AGILENT TECHNOLOGIES, INC. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding growth opportunities, including for revenue and our end markets, strength and drivers of the markets we sell into, sales funnels, our strategic direction, new product and service introductions and the position of our current products and services, market demand for and adoption of our products, the ability of our products and solutions to address customer needs and meet industry requirements, our focus on differentiating our product solutions, improving our customers' experience and growing our earnings, future financial results, our operating margin, our investments, including in manufacturing infrastructure, research and development and expanding and improving our applications and solutions portfolios, expanding our position in developing countries and emerging markets, our focus on balanced capital allocation, our contributions to our pension and other defined benefit plans, impairment of goodwill and other intangible assets, the effect of theU.S. and other tariffs, the impact of foreign currency movements, our hedging programs and other actions to offset the effects of tariffs and foreign currency movements, our future effective tax rate, tax valuation allowance and unrecognized tax benefits, the impact of local government regulations on our ability to pay vendors or conduct operations, our ability to satisfy our liquidity requirements, including through cash generated from operations, indemnification, source and supply of materials used in our products, our sales, our purchase commitments, our capital expenditures, the integration and effects of our acquisitions and other transactions, our stock repurchase program and dividends and the potential or anticipated direct or indirect impact of COVID-19 on our business that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Part II Item 1A and elsewhere in this Form 10-Q.
Basis of Presentation
The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations, comprehensive income (loss) or cash flows. Our fiscal year-end isOctober 31 , and our fiscal quarters end onJanuary 31 ,April 30 andJuly 31 . Unless otherwise stated, these dates refer to our fiscal year and fiscal periods.
Executive Summary
Agilent Technologies, Inc. ("we", "Agilent" or the "company"), incorporated inDelaware inMay 1999 , is a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow.
COVID-19 Pandemic
Both our domestic and international operations have been and continue to be
affected by the ongoing global pandemic of a novel strain of
coronavirus ("COVID-19") and the resulting volatility and uncertainty it has
caused in the
Since we are considered an essential business, we remain open with our top priority during the COVID-19 pandemic being the health and safety of our employees, customers and community. At every stage of the pandemic, we have taken decisive and appropriate precautions, including a mandatory work from home policy for all employees with the exception of manufacturing, distribution, and certain laboratory environments, as well as bans on all non-essential travel and visitors into our facilities. At this time, our factories continue to operate around the world in accordance with the guidance issued by local, state and national government authorities. Over the last several years, we have refined our digital workplace strategy to focus on providing modern connectivity and collaboration tools to our employees. Our strategic technology investments have enabled us to meet remote working needs as this situation has escalated. We will continue to take proactive measures to ensure the health of our global employee base when we move towards the return-to-office phase of the pandemic response as well as the safety of all customer interactions.China is the first country where we have entered the first phase of our return-to-office transition. At this time, the COVID-19 pandemic has not significantly impacted our manufacturing facilities or our third parties to whom we outsource certain manufacturing processes, the distribution centers where our inventory is managed or the operations of our logistics and other service providers. We have increased our inventory levels and may increase them further to ensure we have the inventory on hand to meet our customer needs. We have seen a decrease in revenue recognition in the second quarter related to delays in installation primarily due to our inability to gain access to customer sites as a result of mitigation efforts to slow the spread of COVID-19. We have also seen disruptions or delays in shipments of certain materials or components of our 36
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products. As a result, we are working with our customers and suppliers to understand the existing and future negative impacts to our delivery and supply chain and take actions in an effort to mitigate such impacts.
The majority of the markets we serve, such as the pharmaceutical, biopharmaceutical, food, environmental and diagnostics and clinical markets, have continued to operate at various levels, and we are working closely with our customers to ensure their seamless operations. In the latter part of our second quarter, revenue from the academia and government markets was negatively affected by delays in installations due to laboratory closures inEurope and theAmericas . The chemical and energy market has also been negatively impacted by the global slowdown in economic activity associated with measures put in place to slow the pandemic. From a customer-facing perspective, we are leveraging digital demand generation activities, including virtual demonstrations across all regions, remote instrument repairs, virtual sales seminars, online product training, and a rapid acceleration in one-on-one communications over emails, phone and video conferencing. The COVID-19 pandemic continues to be dynamic and near-term challenges across the economy remain. We are taking a proactive approach to managing through this unpredictability and have implemented a series of cost saving actions that primarily include reductions in travel and non-essential spending.
