Agilent Technologies, Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2017. The financial statements are unaudited. Agilent supplies instruments, software, services and consumables for life sciences, diagnostics and applied chemical markets.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|
| Revenue | $1.102B | $1.019B | $2.169B | $2.047B |
| Gross margin | 53.7% | 52.0% | 53.8% | 52.1% |
| Operating income | $201M | $131M | $407M | $286M |
| Operating margin | 18.2% | 12.9% | 18.8% | 14.0% |
| Net income | $164M | $91M | $332M | $212M |
| Diluted EPS | $0.50 | $0.28 | $1.02 | $0.64 |
| Operating cash flow | Not separately reported | Not separately reported | $373M | $365M |
- Quarterly revenue rose 8%; six-month revenue rose 6%. Foreign exchange reduced revenue growth by about 1 percentage point in both periods.
- Product revenue increased 7% in Q2 and 5% year to date; services and other revenue rose 12% and 9%, respectively.
- Six-month operating cash flow less $75M of capital expenditures was approximately $298M. Cash and equivalents increased to $2.389B from $2.289B at October 31, 2016.
- At April 30, total debt was approximately $2.043B: $241M short-term and $1.802B long-term. Cash exceeded reported debt by about $346M. The $241M short-term balance includes $141M drawn on the revolving facility and $100M of notes due November 2017.
- Current assets were $3.800B and current liabilities $1.187B. Approximately $2.350B of cash was held outside the U.S.; repatriation could incur additional U.S. taxes.
- Six-month dividends paid were $85M; share repurchases were $194M. The board declared a further $0.132-per-share dividend for payment in July 2017.
Segments and material changes
| Segment | Q2 revenue change | Six-month revenue change | Management commentary |
|---|
| Life Sciences and Applied Markets | +6% | +4% | Pharma/biotech and chemical/energy were strengths; life science research and diagnostic/clinical markets remained weak. |
| Diagnostics and Genomics | +13% | +9% | Growth included pathology, companion diagnostics and nucleic acid solutions. Q2 growth included a 1-point contribution from Multiplicom and a 4-point contribution from a customer supply-agreement settlement. |
| Agilent CrossLab | +9% | +8% | Broad-based growth, led by services and service contracts; forensics and life science research were weaker. |
- Operating margin improved 5 percentage points in both the quarter and first half. Management cited higher sales volume, lower manufacturing costs, reduced amortization and lower certain initiative costs.
- Six-month results included a $32M net pension settlement gain from returning a Japanese pension-plan component to the government. This was a material unusual benefit to reported results.
- On January 20, 2017, Agilent acquired Multiplicom for approximately $72M in cash; its results are included from the acquisition date.
- Research and development expense rose 4% in Q2 and 3% year to date; SG&A expense declined 4% in both periods. The effective tax rate was 14.1% for Q2 and 13.5% year to date, versus 22.2% and 18.1% in the comparable 2016 periods.
Outlook, risks and contingencies
- No consolidated numerical revenue or earnings guidance is stated. Management expects continued strength in pharma/biotech and solid diagnostics/clinical growth; it expects FY2017 life science research growth to be flat to slightly down. A sustained cyclical recovery in chemical and energy markets is not yet established.
- Management expects approximately $200M of capital expenditures for FY2017 and approximately $12M of non-U.S. defined-benefit contributions during the remainder of the year. It believes cash, operating cash flow and access to capital markets and credit lines will meet liquidity needs for at least 12 months.
- Management intends to focus on operating-margin growth, product differentiation and customer experience, while returning a significant proportion of cash flow through dividends and repurchases.
- Key disclosed risks include uncertain and seasonally variable customer orders, economic and government-funding conditions, pricing pressure, product innovation and competition, supply-chain and manufacturing capacity constraints, foreign-exchange exposure, acquisition integration, regulation, pension-market exposure, debt obligations and access to overseas cash. Currency hedges generally cover exposures up to 12 months; management’s sensitivity analyses found hypothetical 10% adverse currency and interest-rate movements would not have a material effect.
- Agilent reported no pending legal matter it believed probable or reasonably possible to have a material impact. It noted potential changes in unrecognized tax benefits over the next 12 months but could not estimate the range. The IRS appeal concerning the Altera tax case remains unresolved; no adjustment was recorded.
- 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 much of the improvement in earnings and operating margin is sustainable apart from the $32M pension settlement gain, lower amortization and other period-specific items?
- Whether the Q2 diagnostics growth contribution from the customer settlement and Multiplicom acquisition recurs, and how the acquisition performs after integration.
- Whether cash held overseas can fund U.S. needs without material incremental tax, and the timing and terms for repayment of the $100M notes due November 2017.
- Whether cash generation supports planned capital spending, dividends and remaining share-repurchase authorization of $610M, given working-capital movements and increased tax payments.
- Whether weak life science research and forensics demand, foreign-exchange movements, and customer order timing affect the qualitative outlook.
