Agilent Technologies, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 31, 2020. Agilent provides instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. Figures are unaudited and in U.S. dollars.
Financial performance and position
| Metric | Q1 FY2020 | Prior comparable period |
|---|---|---|
| Revenue | $1.357 billion | $1.284 billion |
| Gross margin | 53.3% | 55.1% |
| Operating income / margin | $215 million / 15.9% | $250 million / 19.5% |
| Income before taxes | $219 million | $248 million |
| Net income | $197 million | $504 million |
| Diluted EPS | $0.63 | $1.57 |
| Cash from operating activities | $(59) million | $213 million |
| Cash and cash equivalents at period end | $1.226 billion | $1.382 billion at Oct. 31, 2019 |
| Short-term and long-term debt | $675 million / $1.787 billion | $616 million / $1.791 billion at Oct. 31, 2019 |
Revenue grew 6% year over year: products rose 4% and services and other revenue rose 10%. Segment revenue was $638 million for Life Sciences and Applied Markets (+5%), $249 million for Diagnostics and Genomics (+6%), and $470 million for Agilent CrossLab (+6%). Segment operating income totaled $311 million versus $297 million; this segment measure excludes specified corporate and acquisition-related items.
Cash used in investing was $35 million, including $34 million of capital expenditures. Cash used in financing was $61 million, including $56 million of dividends and $60 million of share repurchases. Management expected approximately $180 million of capital expenditures for FY2020. The company reported $192 million of operating lease liabilities following adoption of the new lease standard.
Material changes and notable items
- Revenue increased, but reported operating income and margins declined. Management cited unfavorable product mix, higher acquired-intangible amortization, fixed costs at the Frederick, Colorado manufacturing facility, higher wages, transformation costs and legal expenses.
- Net income comparisons are significantly affected by taxes: Q1 FY2019 included a $299 million discrete tax benefit from an extension of a Singapore tax incentive. Q1 FY2020 tax expense was $22 million, including a $13 million discrete stock-compensation tax benefit.
- Operating cash flow included a $226 million one-time tax payment related to a transfer of intellectual property; total net income taxes paid were $241 million. This payment materially contributed to the cash-flow comparison.
- Recent acquisitions contributed approximately 4 percentage points to company-wide revenue growth and approximately 8 percentage points to Life Sciences and Applied Markets growth. The BioTek acquisition was completed in August 2019 for approximately $1.17 billion.
- Agilent recognized a $16 million unrealized gain on an equity investment in other income. It also reported $13 million of transformation and acquisition/integration costs, $48 million of acquisition-related intangible amortization, and $22 million in “other” reconciling items, primarily legal costs related to a claim against a third party.
- In February 2020, Agilent reached a $22.5 million settlement with Twist Bioscience, resolving outstanding litigation and granting a license to specified oligo-synthesis technology.
Outlook, risks and contingencies
Management expected the public health crisis that began in China and spread worldwide to reduce business results in the first half of FY2020. The crisis and extended Lunar New Year reduced January selling days and affected operations; management also noted service-delivery access constraints in some countries. Agilent remained optimistic about long-term growth, while anticipating a negative foreign-currency impact on FY2020 revenue, partly offset by contributions from acquisitions. Management stated that cash, operating cash generation and access to capital markets and credit lines should meet liquidity needs for at least the next 12 months.
Key risks include uncertain customer demand and capital spending, pricing and margin pressure, supply-chain and manufacturing disruption, tariffs and foreign-exchange movements, the public health crisis, acquisition integration and execution, regulation and data protection, tax examinations and incentives, and debt obligations. The company had $175 million drawn on its $1 billion revolving facility and a $500 million acquisition loan outstanding; it reported compliance with credit-facility covenants. It also had $1.8 billion of senior unsecured notes. Management reported no pending legal matters it believed probable or reasonably possible to have a material impact. It could not estimate the range of potential changes to unrecognized tax benefits; significant changes could occur within 12 months.
Agilent adopted lease accounting guidance effective November 1, 2019, recording operating lease right-of-use assets and liabilities; management said adoption significantly affected the balance sheet but did not significantly affect quarterly earnings or cash flows. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the public health crisis affected subsequent-quarter orders, customer-site access, supply chains and full-year results relative to management’s first-half warning.
- Underlying revenue and margin trends excluding acquisitions, currency, intangible amortization, transformation and other specified reconciling costs.
- The sustainability of operating cash flow after the one-time intellectual-property transfer tax payment and the drivers of working-capital outflows.
- Debt repayment plans, liquidity needs and continued covenant compliance, alongside dividends and remaining share-repurchase authorization of $967 million.
- Resolution and financial or operational implications of tax examinations, unrecognized tax benefits and foreign tax incentives.
- Whether the $22.5 million Twist settlement and other litigation-related items have further effects beyond those disclosed.