,652 of long-term debt. Agilent had $1.6 billion principal outstanding in senior unsecured notes, a $38 mortgage, and $235 drawn on its $700 revolving credit facility; it reported covenant compliance. Cash exceeded reported short- and long-term debt by approximately $312.
- Capital expenditures were $87 for nine months; management expected approximately $135 for the full fiscal year. Dividends paid were $112, and share repurchases totaled $388 across two programs. The newer program had $850 of remaining authorization at July 31.
Management stated that cash, operating cash generation and access to capital markets and credit lines should meet liquidity needs for at least the next twelve months.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management emphasized operating-margin growth through simplification, product differentiation and better customer experience, and expected to return a significant proportion of cash flow through dividends and repurchases.
- Management expressed optimism about Diagnostics and Genomics and CrossLab growth, and about Life Sciences and Applied Markets opportunities, but remained concerned about near-term chemical and energy markets. Foreign exchange, variable customer order timing, economic conditions, customer capital spending, competition and supply-chain constraints are cited risks.
- Agilent acquired Seahorse Bioscience in November 2015 for $242 cash. It invested $80 in Lasergen for a 48% initial stake and has an option to acquire the remaining shares for an additional $105 through March 2018. On August 1, 2016, it acquired iLab assets for $26 cash; results were to be included beginning in Q4.
- A $4 impairment was recorded for cancellation of an in-process R&D project. The U.S. pension plan changes generated a $16 curtailment and settlement gain for nine months. The Q3 tax provision included a net $6 discrete tax benefit, including an $11 out-of-period tax benefit; management deemed the correction immaterial to prior and current statements.
- Early adoption of share-based payment accounting produced a $195 cumulative adjustment to opening retained earnings at November 1, 2015, alongside balance-sheet reclassifications. It also affected tax expense and cash-flow presentation; the opening-equity adjustment was not current-period operating income.
- Management reported that disclosure controls remained ineffective because of a material weakness in income-tax accounting controls. Remediation was underway but not yet fully demonstrated to be effective and sustainable.
- Agilent reported no pending legal matters it believed were probable or reasonably possible of materially affecting the business or financial statements. Unrecognized tax benefits and related tax examinations remain uncertain; management could not estimate the range of possible changes over the next twelve months.
Most important facts for investors to verify
- Whether revenue growth and segment trends persist, particularly in chemical and energy markets, and the extent of currency effects.
- How much margin improvement is recurring versus attributable to pension gains, cost reductions, acquisitions or other unusual items.
- The durability and cash-conversion quality of the $559 nine-month operating cash flow, and the planned levels of capital spending, repurchases and dividends.
- Potential taxes and liquidity effects from the large overseas cash balance, uncertain tax positions and tax examinations.
- Progress in remediating the income-tax control material weakness, and whether controls become effective and sustainable.
- Integration and performance of Seahorse, Lasergen and iLab, including Lasergen’s additional purchase option and investment exposure.