Actual Results
Net revenue of$1,238 million and$2,595 million for the three and six months endedApril 30, 2020 was relatively flat and increased 3 percent, respectively, when compared to the same periods last year. Foreign currency movements for the three and six months endedApril 30, 2020 had an overall unfavorable impact on revenue of 2 percentage points and 1 percentage point, respectively, when compared to the same periods last year. Revenue from our most recent acquisition contributed 3 percentage points and 4 percentage points in the three and six months endedApril 30, 2020 , respectively. Revenue generated by our life sciences and applied markets business for the three and six months endedApril 30, 2020 decreased 1 percent and increased 2 percent, respectively, when compared to the same periods last year. Foreign currency movements for the three and six months endedApril 30, 2020 had an overall unfavorable impact on revenue of 2 percentage points and 1 percentage point, respectively, when compared to the same periods last year. Revenue from our most recent acquisition contributed approximately 7 percentage points to our life sciences and applied markets business revenue growth in both the three and six months endedApril 30, 2020 . Revenue generated by our diagnostics and genomics business for the three and six months endedApril 30, 2020 increased 3 percent and 5 percent, respectively, when compared to the same periods last year. Foreign currency movements for the three and six months endedApril 30, 2020 had an overall unfavorable impact on revenue of 2 percentage points and 1 percentage point, respectively, when compared to the same periods last year. Revenue generated by our Agilent CrossLab business in the three and six months endedApril 30, 2020 decreased 1 percent and increased 2 percent, respectively, when compared to the same periods last year. Foreign currency movements for the three and six months endedApril 30, 2020 had an overall unfavorable impact on revenue of 2 percentage points in both periods when compared to the same periods last year. Net income for the three months endedApril 30, 2020 was$101 million compared to net income of$182 million for the corresponding period last year. Net income for the six months endedApril 30, 2020 was$298 million compared to net income of$686 million for the corresponding period last year. Net income for the six months endedApril 30, 2019 was impacted by a discrete tax benefit of$299 million related to the extension of the company's tax incentive inSingapore . In the six months endedApril 30, 2020 , cash provided by operations was$254 million which includes a one-time tax outflow of$226 million related to a transfer of intangibles compared to cash generated from operations of$465 million in the same period last year. For the six months endedApril 30, 2020 and 2019, cash dividends of$111 million and$104 million , respectively, were paid on the company's outstanding common stock. OnNovember 19, 2018 we announced that our board of directors had approved a new share repurchase program (the "2019 repurchase program") designed, among other things, to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs. The 2019 repurchase program authorizes the purchase of up to$1.75 billion of our common stock at the company's discretion and has no fixed termination date. The 2019 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time. During the three and six months endedApril 30, 2020 , we repurchased and retired approximately 1.663 million shares for$126 million and 2.389 million shares for$186 million , respectively, under this authorization. During the three and six months endedApril 30, 2019 , we repurchased approximately 638,000 shares for$50 million and 1.766 million shares for$125 million , respectively, under this authorization. During the three and six months endedApril 30, 2019 we retired approximately 629,000 shares for$49 million and 1.757 million shares for$124 million , respectively. As ofApril 30, 2020 , we had remaining authorization to repurchase up to$841 million of our common stock under this program. OnMarch 23, 2020 , we suspended stock repurchases in light of the COVID-19 pandemic, and we have the ability to reinstate repurchases as circumstances warrant. 37
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Looking forward, our top priority will always be the health and safety of our employees, customers and community, as well as supporting our customers' operations. We remain open for business with the majority of our employees working from home and those employees that work at our manufacturing facilities adhering to the social distancing requirements. In addition, we remain focused on improving our customers' experience, differentiating product solutions and productivity. We also continue to focus on meeting our customers' needs as we support several aspects of the COVID-19 research and testing along with therapeutic and vaccine development. In the second quarter, we saw a rebound inChina as the country began to re-open their economy. We expect to see volatility in the third quarter as more countries begin to manage both the re-opening of their economies and controlling the potential resurgence of COVID-19. We are actively managing our business to minimize the impact the COVID-19 pandemic may have on our business results.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
("GAAP") in the U.S. The preparation of condensed consolidated financial
statements in conformity with GAAP in the U.S. requires management to make
estimates, judgments and assumptions that affect the amounts reported in our
condensed consolidated financial statements and accompanying notes. Our critical
accounting policies are those that affect our financial statements materially
and involve difficult, subjective or complex judgments by management. Those
policies are revenue recognition, inventory valuation, share-based compensation,
retirement and post-retirement benefit plan assumptions, goodwill and purchased
intangible assets and accounting for income taxes. There have been no
significant changes to our critical accounting policies as described in our
Annual Report on Form 10-K for the fiscal year ended October 31, 2019 .
Management bases its estimates on historical experience and various other
assumptions believed to be reasonable. Although these estimates are based on
management's best knowledge of current events and actions that may impact the
company in the future, actual results may be different from the estimates.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made and if different estimates that reasonably
could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements.
Adoption of New Pronouncements
See Note 2, "New Accounting Pronouncements," to the condensed consolidated financial statements for a description of new accounting pronouncements.
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities and equity are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. Foreign currency movements for the six months endedApril 30, 2020 had an overall unfavorable impact on revenue of 1 percentage point when compared to the same period last year. When movements in foreign currency exchange rates have a negative impact on revenue, they will also have a positive impact by reducing our costs and expenses. We calculate the impact of foreign currency exchange rate movements by applying the actual foreign currency exchange rates in effect during the last month of each quarter of the current year to both the applicable current and prior year periods. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the condensed consolidated statement of operations and balance sheet because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (up to a rolling twelve-month period). We may also hedge equity balances denominated in foreign currency on a long-term basis. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact theU.S. dollar cost of the transaction. 38
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Table of Contents Results from OperationsNet Revenue Three Months Ended Six Months Ended
Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions)
Net revenue:
Products $ 923 $ 921 $ 1,946 $ 1,901 -% 2%
Services and other 315 317 649 621 -% 5%
Total net revenue
-% 3% Net revenue of$1,238 million and$2,595 million for the three and six months endedApril 30, 2020 was relatively flat and increased 3 percent, respectively, when compared to the same periods last year. Foreign currency movements for the three and six months endedApril 30, 2020 had a 2 percentage point and a 1 percentage point unfavorable impact on revenue, respectively, when compared to the same periods last year. Revenue from our most recent acquisition contributed approximately 3 percentage point and 4 percentage points to our revenue growth in the three and six months endedApril 30, 2020 , respectively. In the three and six months endedApril 30, 2020 , net revenue was negatively impacted due to the COVID-19 pandemic. During the latter part of our second quarter, we experienced a decline in revenue due to restricted access to customer sites for installation, primarily in theAmericas andEurope regions, as COVID-19 began to spread globally and countries began shelter-in-place measures. At the same time, we saw an increase in revenue inChina as the country began to re-open which partially offset the declines we saw in the other parts of the world. Revenue from products was flat and increased 2 percent for the three and six months endedApril 30, 2020 when compared to the same period last year. For the three months endedApril 30, 2020 , revenue declined in most of our product lines as customers curtailed equipment spending except in our cell analysis business, automation products within our mass spectrometry business and our nucleic acid solutions business. The increase in the cell analysis business is primarily due to the contributions from our most recent acquisition and the recent demand for our products for use in the COVID-19 testing and vaccine research. For the six months endedApril 30, 2020 , the growth in product revenue was driven by increased sales within our cell analysis, biomolecular analysis and our nucleic acid solutions business. Services and other revenue were flat and increased 5 percent for the three and six months endedApril 30, 2020 , respectively, when compared to the same periods last year. Services and other revenue consist of revenue generated from our three business segments: Agilent CrossLab, diagnostics and genomics and our life science and applied markets business. Some of the prominent services in the Agilent CrossLab business include repair and maintenance on multi-vendor instruments, compliance services and installation services. Services in the diagnostics and genomics business include consulting services related to the companion diagnostics and nucleic acid businesses. Services in the life science and applied markets business include repair and maintenance and installation services. For the three months endedApril 30, 2020 , the service revenue from the Agilent CrossLab business declined 2 percent with a 2 percentage point unfavorable currency impact on revenue when compared to the same period last year. This decline for the three months endedApril 30, 2020 reflected the impact from temporary customer laboratory closures and other restrictions on access to laboratories due to the COVID-19 pandemic. For the six months endedApril 30, 2020 , the service revenue from the Agilent CrossLab Business increased 3 percent, with a 1 percentage point unfavorable currency impact when compared to the same period last year. This growth for the six months endedApril 30, 2020 is reflective of the solid growth that the service business experienced before the COVID-19 pandemic, which was then followed by a deterioration in the business conditions across theAmericas andEurope during the last six weeks of this period. For the three and six months endedApril 30, 2020 , the service revenue from the diagnostics and genomics business increased 1 percent and 3 percent, respectively, when compared to the same periods last year. The increase in diagnostics and genomics service revenue in both periods was driven by growth in the pathology and companion diagnostics service businesses. For the three and six months endedApril 30, 2020 , the service revenue from the life sciences and applied markets business increased 24 percent and 40 percent, respectively, when compared to the same periods last year. The increase in life sciences and applied markets service revenue is primarily due to the additional service revenue within the cell analysis business due to our recent acquisitions. 39
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Net Revenue By Segment
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions)
Net revenue by segment:
Life sciences and applied
markets $ 526 $ 529 $ 1,164 $ 1,136 (1)% 2%
Diagnostics and genomics 263 254 512 489 3% 5%
Agilent CrossLab 449 455 919 897 (1)% 2%
Total net revenue $ 1,238 $ 1,238 $ 2,595 $ 2,522 - 3%
Revenue in the life sciences and applied markets business for the three and six
months ended April 30, 2020 , decreased 1 percent and increased 2 percent,
respectively, when compared to the same periods last year. Foreign currency
movements for the three and six months ended April 30, 2020 had an overall
unfavorable impact on revenue of 2 percentage points and 1 percentage point,
respectively, when compared to the same periods last year. Revenue from our most
recent acquisition contributed approximately 7 percentage points to our revenue
growth in both the three and six months ended April 30, 2020 . For the three
months ended April 30, 2020 , revenue growth within the diagnostics and clinical
and academia and government markets was strong which was more than offset by
declines in chemical and energy and environmental and forensics markets when
compared to the same period last year. For the six months ended April 30, 2020
revenue growth within the diagnostics and clinical and academia and government
was strong with moderate revenue increase within the pharmaceutical markets. The
increase in revenue was partially offset by declines in revenue within the
chemical and energy, forensics and food markets. For the three and six months
ended April 30, 2020 , the increase in revenue within the academia and government
was entirely due to the contributions from our most recent acquisition.
Revenue in the diagnostics and genomics business for the three and six months
ended April 30, 2020 , increased 3 percent and 5 percent, respectively, when
compared to the same periods last year. Foreign currency movements for the three
and six months ended April 30, 2020 had an overall unfavorable impact on revenue
of 2 percentage points and 1 percentage point, respectively, when compared to
the same periods last year. For the three and six months ended April 30, 2020 ,
revenue growth within the diagnostics and clinical market and the pharmaceutical
market continued to be strong led by our nucleic acid solutions, companion
diagnostics and biomolecular analyses businesses.
Revenue generated by Agilent CrossLab in the three and six months ended
April 30, 2020 , decreased 1 percent and increased 2 percent, respectively, when
compared to the same periods last year. Foreign currency movements for the three
and six months ended April 30, 2020 had an overall unfavorable impact on revenue
of 2 percentage points in both periods when compared to the same periods last
year. For the three and six months ended April 30, 2020 , revenue growth was
strong within the pharmaceutical market which was more than offset and partially
offset, respectively, by declines in the academia and government market.
Operating Results
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions, except
margin data)
Total gross margin 53.0 % 54.1 % 53.2 % 54.6 % (1) ppt (1) ppt
Research and development $ 197 $ 99 $ 301 $ 201 99% 49%
Selling, general and
administrative $ 358 $ 354 $ 762 $ 709 1% 7%
Operating margin 8.2 % 17.4 % 12.2 % 18.5 % (9) ppts (6) ppts
Total gross margin for the three and six months ended April 30, 2020 decreased 1
percentage points in both periods when compared to the same periods last year.
