AGILENT TECHNOLOGIES, INC. annual report, FY2019

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Agilent Technologies, Inc. — FY2019 Form 10-K

Business context and reporting period. Agilent supplies instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. This annual report covers the fiscal year ended October 31, 2019; the fourth quarter ended October 31, 2019. Its three reportable segments are Life Sciences and Applied Markets, Diagnostics and Genomics, and Agilent CrossLab.

Financial performance and material changes

  • Revenue: FY2019 revenue was $5.163 billion, up 5% from $4.914 billion. Products increased 3% to $3.877 billion; services and other revenue rose 10% to $1.286 billion. Currency reduced reported revenue growth by about 2 percentage points, while acquisitions contributed about 2 points overall.
  • Segments: Life Sciences and Applied Markets revenue was $2.302 billion (+1%); Diagnostics and Genomics was $1.021 billion (+8%); and Agilent CrossLab was $1.840 billion (+8%). Segment operating income was $542 million, $185 million and $475 million, respectively. CrossLab operating margin improved to 25.8% from 22.8%; Diagnostics and Genomics gross margin declined 2 percentage points to 54.7%.
  • Profit and margins: Operating income was $941 million, up from $904 million, while operating margin eased to 18.2% from 18.4%. Gross margin was 54.3% versus 54.5%. Net income was $1.071 billion versus $316 million; diluted EPS was $3.37 versus $0.97. The comparison was dominated by unusual tax items, rather than a similar change in pretax earnings: pretax income was $919 million versus $946 million.
  • Cash flow: Operating cash flow was $1.021 billion, down from $1.087 billion. Investing activities used $1.590 billion, including $1.408 billion for acquisitions and intangible assets; capital expenditures were $155 million. Financing activities used $299 million. Cash and cash equivalents fell to $1.382 billion from $2.247 billion.
  • Liquidity and debt: Working capital was $1.109 billion versus $2.677 billion. At year-end, short-term debt was $616 million and long-term debt was $1.791 billion. Cash was approximately $1.0 billion less than total reported debt. The company had $115 million outstanding on its $1 billion revolving credit facility and a $500 million short-term loan used for BioTek. Approximately $1.310 billion of cash was held outside the U.S.
  • Shareholder returns: Agilent repurchased and retired 10.4 million shares for $723 million and paid $206 million in dividends during FY2019. The annual dividend declared per share rose to $0.656 from $0.596.
  • Fourth-quarter results: Revenue was $1.367 billion, gross profit $737 million, operating income $250 million and net income $194 million; diluted EPS was $0.62. In Q4 FY2018, revenue was $1.294 billion, operating income $244 million, net income $195 million and diluted EPS $0.61.

Guidance, management commentary, risks and unusual items

  • Outlook: Management expressed confidence in Agilent’s ability to manage changing conditions and deliver positive FY2020 results, but gave no specific numerical revenue or earnings guidance in the supplied filing text. It expected foreign currency to weigh on FY2020 revenue, partly offset by recent acquisitions, and emphasized product differentiation, customer experience, growth and earnings expansion.
  • Acquisitions: Agilent acquired ACEA Biosciences for $250 million and BioTek for $1.17 billion. BioTek contributed $35 million revenue and a $12 million net loss from acquisition through year-end. Acquisition and integration costs, amortization and related investment contributed to expense growth; acquired intangible assets and goodwill increased materially.
  • Tax items: FY2019 included a $152 million income tax benefit and a $299 million discrete benefit associated with extension and restructuring of the Singapore tax incentive. Tax holidays reduced income taxes by $368 million; management said $0.94 of the $1.16 diluted-EPS benefit from incentives was attributable to one-time Singapore restructuring items. A separate restructuring created a $231 million cash tax liability payable in Q1 FY2020. FY2018 included a $552 million tax charge related to the U.S. Tax Act.
  • Other unusual items and cost pressures: Agilent redeemed $500 million of 2020 notes early, paying a $12 million prepayment penalty; it also recorded a $9 million debt-extinguishment loss. Wage and variable-pay increases, tariffs, product mix, acquisition costs and transformation spending weighed on margins; efficiency gains and favorable currency effects on costs partly offset them.
  • Principal risks: Demand and order timing can be difficult to forecast and depend on customer capital budgets, research funding and economic conditions. Other risks include competition and product innovation, foreign exchange and tariffs, supplier or manufacturing disruption, acquisition integration and impairment, regulatory and data-privacy compliance, tax examinations and incentives, pension market exposure, debt covenant limits, and cybersecurity or catastrophe-related disruption. Management reported no pending legal matters it believed reasonably possible of having a material impact. The auditor and management reported effective internal control over financial reporting; ACEA and BioTek were excluded from the 2019 control assessment because of their recent acquisitions.

Important facts for investors to verify

  • Assess underlying earnings and tax-normalized EPS separately from reported FY2019 net income, given the Singapore tax benefit and the prior-year Tax Act charge.
  • Track FY2020 cash taxes, including the $231 million restructuring liability, and the remaining transition-tax payments.
  • Evaluate whether BioTek and ACEA deliver expected growth and synergies against acquisition costs, added debt and acquired-intangible amortization.
  • Monitor cash conversion, working capital, receivables and liquidity after the acquisition-driven decline in cash and increase in short-term debt.
  • Check whether currency, tariffs and weakness in selected instrument product lines continue to constrain revenue or margins.
  • Review the full debt maturities, credit-facility covenants and commitments; the filing reports $2.407 billion of short- and long-term debt at year-end.