Agilent Technologies, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended July 31, 2019. Unaudited results; dollar amounts are in millions except per-share data. Agilent supplies instruments, software, services and consumables to life sciences, diagnostics and applied chemical markets.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $1,274 | $1,203 | $3,796 | $3,620 |
| Operating income | $225 | $221 | $691 | $660 |
| Net income | $191 | $236 | $877 | $121 |
| Diluted EPS | $0.60 | $0.73 | $2.74 | $0.37 |
| Gross margin | 54.3% | 54.8% | 54.5% | 54.5% |
| Operating margin | 17.6% | 18.4% | 18.2% | 18.2% |
- Q3 revenue rose 6% (products +4%; services and other +10%); nine-month revenue rose 5%. Currency movements reduced revenue growth by approximately 2 percentage points in both periods.
- Q3 net income declined 19% year over year despite higher revenue and operating income. The prior-year quarter included $30 million of other income versus $5 million in Q3 2019; the filing describes $15 million of one-time third-party settlement income in the prior-year nine-month period, but does not clearly attribute the full quarterly difference.
- Nine-month net income comparisons are dominated by tax items: FY2019 included a $299 million discrete tax benefit from restructuring and extending a Singapore tax incentive; FY2018 included a $533 million Tax Act charge. FY2019 nine-month effective tax rate was (27.5%), versus 82.8% in FY2018. Q3 FY2019 effective rate was 14.0%.
Segments and operating drivers
- Life Sciences and Applied Markets: Q3 revenue $544 million, up 1%; nine-month revenue $1,680 million, essentially flat. Weakness in spectroscopy and some food, chemical and energy demand offset strength in GCMS, informatics and pharmaceutical markets.
- Diagnostics and Genomics: Q3 revenue $263 million, up 11%; nine-month revenue $752 million, up 9%. Growth was led by nucleic acid solutions, pathology, genomics and biomolecular analysis. Segment operating margin increased 1 percentage point in both periods.
- Agilent CrossLab: Q3 revenue $467 million, up 10%; nine-month revenue $1,364 million, up 8%. Services and consumables grew broadly; operational efficiency supported a 3-point segment operating-margin increase in both periods.
- Company Q3 gross margin declined 0.5 percentage point; management cited tariffs, wage increases, product mix and higher amortization, partly offset by lower material costs and favorable currency effects. Company operating margin decreased 0.8 percentage point year over year.
Cash flow, liquidity and capital allocation
- Nine-month operating cash flow was $707 million, versus $715 million; investing cash outflow was $397 million, versus $591 million; financing cash outflow was $796 million, versus $666 million. Capital expenditures were $125 million, and management expected approximately $165 million for FY2019.
- Cash and cash equivalents were $1,765 million at July 31, 2019, down from $2,247 million at October 31, 2018. Current assets were $3,457 million and current liabilities $1,622 million.
- Debt totaled $1,798 million: $504 million short-term and $1,294 million long-term. The $500 million 2020 senior notes were reclassified as current debt. Agilent had no borrowings under its $1 billion revolving facility at quarter-end and reported covenant compliance.
- Nine-month share repurchases were $674 million (9.8 million shares); $1.076 billion remained authorized. Dividends paid were $155 million. Management said available cash, operating cash generation and access to capital markets and credit lines should meet liquidity needs for at least 12 months.
Outlook, material events and risks
- No quantified revenue or EPS guidance is provided in the supplied filing text. Management cited challenging market conditions, expected foreign-exchange headwinds for the remainder of 2019, and expected recent acquisitions to partly offset currency effects. It remained focused on product differentiation, customer experience, growth and earnings expansion.
- After quarter-end, Agilent completed the $1.165 billion BioTek acquisition on August 23, 2019. A $500 million short-term loan facility was drawn in full to fund the acquisition. The company also called for redemption of its $500 million 2020 notes, with redemption scheduled for September 17, 2019.
- Agilent acquired ACEA Biosciences for approximately $250 million in November 2018; its results are included from closing. Acquisition and integration costs, tariffs, transformational initiatives, and increased research and development and personnel costs affected results.
- Principal disclosed risks include uncertain customer demand and budget cycles, competition and product innovation, tariffs and trade disputes, foreign-exchange exposure, supply-chain and manufacturing constraints, acquisition integration, regulatory and data-privacy compliance, tax uncertainty, debt obligations, and potential disruption of IT or facilities. Management reported no pending legal matters it believed were likely or reasonably possible to have a material impact.
- Agilent adopted ASC 606 on November 1, 2018 using the modified retrospective method, increasing opening retained earnings by $23 million; management said prior guidance would not have materially changed FY2019 income, comprehensive income or cash flow statements. The new lease standard was expected to be adopted November 1, 2019; impact was still under evaluation.
Key facts for investors to verify
- Underlying earnings excluding the $299 million Singapore tax benefit, and the sustainability and conditions of the renewed tax incentive.
- Organic growth and segment trends, especially the flat Life Sciences and Applied Markets business, against acquisition contributions and currency headwinds.
- BioTek purchase financing, integration progress, and the cash and debt effects of the acquisition and the 2020-note redemption.
- Execution of the remaining share-repurchase authorization alongside acquisition spending, dividends and liquidity needs.
- Exposure to tariffs, customer spending volatility, and the extent to which cost savings and operating efficiencies offset margin pressure.