Gross margin for the three and six months ended April 30, 2020 reflects impacts
of pricing pressure, lower volume, higher intangible amortization expense,
higher transformational initiative expenses and higher fixed costs
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related to the new manufacturing facility in
Research and development expenses for the three and six months endedApril 30, 2020 increased 99 percent and 49 percent, respectively, when compared to the same periods last year. Research and development expenses for the three and six months endedApril 30, 2020 increased primarily due to intangible and other asset impairments of$97 million related to the shut-down of our sequencer development program. The increase in both periods is also due to higher wages and additional expenses related to recent acquisitions partially offset by lower variable pay and favorable currency impact. Selling, general and administrative expenses for the three and six months endedApril 30, 2020 increased 1 percent and 7 percent, respectively, when compared to the same periods last year. The increase in selling, general and administrative expenses for the three months endedApril 30, 2020 was due to higher wages, higher intangible amortization expense, higher acquisition and integration costs and higher transformational initiative expenses which more than offset the impact of discretionary spending reductions, lower variable pay and favorable currency impact. The increase in selling, general and administrative expenses for the six months endedApril 30, 2020 was due to higher wages, higher intangible amortization expense, higher acquisition and integration costs, higher transformational initiative expenses and higher legal costs in connection with our claim against Twist Bioscience Corporation. Total operating margin for the three and six months endedApril 30, 2020 decreased 9 percentage points and 6 percentage points, respectively, when compared to the same periods last year. Operating margin for the three and six months endedApril 30, 2020 was impacted by intangible and other asset impairments, higher wages, higher acquisition-related expenses, higher transformational initiative expenses and increased legal costs associated with our claim against Twist Bioscience Corporation.
At
Other income (expense), net
In the three and six months ended
In the three and six months endedApril 30, 2020 and 2019 other income and expense, net includes income of$3 million and$6 million , respectively, in both periods related to the provision of site service costs to, and lease income from Keysight Technologies, Inc. The costs associated with these services are reported within income from operations.
Income Taxes
For the three and six months endedApril 30, 2020 , the company's income tax expense was$20 million with an effective tax rate of 16.5 percent and$42 million with an effective tax rate of 12.4 percent, respectively. For the three months endedApril 30, 2020 , there were no significant discrete tax items. For the six months endedApril 30, 2020 , our effective tax rate and the resulting provision for income taxes were impacted by a discrete tax benefit of$14 million related to the excess tax benefits from stock-based compensation. Our calculation of income tax expense for the three and six months endedApril 30, 2020 , is dependent in part on forecasts of full year results. The impact of the COVID-19 outbreak to the economic environment is uncertain and may change these forecasts, which could impact tax expense. For the three and six months endedApril 30, 2019 , the company's income tax expense was$36 million with an effective tax rate of 16.5 percent and an income tax benefit of$220 million with an effective tax rate of (47.2) percent, respectively. For the six months endedApril 30, 2019 , our effective tax rate and the resulting provision for income taxes were significantly impacted by a discrete benefit of$299 million related to the extension of the company's tax incentive inSingapore . The income tax provision for the three and six months endedApril 30, 2019 also includes the excess tax benefits from stock-based compensation of$3 million and$7 million , respectively. In theU.S. , tax years remain open back to the year 2016 for federal income tax purposes and the year 2015 for significant states. In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2009. 41
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It is reasonably possible there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range of possible changes to the balance of our unrecognized tax benefits. The company will continue to assess the impact of the further guidance from federal and state tax authorities on its business and consolidated financial statements. Any future adjustments will be recognized as discrete income tax expense or benefit in the period the adjustments are determined.
Segment Overview
We continue to have three business segments comprised of the life sciences and applied markets business, diagnostics and genomics business and the Agilent CrossLab business.
Life Sciences and Applied Markets
Our life sciences and applied markets business provides application-focused
solutions that include instruments and software that enable customers to
identify, quantify and analyze the physical and biological properties of
substances and products, as well as enable customers in the clinical and life
sciences research areas to interrogate samples at the molecular and cellular
level. Key product categories include: liquid chromatography ("LC") systems and
components; liquid chromatography mass spectrometry ("LCMS") systems; gas
chromatography ("GC") systems and components; gas chromatography mass
spectrometry ("GCMS") systems; inductively coupled plasma mass spectrometry
("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave
plasma-atomic emission spectrometry ("MP-AES") instruments; inductively coupled
plasma optical emission spectrometry ("ICP-OES") instruments; raman
spectroscopy; cell analysis plate based assays; flow cytometer; real-time cell
analyzer; cell imaging systems; microplate reader; laboratory software for
sample tracking; information management and analytics; laboratory automation and
robotic systems; dissolution testing; vacuum pumps and measurement technologies.
Net Revenue
Three Months Ended Six Months Ended Yearover Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions)
Net revenue $ 526 $ 529 $ 1,164 $ 1,136 (1)% 2%
Life sciences and applied markets business revenue for the three and six months
ended April 30, 2020 decreased 1 percent and increased 2 percent, respectively,
when compared to the same periods last year. Overall, foreign currency movements
for the three and six months ended April 30, 2020 had an unfavorable impact of 2
percentage points and 1 percentage point, respectively, on revenue when compared
to the same periods last year. Revenue from our acquisitions in fiscal year 2019
contributed approximately 7 percentage points to our revenue growth in both the
three and six months ended April 30, 2020 .
Geographically, revenue increased 17 percent in the Americas with a 2 percentage
point unfavorable currency impact, decreased 11 percent in Europe with a 1
percentage point unfavorable currency impact and decreased 5 percent in Asia
Pacific with a 1 percentage point unfavorable currency impact for the three
months ended April 30, 2020 compared to the same period last year. Revenue
increased 21 percent in the Americas with no currency impact, decreased 4
percent in Europe with a 2 percentage point unfavorable currency impact and
decreased 5 percent in Asia Pacific with a 1 percentage point unfavorable
currency impact for the six months ended April 30, 2020 compared to the same
period last year. Weaker sales across all products were partially offset by
increased revenue in our cell analysis products from our most recent
acquisition, primarily in the Americas , when compared to the same periods last
year for both the three and six months ended April 30, 2020 .
