Agilent Technologies, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019; comparisons are with the three months ended January 31, 2018, unless otherwise noted. Agilent provides instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. Amounts are in millions of dollars, except per-share data.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Revenue | $1,284 | $1,211 | Up 6%; foreign currency reduced growth by about 2 percentage points |
| Products revenue | $980 | $930 | Up 5% |
| Services and other revenue | $304 | $281 | Up 8% |
| Gross margin | 55.1% | 55.3% | Down 0.2 percentage points |
| Operating income | $250 | $229 | Up 9% |
| Operating margin | 19.5% | 18.9% | Up 0.6 percentage points |
| Income before taxes | $248 | $233 | Up $15 |
| Income tax benefit (expense) | $256 benefit | $553 expense | Materially affected by discrete tax items |
| Net income (loss) | $504 | $(320) | Prior-period result was also affected by a large discrete tax charge |
| Diluted EPS | $1.57 | $(0.99) | Not indicative of comparable underlying earnings because of tax items |
| Cash from operations | $213 | $215 | Down $2 |
| Capital expenditures | $39 | $60 | Down $21 |
Segment results
| Segment | Revenue | Year-over-year growth | Segment operating income |
|---|---|---|---|
| Life Sciences and Applied Markets | $607 | 2% | $159, versus $154 |
| Diagnostics and Genomics | $235 | 13% | $33, versus $24 |
| Agilent CrossLab | $442 | 8% | $105, versus $87 |
Segment operating income is a management measure and excludes specified items; it is not the same as consolidated operating income. Growth was strongest in Diagnostics and Genomics, led by nucleic acid solutions, while Life Sciences and Applied Markets growth was modest.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $2,057 at January 31, 2019, down from $2,247 at October 31, 2018. Cash, cash equivalents and restricted cash at quarter-end totaled $2,064.
- Long-term debt was $1,798, largely unchanged from $1,799 at fiscal year-end. The company had no borrowings on its $1 billion revolving credit facility; the facility was due to expire in September 2019, and the company reported covenant compliance.
- Cash exceeded reported long-term debt by approximately $259 at quarter-end. Current assets were $3,712 and current liabilities were $1,095.
- Operating cash flow was $213; investing activities used $290, including $248 for acquisitions net of cash acquired; financing activities used $122, including $75 of share repurchases and $52 of dividends.
- Management stated that cash, operating cash generation and access to capital markets and credit lines were expected to meet liquidity requirements for at least the next 12 months.
Material changes and unusual items
- Tax-driven earnings: Q1 FY2019 included a $299 discrete tax benefit following a Singapore operations restructuring that extended and modified the company’s tax incentive through 2027. The reported tax benefit was $256, with an effective tax rate of negative 103.2%. The restructuring and related accounting treatment also used $266 of cash, reflected in deferred taxes.
- Prior-period comparison: Q1 FY2018 included a $533 discrete tax charge related to the U.S. Tax Cuts and Jobs Act, contributing to its $320 net loss despite $233 of pretax income. The sharp net-income swing therefore does not represent a comparable change in operating performance.
- ACEA acquisition: Agilent acquired ACEA Biosciences on November 14, 2018, for approximately $250 in cash. Its results are included from the acquisition date. The filing reports $248 of acquisition cash outflow net of cash acquired and $153 of goodwill recorded for acquisitions during the quarter; purchase accounting remained subject to finalization.
- Accounting adoption: Agilent adopted ASC 606 revenue recognition on November 1, 2018, using the modified retrospective method, increasing opening retained earnings by $23. The company stated that prior revenue rules would not have materially changed Q1 FY2019 income, comprehensive income or cash flows.
- Capital returns: The new $1.75 billion repurchase authorization had $1.675 billion remaining at quarter-end. Agilent repurchased about 1.1 million shares for $75. It paid a quarterly dividend of $0.164 per share, totaling $52.
Management outlook, risks and contingencies
- Management expects foreign currency to weigh on revenue for the rest of FY2019, partly offset by contributions from recent acquisitions. No specific consolidated revenue or earnings guidance is provided in the supplied filing text.
- Management expects FY2019 capital expenditures of approximately $175 and expects to contribute $19 to non-U.S. defined benefit plans during the remainder of the year.
- Management described growth opportunities across its businesses, citing new product introductions, continued investment in research and development, strong demand in nucleic acid solutions and near-term strength across CrossLab end markets. It also noted market volatility and weaker results in certain food and chemical and energy markets.
- Reported gross margin was nearly flat: higher sales volume and lower share-based compensation were offset by wage increases, tariffs and higher acquired-intangible amortization. Consolidated operating margin improved, with higher volume and lower share-based compensation partly offset by wage, acquisition and integration, tariff and amortization costs.
- Principal disclosed risks include uncertain customer demand and budgets, economic and market volatility, competition and product-development execution, tariffs and international trade conditions, foreign-exchange movements, supply constraints, acquisition integration, tax-law changes and examinations, regulatory and data-privacy compliance, and potential disruptions to operations or information systems.
- Agilent reported no pending legal matter it currently believed probable or reasonably possible of having a material impact. It noted that significant changes in unrecognized tax benefits could occur within 12 months, but management could not estimate the possible range.
Important facts for investors to verify
- How much of reported net income and EPS reflects the $299 Singapore tax benefit, and what normalized tax rate and earnings measure management expects going forward.
- ACEA’s contribution to revenue and earnings, integration costs, purchase-price allocation and the returns expected from the acquisition.
- Whether organic growth and segment margins remain resilient after separating acquisition effects and foreign-currency impacts.
- Progress against the $175 FY2019 capital-expenditure outlook, cash-flow generation and the planned $19 non-U.S. pension contribution.
- The refinancing, renewal or replacement of the $1 billion revolving credit facility ahead of its September 2019 expiration.
- The pace and price of share repurchases under the $1.75 billion authorization, alongside dividends and other capital needs.
- Exposure to tariffs, foreign currency, tax-incentive conditions and potential tax-audit settlements, as well as any material developments in litigation or contingencies.