Agilent Technologies, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017; comparisons are with the three months ended January 31, 2016. Amounts are in U.S. dollars.
Business context
Agilent provides instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. Its reportable segments are Life Sciences and Applied Markets, Diagnostics and Genomics, and Agilent CrossLab.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $1,067 million | $1,028 million |
| Gross margin | 53.8% | 52.2% |
| Operating income | $206 million | $155 million |
| Operating margin | 19.3% | 15.1% |
| Net income | $168 million | $121 million |
| Diluted EPS | $0.52 | $0.36 |
| Operating cash flow | $116 million | $111 million |
- Revenue increased 4% year over year; foreign exchange reduced reported growth by approximately 1 percentage point. Products revenue rose 3%, while services and other revenue increased 7%.
- Segment revenue and year-over-year growth: Life Sciences and Applied Markets, $540 million (+3%); Diagnostics and Genomics, $164 million (+4%); CrossLab, $363 million (+6%). CrossLab’s operating margin declined 2 percentage points to 20.3%, while the other two segments’ margins improved.
- Gross margin improvement reflected higher volume and better mix, lower warranty costs and a pension settlement gain, partly offset by inventory charges and wage increases. Operating margin also benefited from lower amortization and transformational initiative costs.
- Cash and cash equivalents were $2.241 billion at January 31, down $48 million from October 31, 2016. Current assets were $3.635 billion and current liabilities $1.089 billion.
- Debt comprised $190 million of short-term debt and $1.802 billion of long-term debt. The company had $89 million outstanding under its $700 million revolving credit facility and reported compliance with its covenants. Cash exceeded reported debt by approximately $249 million.
- Investing activities used $101 million, including $70 million for acquisitions net of cash acquired and $32 million for capital expenditures. Financing activities used $58 million, including $111 million of share repurchases and $42 million of dividends.
Material changes and unusual items
- Net income included a $32 million gain from the settlement of a Japanese pension plan obligation. This nonrecurring item contributed to the year-over-year improvement in margins and earnings.
- Agilent acquired Multiplicom NV, a European molecular diagnostics company, on January 20 for approximately $72 million in cash. The acquisition’s asset valuations were preliminary; the company recorded $46 million of goodwill and $34 million of other intangible assets.
- Agilent retired 292.5 million treasury shares, representing previously repurchased shares and first-quarter purchases. This was an equity-account reclassification, reducing retained earnings by $6.7 billion and additional paid-in capital by $3.9 billion; it did not represent a comparable cash outflow in the quarter.
- The effective tax rate was 13.0%, versus 14.8% a year earlier. The current quarter included $2 million of net discrete tax benefits, including items related to an Italian tax audit and the pension settlement.
Outlook, management commentary and risks
- Management expressed optimism about growth in key markets and geographies, particularly China and emerging markets. It expected continued strength in pharmaceuticals and solid growth in food and diagnostics and clinical markets. It remained uncertain whether the quarter’s chemical and energy market growth would continue.
- Management emphasized operating-margin growth through simplification, product differentiation and customer-experience improvements, alongside continued shareholder returns through dividends and repurchases. No specific revenue or earnings guidance for the next quarter or full fiscal year is stated in the provided filing text.
- Capital expenditures were expected to be approximately $200 million for FY2017. The company expected approximately $42 million of defined-benefit plan contributions during the remainder of FY2017.
- Management said existing cash, operating cash generation and access to capital markets and credit lines should meet liquidity needs for at least 12 months. Approximately $2.204 billion of cash was held outside the U.S.; repatriation could trigger additional U.S. federal and state taxes.
- Key disclosed risks include uncertain customer order timing and market demand, seasonality, foreign-exchange exposure, competition and product-development execution, supply-chain constraints, acquisition integration, regulatory requirements, tax examinations and pension funding exposure. The filing also notes that currency hedging is generally limited to a rolling twelve-month period.
- The company reported no pending legal matters it believed probable or reasonably possible to have a material impact. Disclosure controls were judged effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the earnings and margin increase is attributable to the $32 million pension settlement gain versus recurring operations.
- Whether segment growth—particularly CrossLab’s revenue growth alongside lower margins—continues in subsequent quarters.
- Multiplicom’s finalized purchase-price allocation, integration costs and contribution to future growth.
- Cash accessibility and potential tax costs associated with repatriating foreign-held cash, as well as the approaching 2017 senior-note maturity.
- Whether chemical and energy market improvement proves sustainable and how currency movements affect reported results.