For the three months ended April 30, 2020 , revenue growth by end markets were
mixed with academia and government and diagnostics and clinical markets
delivering strong growth; pharmaceutical, food and environmental markets
delivered moderate growth which were more than offset by declines in chemical
and energy and forensics markets. The growth in the diagnostics and clinical
business was fueled by automation products within the mass spectrometry
division. For the six months ended April 30, 2020 revenue results by end markets
were mixed with academia and government and diagnostics and clinical markets
delivering strong results; pharmaceutical and environmental markets delivered
moderate results which were partially offset by chemical and
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energy, food and forensics markets. In both periods, revenue growth in the academia and government and pharmaceutical markets were entirely driven by strong performance of our cell analysis products from theLionheart Technologies LLC ("BioTek") acquisition. The growth in the diagnostics and clinical business was due to the strength in liquid phase mass spectrometry products. Looking forward, despite short term uncertainties and the adverse effects of the COVID-19 pandemic, we are optimistic about our long-term growth opportunities in the life sciences and applied markets as our broad portfolio of products and solutions are well suited to address customer needs. We anticipate growth from our new product introductions and recent acquisitions as we continue to invest in expanding and improving our applications and solutions portfolio. While we anticipate volatility in our markets, we expect continued growth across most end markets in the long term. Operating Results Three Months Ended Six Months Ended Year over Year Change April 30, April 30, Three Six 2020 2019 2020 2019 Months Months (in millions, except margin data) Gross margin 58.1 % 60.6 % 59.2 % 61.4 % (3) ppts (2) ppts Research and development$ 53 $ 54 $ 108 $ 110 (1)% (2)% Selling, general and administrative$ 154 $ 159 $ 325 $ 321 (3)% 1% Operating margin 18.7 % 20.3 % 22.0 % 23.4 % (2) ppts (1) ppt Gross margin for products and services for the three and six months endedApril 30, 2020 , decreased 3 percentage points and 2 percentage points, respectively, when compared to the same periods last year. Gross margin for the three and six months endedApril 30, 2020 declined due to the increased impact of pricing pressures and lower volume partially offset by favorable currency impact. Research and development expenses for the three and six months endedApril 30, 2020 , decreased 1 percent and 2 percent, respectively, when compared to the same periods last year. Research and development for the three and six months endedApril 30, 2020 decreased due to cost saving actions and favorable currency impact partially offset by additional expenses related to our recent acquisitions as well as higher wages and benefits. Selling, general and administrative expenses for the three and six months endedApril 30, 2020 , decreased 3 percent and increased 1 percent, respectively, when compared to the same periods last year. Selling, general and administrative expenses for the three months endedApril 30, 2020 decreased due to lower variable pay, lower sales commissions, cost saving actions and favorable currency impact partially offset by additional expenses related to our recent acquisitions as well as higher wages and benefits. Selling, general and administrative expenses for the six months endedApril 30, 2020 increased due to higher wages and benefits and additional expenses related to our recent acquisitions partially offset by cost saving actions and a favorable currency impact. Operating margin for products and services for the three and six months endedApril 30, 2020 decreased 2 percentage points and 1 percentage point, respectively, when compared to the same periods last year. Operating margin for the three and six months endedApril 30, 2020 declined due to additional expenses related to our recent acquisitions and unfavorable margin due to pricing pressures.
Income from Operations
Income from operations for the three and six months ended
Diagnostics and Genomics
Our diagnostics and genomics business includes the genomics, nucleic acid contract manufacturing and research and development, pathology, companion diagnostics, reagent partnership and biomolecular analysis businesses.
Our diagnostics and genomics business is comprised of six areas of activity
providing active pharmaceutical ingredients ("APIs") for oligo-based
therapeutics as well as solutions that include reagents, instruments, software
and consumables, which enable customers in the clinical and life sciences
research areas to interrogate samples at the cellular and molecular
level. First, our genomics business includes arrays for DNA mutation detection,
genotyping, gene copy number determination, identification
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of gene rearrangements, DNA methylation profiling, gene expression profiling, as
well as next generation sequencing ("NGS") target enrichment and genetic data
management and interpretation support software. This business also includes
solutions that enable clinical labs to identify DNA variants associated with
genetic disease and help direct cancer therapy. Second, our nucleic acid
solutions business provides equipment and expertise focused on production of
synthesized oligonucleotides under pharmaceutical good manufacturing practices
("GMP") conditions for use as API in an emerging class of drugs that utilize
nucleic acid molecules for disease therapy. Third, our pathology solutions
business is focused on product offerings for cancer diagnostics and anatomic
pathology workflows. The broad portfolio of offerings includes
immunohistochemistry ("IHC"), in situ hybridization ("ISH"), hematoxylin and
eosin ("H&E") staining and special staining. Fourth, we also collaborate with a
number of major pharmaceutical companies to develop new potential
pharmacodiagnostics, also known as companion diagnostics, which may be used to
identify patients most likely to benefit from a specific targeted therapy.
Fifth, the reagent partnership business is a provider of reagents used for
turbidimetry and flow cytometry. Finally, our biomolecular analysis business
provides complete workflow solutions, including instruments, consumables and
software, for quality control analysis of nucleic acid samples. Samples are
analyzed using quantitative and qualitative techniques to ensure accuracy in
further genomics analysis techniques utilized in clinical and life science
research applications.
Net Revenue
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions)
Net revenue $ 263 $ 254 $ 512 $ 489 3% 5%
Diagnostics and genomics business revenue for the three and six months ended
April 30, 2020 increased 3 percent and 5 percent, respectively, when compared to
the same periods last year. Foreign currency movements for the three and six
months ended April 30, 2020 had an overall unfavorable impact on revenue of
2 percentage points and 1 percentage point, respectively, when compared to the
same periods last year.
