Agilent Technologies, Inc. — Q1 FY2018 10-Q
Reporting period: Three months ended January 31, 2018; unaudited. Agilent supplies instruments, software, services and consumables to life sciences, diagnostics and applied chemical markets. Comparisons are with the three months ended January 31, 2017, unless noted.
Financial results and position
| Metric | Q1 FY2018 | Q1 FY2017 | Change / context |
|---|---|---|---|
| Revenue | $1,211 million | $1,067 million | Up 14%; favorable currency contributed about 4 percentage points |
| Gross margin | 55.6% | 53.8% | Up 1.8 percentage points |
| Operating income | $239 million | $206 million | Up 16%; operating margin was 19.7% versus 19.3% |
| Income before taxes | $233 million | $193 million | — |
| Income tax provision | $553 million | $25 million | Includes $533 million provisional Tax Act charge |
| Net income (loss) | $(320) million | $168 million | Basic and diluted EPS $(0.99) versus $0.52 |
| Cash from operations | $215 million | $116 million | 2018 cash flow includes a $533 million tax-related assets/liabilities adjustment |
Revenue increased across all three reportable segments: Life Sciences and Applied Markets $618 million, up 14%; Diagnostics and Genomics $185 million, up 13%; and Agilent CrossLab $408 million, up 12%. Segment operating income was $159 million, $22 million and $88 million, respectively. Diagnostics and Genomics operating margin declined to 11.7% from 14.3%, with acquisition-related costs, higher infrastructure, R&D and compensation costs cited.
At January 31, 2018, cash and cash equivalents were $2.887 billion, versus $2.678 billion at October 31, 2017. Current assets were $4.397 billion and current liabilities $1.361 billion. Short-term debt was $345 million and long-term debt $1.800 billion; cash exceeded reported debt by approximately $742 million. The company had a $1 billion revolving facility, with $345 million drawn, and reported covenant compliance. About $2.850 billion of cash was held outside the U.S.
Investing activities used $67 million, including $60 million of capital expenditures; financing activities provided $37 million. Agilent paid $48 million in dividends and repurchased $47 million of shares. It expects approximately $200 million of capital expenditures for FY2018.
Material changes and unusual items
- The $533 million provisional tax charge comprised an estimated $480 million net transition-tax provision and $53 million from remeasuring deferred taxes after the U.S. corporate tax-rate reduction. The company had not completed its Tax Act accounting. The transition tax is payable over eight years; the filing also describes an estimated $440 million cash obligation after credits, so the cash amount should be reconciled with the accounting provision.
- Tax Act effects drove the reported net loss despite higher revenue and operating income. The resulting 237.3% effective tax rate is not representative of the quarter’s operating performance.
- Cash flow benefited from a $533 million change in tax-related assets and liabilities. This is an important non-operating tax-related cash-flow adjustment in interpreting reported operating cash generation.
- Other long-term liabilities rose to $770 million from $293 million, including long-term income tax liabilities of $611 million versus $131 million at October 31, 2017.
- Prior-year product and service revenue and related cost classifications were revised by $3 million and $2 million, respectively; the company said the reclassification was not material and did not affect previously reported results.
Outlook, commentary and risks
Management described a strong start to FY2018, broad-based business growth and optimism about opportunities in most key end markets. It expects continued growth across most Life Sciences and Applied Markets end markets, ongoing Diagnostics and Genomics demand (including nucleic-acid solutions), and near-term CrossLab growth. No consolidated numerical revenue or earnings guidance was provided. Management emphasized operating-margin growth, investment in R&D and returning cash to shareholders.
Key exposures include uncertain customer spending and order timing, economic and market volatility, competition and the need for successful new products, supply and manufacturing constraints, foreign-exchange movements, and acquisition integration. Currency movements boosted quarterly revenue by about 4 percentage points but increased costs and net exposure; hedging is generally limited to a rolling twelve-month period. Tax Act estimates remain provisional and could change with further analysis and tax-authority guidance. The company said ordinary-course legal matters were not currently believed likely to have a material impact. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
After quarter-end, Agilent exercised its option to acquire the remaining shares of Lasergen for $105 million; closing remained subject to an executed merger agreement and other conditions. The company’s existing 48% Lasergen investment had a carrying value and maximum exposure of $80 million at quarter-end.
Important facts for investors to verify
- Reconcile the $480 million provisional net transition-tax expense, the filing’s stated $440 million cash transition-tax obligation, and the related payment schedule and credits.
- Track completion of the provisional Tax Act accounting, including deferred-tax remeasurement, GILTI policy election, state-tax effects and foreign-earnings repatriation plans.
- Assess operating cash flow excluding the $533 million tax-related adjustment, and monitor cash location, tax liabilities and working-capital trends.
- Monitor Diagnostics and Genomics margin pressure and whether investment and acquisition costs translate into sustained growth and profitability.
- Confirm completion and final terms of the Lasergen acquisition, alongside capital spending, debt usage, share repurchases and dividends.