Agilent Technologies, Inc. — FY2018 Form 10-K
Business context and reporting period. Agilent sells laboratory instruments, software, services and consumables across life sciences, diagnostics and applied chemical markets. Its three reporting segments are Life Sciences and Applied Markets, Diagnostics and Genomics, and Agilent CrossLab. The fiscal year ended October 31, 2018; Q4 ended October 31, 2018. Segment comparisons reflect a reorganization that moved microfluidics into Diagnostics and Genomics.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $4.914 billion | $4.472 billion |
| Operating income / margin | $928 million / 18.9% | $841 million / 18.8% |
| Gross margin | 54.7% | 53.9% |
| Income before taxes | $946 million | $803 million |
| Income tax expense / effective rate | $630 million / 66.6% | $119 million / 14.8% |
| Net income / diluted EPS | $316 million / $0.97 | $684 million / $2.10 |
| Operating cash flow | $1.087 billion | $889 million |
| Capital expenditures | $177 million | $176 million |
Revenue rose 10%, including an approximately 2-percentage-point favorable currency effect and a 1-point contribution from acquisitions. Products generated $3.746 billion (up 10%); services and other generated $1.168 billion (up 9%). FY2018 operating cash flow less capital expenditures was approximately $910 million, calculated from reported amounts.
Segment revenue and operating margin: Life Sciences and Applied Markets: $2.270 billion, up 9%, margin 24.1% (22.5% in FY2017); Diagnostics and Genomics: $943 million, up 10%, margin 18.9% (19.5%); Agilent CrossLab: $1.701 billion, up 11%, margin 23.3% (22.1%). Currency contributed to growth in each segment; acquisitions contributed 2 percentage points to Diagnostics and Genomics growth.
Q4 snapshot: Revenue was $1.294 billion versus $1.189 billion in Q4 FY2017; operating income was $249 million versus $233 million; net income was $195 million versus $177 million. Diluted EPS was $0.61 versus $0.54.
Liquidity, debt and capital allocation
At October 31, 2018, cash and cash equivalents were $2.247 billion, working capital was $2.677 billion, and total assets were $8.541 billion. Current assets were $3.848 billion and current liabilities $1.171 billion. Long-term debt was $1.799 billion; the company had no borrowings under its $1 billion revolving facility, which was due to expire in September 2019. Cash declined $431 million during the year. Cash dividends paid were $191 million, and the company repurchased approximately 6.4 million shares for $422 million.
Material changes, outlook and notable items
- Net income fell to $316 million, principally because FY2018 included a $552 million discrete Tax Act charge: $499 million for transition tax and $53 million from remeasuring deferred taxes. The transition tax is payable over eight years. Management had not yet elected an accounting method for GILTI taxes.
- Gross margin improved 0.8 percentage points, while operating margin was nearly flat. Higher volume and favorable mix helped; wage and variable-pay increases, transformation spending, acquisition-related costs and a $21 million Diagnostics and Genomics intangible-asset impairment were offsets.
- Agilent acquired seven businesses for approximately $536 million during FY2018, including AATI for about $268 million. After year-end, it acquired ACEA Biosciences for approximately $250 million in cash.
- Management emphasized product differentiation, customer experience, operating-margin growth and balanced capital allocation. It expected foreign currency to weigh on FY2019 revenue, partly offset by recent acquisitions; no specific consolidated FY2019 revenue or earnings guidance is provided in the cited filing text.
- In December 2018, Singapore tax incentives were extended through 2027; the company expected this and a newly adopted accounting rule to produce an approximately $265 million tax benefit in Q1 FY2019.
- Principal risks include uncertain customer and government spending, intense competition and product-cycle demands, tariffs and foreign-exchange exposure, supply-chain constraints, acquisitions and integration, regulatory and data-privacy compliance, tax examinations and pension-market exposure. The company reported no pending legal matters it believed reasonably likely to have a material impact. The independent auditor gave an unqualified opinion and concluded internal control over financial reporting was effective.
Key facts investors should verify
- How much FY2019 earnings and cash taxes are affected by the transition-tax payment schedule, GILTI treatment and the Singapore incentive benefit.
- Whether underlying growth remains strong after separating currency and acquisition contributions, particularly across the three segments.
- Whether Diagnostics and Genomics can recover margin after acquisition-related spending and the intangible impairment.
- How the new $1.75 billion repurchase authorization, dividends and acquisition spending affect cash, share count and debt.
- Whether inventory growth, supplier commitments, tariffs and foreign-currency movements create further pressure on margins or cash conversion.