Geographically, revenue increased 5 percent in the Americas with no currency
impact, decreased 5 percent in Europe with a 2 percentage point unfavorable
currency impact and increased 20 percent in Asia Pacific with a 1 percentage
point unfavorable currency impact for the three months ended April 30, 2020
compared to the same period last year. For the three months ended April 30,
2020 , the growth in Americas was driven by strong performance in the nucleic
acid solutions and reagent partnership businesses. This was partly offset by a
COVID-19 related significant reduction in routine and cancer testing, as well as
the closure of most academic and research labs, which also affected Europe
negatively. Asia Pacific growth was driven by the pathology and biomolecular
analysis businesses. Revenue increased 7 percent in the Americas with no
currency impact, decreased 2 percent in Europe with a 2 percentage point
unfavorable currency impact and increased 16 percent in Asia Pacific with no
currency impact for the six months ended April 30, 2020 compared to the same
period last year. The growth in Americas was driven by strong performance in the
nucleic acid solutions, reagent partnership and companion diagnostics
businesses. This was partly offset by a COVID-19 related significant reduction
in routine and cancer testing, as well as the closure of most academic and
research labs, which also affected Europe negatively. Asia Pacific growth was
driven by the pathology and biomolecular analysis businesses.
For the three and six months ended April 30, 2020 , revenue growth in the
diagnostics and genomics business was led by strong revenue performance in our
nucleic acid solutions, companion diagnostics and biomolecular analyses
businesses. This was partly offset by a COVID-19 related significant reduction
in routine and cancer testing, as well as the closure of most academic and
research labs. The diagnostics and clinical research end markets remain strong
long-term and growing driven by an aging population and lifestyle developments
such as poor diet and physical inactivity.
Looking forward, although we see short-term impacts to routine and cancer
testing due to COVID-19, we are optimistic about our long-term growth
opportunities in our end markets and continue to invest in expanding and
improving our applications and solutions portfolio. We remain positive about our
growth in our end markets as our product portfolio around OMNIS, PD-L1 assays
and SureFISH continue to gain strength with our customers in clinical oncology
applications and our next generation sequencing target enrichment solutions
continue to be adopted. Market demand in the nucleic acid solutions business
related to therapeutic oligo programs continues, and with our newly opened
nucleic acid solutions production facility in Frederick, Colorado , we are well
positioned to serve more of the market demand. We will continue to invest in
research and development and seek to expand our position in developing countries
and emerging markets.
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Operating Results
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions, except margin
data)
Gross margin 55.1 % 54.8 % 53.4 % 54.5 % - (1) ppt
Research and development $ 30 $ 29 $ 62 $ 60 2% 2%
Selling, general and
administrative $ 58 $ 61 $ 121 $ 124 (5)% (2)%
Operating margin 21.6 % 19.3 % 17.7 % 16.8 % 2 ppts 1 ppt
Gross margin for products and services for the three and six months ended
April 30, 2020 , was relatively flat and decreased 1 percentage point,
respectively, when compared to the same periods last year. Gross margin in the
three and six months ended April 30, 2020 was impacted by higher fixed costs
related to the new manufacturing facility in Frederick, Colorado and benefited
from lower period costs.
Research and development expenses for the three and six months ended April 30,
2020 , increased 2 percent in both periods when compared to the same periods last
year. Research and development for the three and six months ended April 30, 2020
increased due to higher spending for the development of clinical applications
and solutions and higher wages and benefits.
Selling, general and administrative expenses for the three and six months ended
April 30, 2020 , decreased 5 percent and 2 percent, respectively, when compared
to the same periods last year. Selling general and administrative expenses for
the three and six months ended April 30, 2020 decreased due to cost saving
actions partially offset by higher wages and benefits.
Operating margin for products and services for the three and six months ended
April 30, 2020 increased 2 percentage points and 1 percentage point,
respectively, when compared to the same periods last year. The increase in
operating margin for the three and six months ended April 30, 2020 came from the
improved revenue growth in combination with cost saving actions.
Income from Operations
Income from operations for the three and six months ended
Agilent CrossLab
The Agilent CrossLab business spans the entire lab with its extensive
consumables and services portfolio, which is designed to improve customer
outcomes. Most of the portfolio is vendor neutral, meaning Agilent can serve and
supply customers regardless of their instrument purchase choices. Solutions
range from chemistries and supplies to services and software helping to connect
the entire lab. Key product categories in consumables include GC and LC columns,
sample preparation products, custom chemistries, and a large selection of
laboratory instrument supplies. Services include startup, operational, training
and compliance support, software as a service, as well as asset management and
consultative services that help increase customer productivity. Custom service
and consumable bundles are tailored to meet the specific application needs of
various industries and to keep instruments fully operational and compliant with
the respective industry requirements.
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Net Revenue
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions)
Net revenue $ 449 $ 455 $ 919 $ 897 (1)% 2%
Agilent CrossLab business revenue for the three and six months ended April 30,
2020 decreased 1 percent and increased 2 percent, respectively, when compared to
the same periods last year. Foreign currency movements for the three and six
months ended April 30, 2020 had an overall unfavorable impact on revenue of 2
percentage points in both periods when compared to the same periods last year.
Geographically, revenue decreased 3 percent in the Americas with no currency
impact, decreased 2 percent in Europe with a 3 percentage point unfavorable
currency impact and increased 1 percent in Asia Pacific with a 3 percentage
point unfavorable currency impact for the three months ended April 30, 2020
compared to the same period last year. During the three months ended April 30,
2020 , revenue declined due to non-contracted services and other parts of the
consumable portfolio which were hampered by the COVID-19 pandemic in the
Americas , Europe and most of Asia Pacific . The decline was partially offset by
revenue growth from contracted services and the performance chemistries
portfolio. Revenue increased 1 percent in the Americas with a 1 percentage point
unfavorable currency impact, increased 1 percent in Europe with a 2 percentage
point unfavorable currency impact and increased 5 percent in Asia Pacific with a
1 percentage point unfavorable currency impact for the six months ended
April 30, 2020 compared to the same period last year. During the six months
ended April 30, 2020 , revenue growth was driven mainly by the contracted
services and consumable sales in China .
