Agilent Technologies, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended July 31, 2017; fiscal year ends October 31. Unaudited results. Agilent supplies instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $1.114B | $1.044B | $3.283B | $3.091B |
| Operating income | $201M | $146M | $608M | $432M |
| Net income | $175M | $124M | $507M | $336M |
| Diluted EPS | $0.54 | $0.38 | $1.56 | $1.02 |
| Gross margin | 53.5% | 51.9% | 53.7% | 52.1% |
| Operating margin | 18.0% | 14.0% | 18.5% | 14.0% |
- Revenue growth: Q3 increased 7% and nine-month revenue increased 6%. Products grew 6% and 5%, respectively; services and other grew 10% in both periods. Foreign exchange reduced reported growth by about one percentage point.
- Segments, Q3 revenue growth year over year: Life Sciences and Applied Markets, $531M (+5%); Diagnostics and Genomics, $197M (+9%); Agilent CrossLab, $386M (+7%). Nine-month segment revenue was $1.594B, $562M and $1.127B, respectively.
- Cash flow: Nine-month operating cash flow was $601M, versus $559M; investing cash outflow was $245M, versus $160M; financing cash outflow was $96M, versus $212M. Capital expenditures were $118M. Cash increased $274M to $2.563B.
- Liquidity and debt: At July 31, cash and cash equivalents were $2.563B; current assets were $3.996B and current liabilities $1.241B. Short-term debt was $280M and long-term debt $1.801B. The $1B revolving facility had $180M drawn; Agilent reported covenant compliance. About $2.528B of cash was held outside the U.S.
- Shareholder returns: Nine-month dividends paid were $127M ($0.396 per share); share repurchases were $194M for 4.1M shares. $610M remained authorized under the repurchase program. The board controls future dividend decisions.
Material changes and notable items
- Q3 operating income rose $55M year over year; nine-month operating income rose $176M. Management attributed margin improvement mainly to favorable mix, higher volume, lower manufacturing material costs and lower intangible amortization, alongside lower transformation and acquisition costs. Nine-month results also benefited from a pension settlement gain.
- Net income benefited from discrete tax items: tax benefits were $60M for Q3 and $63M year to date. These included a $51M benefit from settling a German tax audit; a $40M benefit from U.S. statute expirations was offset by a deferred tax liability for expected repatriation. The company also accrued tax on some foreign earnings it plans to repatriate, affecting its estimated tax rate.
- A Japanese pension-plan settlement generated a $32M net gain in the first nine months. Multiplicom was acquired for approximately $72M in January and Cobalt Light Systems for approximately $53M in July; acquisition valuations included preliminary amounts for Cobalt.
- During the nine months, Agilent retired 294.2M treasury shares at an aggregate historical cost of $10.7B, reducing retained earnings and additional paid-in capital. This accounting retirement is distinct from the period’s $194M repurchases.
Outlook, commentary and risks
- Management expressed optimism about growth opportunities and continued strength in pharmaceuticals and biotechnology, with solid expected growth in diagnostics and clinical markets. It expected FY2017 growth in academia and government to be flat; life science research growth was expected to remain challenging. A cyclical recovery in chemical and energy markets was not yet established.
- Management emphasized operating-margin growth, simplification, product differentiation, R&D and returning a significant proportion of cash flow to shareholders. FY2017 capital expenditures were expected to be approximately $185M. No consolidated revenue or EPS guidance figures are provided in the filing text.
- Key risks include uncertain customer orders and market seasonality, economic and government-funding changes, competition and new-product execution, supply-chain and manufacturing constraints, foreign-exchange exposure, acquisition integration, regulatory and tax changes, debt obligations, and IT or operational disruptions. Currency hedging generally covers forecast exposures up to twelve months; a hypothetical 10% adverse currency or interest-rate movement was assessed as immaterial at quarter end.
- Agilent said it believed available cash, operating cash generation and access to capital markets and credit lines would meet liquidity needs for at least twelve months. It disclosed no pending legal matter it believed probable or reasonably possible to have a material impact. Disclosure controls were reported effective, with no material change in internal control during the quarter.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus discrete tax benefits and the pension settlement gain.
- Progress and final purchase accounting for Multiplicom and Cobalt, and their contribution to organic growth and margins.
- Cash availability and tax cost of repatriating foreign-held funds, and the effect of U.S. tax-law changes.
- Working-capital trends: receivables used $29M of cash, inventory used $46M, and days sales outstanding increased to 55 from 51 a year earlier.
- Debt maturities and refinancing: the remaining $100M of 2017 senior notes was due November 1, 2017; revolving-credit borrowings stood at $180M.
- Whether end-market expectations, particularly academia and government and life science research, and the expected $185M capital-spending level are achieved.