Agilent Technologies, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended April 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The statements are unaudited.
Business context and reporting period
Agilent provides instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. Its three reportable segments are Life Sciences and Applied Markets, Diagnostics and Genomics, and Agilent CrossLab. The company acquired cell-analysis developer ACEA Biosciences in November 2018 for approximately $250 million in cash; its results are included from the acquisition date.
Financial performance and liquidity
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $1,238 | $1,206 | $2,522 | $2,417 |
| Gross margin | 54.1% | 53.3% | 54.6% | 54.3% |
| Operating income | $216 | $210 | $466 | $439 |
| Operating margin | 17.4% | 17.4% | 18.5% | 18.2% |
| Net income (loss) | $182 | $205 | $686 | $(115) |
| Diluted EPS | $0.57 | $0.63 | $2.13 | $(0.36) |
- Q2 revenue rose 3%; six-month revenue rose 4%. Foreign exchange reduced revenue growth by about 3 percentage points in both periods. Services and other revenue grew 10% in Q2 and 9% for the half.
- Q2 net income fell to $182 million from $205 million despite higher revenue and operating income. Other income, net, was $9 million versus $26 million. Six-month earnings include a $299 million discrete tax benefit related to restructuring and extending a Singapore tax incentive; the prior-year period included a $533 million Tax Act charge. These items materially affect year-over-year net income comparisons.
- Segment revenue in Q2: Life Sciences and Applied Markets $529 million, down 1%; Diagnostics and Genomics $254 million, up 5%; CrossLab $455 million, up 7%. CrossLab operating margin improved to 25.2% from 22.5%; Diagnostics and Genomics Q2 margin was 19.3% versus 19.9%, while Life Sciences and Applied Markets was 20.3% versus 21.0%.
- Six-month operating cash flow was $465 million versus $518 million. Investing cash outflow was $346 million, including $248 million for ACEA; capital expenditures were $78 million. Financing cash outflow was $214 million, including $125 million of share repurchases and $104 million of dividends.
- At April 30, cash and cash equivalents were $2.155 billion; cash, cash equivalents and restricted cash totaled $2.161 billion. Current assets were $3.812 billion and current liabilities $1.118 billion. Long-term debt was $1.798 billion, principally senior unsecured notes; no borrowings were outstanding on the new $1 billion revolving credit facility.
- Cash declined from $2.247 billion at October 31, 2018. Approximately $1.686 billion was held by foreign subsidiaries. Management said available cash, operating cash flow and access to capital and credit were expected to meet liquidity needs for at least 12 months.
Changes, outlook and risks
- Growth was led by CrossLab and Diagnostics and Genomics; Life Sciences and Applied Markets was flat for the six-month period. Management cited weakness in LC, LCMS and spectroscopy, offset in part by strength in cell analysis, informatics and other offerings. CrossLab growth was broad across services and supplies.
- Management expects foreign currency to weigh on revenue for the remainder of 2019, partly offset by recent acquisitions. It described challenging market conditions and short-term uncertainty, while expressing optimism about longer-term opportunities and segment growth. No specific consolidated revenue or earnings guidance was provided in the supplied filing text.
- Management expected approximately $170 million of capital expenditures for FY2019 and approximately $15 million of defined-benefit plan contributions in the remainder of 2019. It also anticipated higher-than-typical share repurchases in Q3 FY2019. A $0.164-per-share dividend was declared for payment in July 2019.
- Reported margins reflected offsetting factors: favorable currency effects on costs, lower materials costs and operational savings, versus wage increases, tariffs, acquisition and integration costs, and higher intangible amortization. The company cautioned that tariffs and potential trade escalation could adversely affect results.
- Key risks include uncertain customer demand and capital spending, foreign-exchange exposure, tariffs and geopolitical or trade changes, competition and product-development execution, acquisition integration, supply-chain constraints, and tax-incentive or tax-audit outcomes. Management reported no pending legal matters it believed were probable or reasonably possible to have a material impact. It also stated disclosure controls were effective and there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Underlying earnings and tax outlook excluding the $299 million Singapore incentive benefit, and the sustainability and conditions of that incentive.
- Organic, constant-currency growth by segment, particularly the trend in Life Sciences and Applied Markets and the contribution from acquisitions.
- Cash conversion and working-capital trends: days sales outstanding increased to 59 days from 56 a year earlier, and inventory days on hand to 104 from 95.
- ACEA integration, acquisition-related costs and the expected contribution of recent acquisitions to growth and margins.
- Debt repayment and refinancing plans, including the senior notes due in 2020, alongside planned repurchases, dividends and capital spending.
- Exposure to tariffs, tax examinations and possible changes in unrecognized tax benefits; management said the possible range of tax-benefit changes could not be estimated.