For the three and six months ended April 30, 2020 , the Agilent CrossLab business
saw the strongest growth coming from the pharmaceutical market, and with the
temporary closure of many research laboratories due to COVID-19, a notable
decline in the academia and government market.
Looking forward, the Agilent CrossLab portfolio of products and services
capabilities are well positioned to succeed in our key end markets. With less
predictable access to customer sites during the global COVID-19 pandemic, the
business is taking advantage of digital and remote capabilities to offer
services and consumables to customers. Despite the current COVID-19 impact, we
remain optimistic about the long-term growth opportunities. Geographically, the
business is well diversified across all regions to take advantage of local
market opportunities as they reopen to commerce.
Operating Results
Three Months Ended Six Months Ended Year over Year Change
April 30, April 30, Three Six
2020 2019 2020 2019 Months Months
(in millions, except margin data)
Gross margin 52.5 % 51.3 % 52.2 % 51.3 % 1 ppt 1 ppt
Research and development $ 14 $ 14 $ 29 $ 29 - -
Selling, general and administrative
$ 212 (5)% (1)% Operating margin 27.2 % 25.2 % 26.3 % 24.5 % 2 ppts 2 ppts Gross margin for products and services for the three and six months endedApril 30, 2020 increased 1 percentage point in both periods when compared to the same periods last year. Gross margin in the three months endedApril 30, 2020 benefited from lower service delivery costs, improved pricing in certain key categories and a favorable product mix in the consumables business. Gross margin in the six months endedApril 30, 2020 benefited from higher sales volume and lower service delivery costs. Research and development expenses for the three and six months endedApril 30, 2020 was relatively flat in both periods when compared to the same periods last year. Research and development for the three and six months endedApril 30, 2020 was impacted by higher wages, offset by lower variable pay and cost saving actions. 46
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Selling, general and administrative expenses for the three and six months endedApril 30, 2020 decreased 5 percent and 1 percent, respectively, when compared to the same periods last year. The decrease for the three months endedApril 30, 2020 was primarily due to savings from lower variable pay, lower sales commissions and cost saving actions, which all helped to offset the impact from higher wages. The decrease for the six months endedApril 30, 2020 was primarily due to savings from lower variable pay and cost saving actions, which helped to offset the impact from higher wages. Operating margin for products and services for the three and six months endedApril 30, 2020 increased 2 percentage points in both periods when compared to the same periods last year. The increase for the three months endedApril 30, 2020 was primarily due to savings from lower variable pay, lower sales commissions and cost saving actions, as well as favorable gains from currency hedging contracts. The increase for the six months endedApril 30, 2020 was primarily due to savings from lower variable pay and cost saving actions, as well as the impact from higher sales volume.
Income from Operations
Income from operations for the three and six months ended
FINANCIAL CONDITION
Liquidity and Capital Resources
We believe our cash and cash equivalents, cash generated from operations, and ability to access capital markets and credit lines will satisfy, for at least the next twelve months, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, business acquisitions, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations. Our sources and uses of cash were not materially impacted by COVID-19 to date. We have not identified any material liquidity concerns as a result of the COVID-19 pandemic. We will continue to monitor and assess the impact COVID-19 may have on our business and financial results. Economic stimulus legislation was passed in many countries in response to COVID-19. In March in theU.S. , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted to provide for tax relief and government loans, subsidies and other relief for entities in affected industries. We are currently analyzing the impact of the CARES Act and other government benefits outside theU.S. to our condensed consolidated financial statements and related disclosures. Our financial position as ofApril 30, 2020 consisted of cash and cash equivalents of$1,324 million as compared to$1,382 million as ofOctober 31, 2019 . As ofApril 30, 2020 ,$1,020 million of our cash and cash equivalents is held outside of theU.S. by our foreign subsidiaries and can be repatriated to theU.S. as local working capital and other regulatory conditions permit. We utilize a variety of funding strategies to ensure that our worldwide cash is available in the locations in which it is needed.
Net Cash Provided by Operating Activities
Net cash inflow from operating activities was$254 million for the six months endedApril 30, 2020 compared to cash inflow of$465 million for the same period in 2019. In the six months endedApril 30, 2020 and 2019, we paid approximately$79 million under our variable and incentive pay programs in both periods. Net cash paid for income taxes in 2020 was approximately$286 million which included a one-time payment of$226 million related to the transfer of intellectual property compared to income taxes paid of$104 million in the prior year. For the six months endedApril 30, 2020 , deferred tax cash outflows were$3 million compared to cash outflows of$272 million in the prior year. Deferred tax outflows in 2019 included$266 million related to the extension of the company's tax incentive inSingapore . For the six months endedApril 30, 2020 , there was an unrealized gain on the fair value of an equity investment of$27 million . For the six months endedApril 30, 2020 , there was an asset impairment charge of$99 million related to the closure of a business in our diagnostics and genomics group. For the six months endedApril 30, 2020 , other assets and liabilities had cash outflow of$204 million compared to cash outflow of$46 million for the same period in 2019. Cash outflow in the six months endedApril 30, 2020 was largely the result of increased income tax payments, interest payments on senior notes and changes in non-U.S. transaction tax receivables and deferred revenue. Cash outflow for the six months endedApril 30, 2019 in other assets and liabilities was related to income tax payments and interest payments on senior notes. 47
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In the six months endedApril 30, 2020 , accounts receivable provided cash of$25 million compared to cash used of$17 million for the same period in 2019. Days' sales outstanding as ofApril 30, 2020 and 2019 was 64 days and 59 days, respectively. Cash used for inventory was$85 million for the six months endedApril 30, 2020 compared to cash used of$21 million for the same period in 2019. Inventory days on-hand was 116 days as ofApril 30, 2020 compared to 104 days as ofApril 30, 2019 . In the six months endedApril 30, 2020 , we increased our inventory levels and may increase them further to ensure we have the inventory on hand to meet our customer needs in response to the COVID-19 pandemic. The change in the employee compensation and benefits liability was$50 million primarily due to the reduction of the variable pay liability for the six months endedApril 30, 2020 compared to$13 million for the same period in 2019. We contributed approximately$19 million and$11 million to our defined benefit plans in the six months endedApril 30, 2020 and 2019, respectively. Our annual contributions are highly dependent on the relative performance of our assets versus our projected liabilities, among other factors. We expect to contribute approximately$16 million to our defined benefit plans during the remainder of 2020.
