Agilent Technologies, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended July 31, 2018. Agilent supplies instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $1.203 billion | $1.114 billion | $3.620 billion | $3.283 billion |
| Gross margin | 55.0% | 53.5% | 54.6% | 53.7% |
| Operating income | $225 million | $201 million | $679 million | $608 million |
| Operating margin | 18.7% | 18.0% | 18.8% | 18.5% |
| Net income | $236 million | $175 million | $121 million | $507 million |
| Diluted EPS | $0.73 | $0.54 | $0.37 | $1.56 |
- Q3 revenue grew 8%; nine-month revenue grew 10%. Favorable currency contributed approximately 2 and 3 percentage points, respectively.
- Q3 operating cash flow was not separately reported. Nine-month operating cash flow was $715 million, compared with $601 million. The cash flow statement includes a $533 million tax-related change in assets and liabilities, so reported operating cash flow benefited from this item.
- Cash and cash equivalents were $2.131 billion at July 31, down from $2.678 billion at October 31, 2017. Current assets were $3.667 billion and current liabilities $1.014 billion.
- Long-term debt was $1.799 billion; no short-term debt or revolving-credit borrowings were outstanding at July 31. The company had a $1 billion revolving credit facility, expiring September 2019, and reported compliance with its covenants.
- Nine-month investing cash outflow was $590 million, including $437 million for acquisitions and $141 million of capital expenditure. Financing cash outflow was $666 million, including $336 million of share repurchases and $144 million of dividends.
Changes versus the comparable period
- All three segments grew in Q3: Life Sciences and Applied Markets revenue rose 6% to $540 million; Diagnostics and Genomics rose 9% to $237 million; Agilent CrossLab rose 10% to $426 million. CrossLab led nine-month growth at 12%.
- Q3 gross and operating margins improved year over year. Management attributed gains primarily to volume, favorable mix and efficiencies, partly offset by wage and variable-pay increases, currency effects and acquisition-related costs.
- Nine-month net income fell to $121 million from $507 million, principally because of a $533 million discrete tax charge related to the U.S. Tax Cuts and Jobs Act. The nine-month effective tax rate was 82.8%, versus 12.1% in the prior-year period.
- Agilent acquired Lasergen, Genohm, Advanced Analytical Technologies and Ultra Scientific during the period. Goodwill increased by $326 million net of currency effects. Subsequent to quarter-end, it acquired ProZyme and certain Young In Scientific assets for approximately $80 million combined.
Outlook, commentary and risks
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management expressed optimism about growth opportunities and expected continued growth across most end markets, while noting potential market volatility.
- Management said U.S. tariffs effective in July 2018 would negatively affect results, but that actions taken substantially offset the expected impact. Inventory days on hand increased to 103 from 98 a year earlier, partly reflecting acquisition-related and planned inventory builds and actions to mitigate tariffs.
- The company emphasized investment in differentiated products, customer experience, R&D and operating-margin improvement, alongside dividends and share repurchases. It expected to contribute approximately $8 million to defined-benefit plans during the remainder of FY2018.
- The provisional Tax Act accounting was incomplete. The filing describes a $480 million net transition-tax estimate in the tax note, while the liquidity discussion states a $440 million transition tax payable; amounts and final tax effects remain subject to measurement and tax-authority guidance. The company had not yet elected an accounting method for GILTI.
- Key disclosed risks include uncertain customer demand and budgets, competition and product-development execution, acquisition integration, foreign-currency and trade/tariff exposure, supply-chain and manufacturing constraints, regulatory and data-privacy compliance, tax examinations, and debt and pension-market risks. Management reported no pending legal matters it believed were likely or reasonably possible to have a material impact.
Most important facts for investors to verify
- How recurring earnings and tax expense compare after isolating the $533 million Tax Act charge and other unusual income items, including the $20 million Lasergen remeasurement gain and a $15 million one-time third-party settlement recorded in the nine-month period.
- The final Tax Act transition-tax liability and payment schedule, including the filing’s differing $480 million and $440 million disclosures, and the eventual GILTI accounting policy.
- Whether organic growth and margin performance persist after considering favorable currency effects, acquisitions and acquisition-related expenses.
- Integration progress and returns from recent acquisitions, and the cash and earnings effects of further acquisitions, capital spending, repurchases and dividends.
- The effect of tariffs, inventory growth and supply-chain actions on future costs, working capital and margins.