Net cash used in investing activities was$88 million for the six months endedApril 30, 2020 as compared to net cash used in investing activities of$346 million in the same period of 2019. Investments in property, plant and equipment were$67 million for the six months endedApril 30, 2020 compared to$78 million in the same period of 2019. We expect that total capital expenditures for the current year will be approximately$124 million . Cash used to purchase fair value investments for the six months endedApril 30, 2020 and in the same period of 2019 was$18 million . In the six months endedApril 30, 2019 , we invested$248 million in our acquisition of ACEA.
Net cash used in financing activities for the six months ended
Treasury Stock Repurchases
OnNovember 19, 2018 we announced that our board of directors had approved a new share repurchase program (the "2019 repurchase program") designed, among other things, to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs. The 2019 repurchase program authorizes the purchase of up to$1.75 billion of our common stock at the company's discretion and has no fixed termination date. The 2019 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time. During the three and six months endedApril 30, 2020 , we repurchased and retired approximately 1.663 million shares for$126 million and 2.389 million shares for$186 million , respectively, under this authorization. During the three and six months endedApril 30, 2019 , we repurchased approximately 638,000 shares for$50 million and 1.766 million shares for$125 million , respectively, under this authorization. During the three and six months endedApril 30, 2019 we retired approximately 629,000 shares for$49 million and 1.757 million shares for$124 million , respectively. As ofApril 30, 2020 , we had remaining authorization to repurchase up to$841 million of our common stock under this program. OnMarch 23, 2020 , we suspended stock repurchases in light of the COVID-19 pandemic and we have the ability to reinstate repurchases as circumstances warrant.
Dividends
During the six months endedApril 30, 2020 and 2019, we paid cash dividends of$0.360 per common share or$111 million , and$0.328 per common share or$104 million , respectively, on the company's common stock. OnMay 20, 2020 , our board of directors declared a quarterly dividend of$0.18 per share of common stock or approximately$56 million which will be paid onJuly 22, 2020 to all shareholders of record at close of business onJune 30, 2020 . The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Credit Facilities and Short-Term Debt
Credit Facilities. OnMarch 13, 2019 , Agilent entered into a credit agreement with a group of financial institutions which provided for a$1 billion five-year unsecured credit facility that will expire onMarch 13, 2024 . During the six months endedApril 30, 2020 , we borrowed$798 million and repaid$713 million under the credit facility. As ofApril 30, 2020 , the company had borrowings of$200 million outstanding under the credit facility. We were in compliance with the covenants for the credit 48
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facility during the six months endedApril 30, 2020 . OnAugust 7, 2019 , we entered into an amendment to the credit agreement, which provided for a$500 million short-term loan facility that was used in full to complete the BioTek acquisition and which is outstanding atApril 30, 2020 . OnOctober 21, 2019 , we entered into a second amendment to the credit agreement, which refreshed the amount available for additional incremental term loan facilities under the credit agreement to permit additional incremental facilities of up to$500 million . We had no borrowings under the additional incremental loan facilities as ofApril 30, 2020 . OnApril 17, 2020 , we entered into a third amendment to the credit agreement which provides the company with the option to request the consent of the applicable class of lenders to extend the maturity date of revolving borrowings and swingline loans for an additional period of one year and of the 2019 incremental term loans for an additional period of up to 364 days. Commercial Paper InMay 2020 , the company established aU.S. commercial paper program, under which the company may issue and sell unsecured, short-term promissory notes in the aggregate principal amount not to exceed$1.0 billion with up to 397-day maturities. At any point in time, the company intends to maintain available commitments under its revolving credit facility in an amount at least equal to the amount of the commercial paper notes outstanding. Amounts available under the program may be borrowed, repaid and re-borrowed from time to time. The proceeds from issuances under the program may be used for general corporate purposes.
Long-Term Debt
There have been no other changes to the principal, maturity, interest rates and interest payment terms of the Agilent outstanding senior notes in the six months endedApril 30, 2020 as compared to the senior notes as described in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 .
Other
There were no other substantial changes from our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 to our contractual commitments in the first six months of fiscal 2020. We have contractual commitments for non-cancelable operating leases see Note 9, "Leases" for more information. We have no other material non-cancelable guarantees or commitments. Other long-term liabilities as ofApril 30, 2020 andOctober 31, 2019 include$334 million and$328 million , respectively, related to long-term income tax liabilities. Of these amounts,$205 million and$199 million related to uncertain tax positions of continuing operations as ofApril 30, 2020 andOctober 31, 2019 , respectively. We are unable to accurately predict when these amounts will be realized or released. However, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitations or a tax audit settlement. The remaining$129 million in other long-term liabilities relates to the one-time transition tax payable.
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