Agilent Technologies, Inc.
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- Oscar Wheeler
- 5 years ago
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1 February 14, 2018 Agilent Technologies, Inc. A: Q Full Analysis -- Momentum Continues Outperform/$80 Life Science Tools Market Weight Earnings Estimates Revised Up What now? Agilent posted a very strong beat-and-raise quarter highlighted by 10% core revenue growth and strength across end markets and geographies. The company raised guidance, now expecting 5.5% core growth in FY18, which continues to feel somewhat conservative. Part of Agilent s strength comes from the macro environment, but part is also the impact of innovation and new product cycles. It is Agilent s recent success in the later bucket that keeps us at Outperform. Raising our estimates. Quick take on the quarter. Agilent beat revenue and EPS consensus driven by strong core growth (9.7% vs. 5.7% consensus). Strength was broad-based across all segments. On an end market basis, environmental/forensics (+14%), chemical/energy (+13%), and academia/gov t (+11%) lead the way while pharma/biotech (+8%), food (+8%), and diagnostics (+5%) followed. Pharma/biotech outlook is positive after bouncing back from timingrelated issues last quarter. Geographically, China (+21%), Europe (+18%), and the Americas (+9%) were notably strong. The company continues to deliver on their Agile Agilent initiatives as operating margin expanded YoY for the twelfth consecutive quarter. For details, see our variance table in Exhibit 1. Guidance. Management revised 2018 guidance after the strong quarter. Revenue was increased $165MM at the midpoint (~$110MM FX and $55MM core) and EPS was increased $0.12 at the midpoint. Core growth guidance was increased to 5.5% from 4.3%. Margin expansion is expected to be ~60bps vs ~40bps previously. Q1 revenue is projected to be $1.21B at the midpoint with 4.3% core growth and $0.62 EPS at midpoint. For details, see our guidance table in Exhibit 3. $ 2017A 2018E 2019E EPS Curr. Prior Curr. Prior Q1 (Jan.) A Q2 (Apr.) Q3 (July) Q4 (Oct.) FY CY FY P/EPS 29.5x 26.1x 22.8x Rev.(MM) 4,472 4,898 5,212 Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful V = Volatile, = Company is on the Priority Stock List Non-GAAP EPS excludes amortization of intangibles and non-recurring items. Ticker Price Target/Prior: A $80/NC Price (02/14/2018) $ Week Range: $50-75 Shares Outstanding: (MM) Market Cap.: (MM) $22,513.1 S&P 500: 2, Avg. Daily Vol.: 2,321,090 Dividend/Yield: $0.53/0.8% LT Debt: (MM) $2,145.0 LT Debt/Total Cap.: 32.2% ROE: 17.0% 3-5 Yr. Est. Growth Rate: 12.0% CY 2018 Est. P/EPS-to-Growth: 2.2x Last Reporting Date: 02/14/2018 NC = No Change Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters Tim Evans Senior Analyst tim.evans@ we llsfargo.com Robert Amparo Associate Analyst robert.amparo@ we llsfargo.com Please see page 7 for rating definitions, important disclosures and required analyst certifications. All estimates/forecasts are as of 02/14/18 unless otherwise stated. 02/14/18 19:32:20 ET Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.
2 Life Science Tools, Services, & Diagnostics Exhibit 1: Variance Table Report Date: 2/14/2018 FY ending December Actual Est Actual Cons Yr / Yr Seq In MM except EPS Q Q Q Q Q change change Total net revenue $ 1,067 $ 1,189 $ 1,162 $ 1,211 $ 1, % 1.9% Cost of sales % 0.0% Gross profit % 3.3% R&D % 4.5% SG&A % 7.5% Operating income % (1.8%) Int. & other income (expense) (11) (8) (11) (5) Pretax income % (0.8%) Provision for income taxes % 0.0% Net income continuing ops $ 172 $ 218 $ 188 $ % (0.9%) Non-GAAP EPS $ 0.53 $ 0.67 $ 0.58 $ 0.66 $ % (1.2%) Diluted shares outstanding % 0.3% EBITDA $ 247 $ 298 $ 263 $ 295 $ 271 (1.0%) MARGIN ANALYSIS Yr / Yr Seq Cost of sales / net revenue 44.9% 43.9% 44.7% 43.1% (180) bps (80) bps Gross margin 55.1% 56.1% 55.3% 56.9% 55.4% 180 bps 80 bps R&D / net revenue 7.7% 7.4% 7.7% 7.6% (10) bps 20 bps SG&A / net revenue 26.5% 25.7% 27.1% 27.1% 60 bps 140 bps Operating margin 20.9% 23.0% 20.6% 22.2% 20.9% 130 bps (80) bps Pretax margin 19.9% 22.4% 19.6% 21.8% 190 bps (60) bps Tax rate 18.9% 18.0% 17.5% 18.2% 17.9% (70) bps 10 bps Net margin 16.1% 18.3% 16.2% 17.8% 170 bps (50) bps EBITDA margin 23.1% 25.1% 22.6% 24.4% 23.4% 120 bps (70) bps SEGMENT ANALYSIS Yr / Yr Seq LSAG Segment Revenue $ 540 $ 575 $ 580 $ 618 $ % 7.5% Growth: core 4.0% 4.0% 4.3% 11.0% 700 bps 700 bps Growth: FX (1.0%) 0.7% 2.6% 0.6% 150 bps (20) bps Growth: other (0.4%) 0.2% 0.6% 2.9% 330 bps 270 bps Growth: total 2.7% 4.9% 7.5% 14.4% 1180 bps 950 bps Gross profit $ 322 $ 351 $ 347 $ % 8.9% Gross margin 59.6% 61.0% 59.8% 61.8% 220 bps 80 bps Operating income $ 126 $ 138 $ 133 $ % 15.2% Operating margin 23.3% 24.0% 23.0% 25.7% 240 bps 170 bps ACG Segment Revenue $ 363 $ 404 $ 401 $ 408 $ % 1.0% Growth: core 7.0% 8.0% 6.5% 9.0% 200 bps 100 bps Growth: FX (1.5%) 1.4% 3.9% 0.8% 230 bps (50) bps Growth: other (0.0%) (0.2%) 0.0% 2.6% 260 bps 270 bps Growth: total 5.5% 9.2% 10.4% 12.4% 690 bps 320 bps Gross profit $ 176 $ 200 $ 196 $ % 3.0% Gross margin 48.5% 49.6% 49.0% 50.6% 210 bps 100 bps Operating income $ 74 $ 92 $ 80 $ % (4.3%) Operating margin 20.4% 22.8% 20.0% 21.6% 120 bps (120) bps DGG Segment Revenue $ 164 $ 210 $ 181 $ 185 $ % (11.9%) Growth: core 4.0% 7.0% 6.0% 8.0% 400 bps 100 bps Growth: FX (0.6%) 1.0% 1.9% 0.6% 120 bps (40) bps Growth: other 0.4% 0.8% 2.4% 4.2% 380 bps 340 bps Growth: total 3.8% 8.8% 10.3% 12.8% 900 bps 400 bps Gross profit $ 90 $ 116 $ 100 $ % (13.2%) Gross margin 54.8% 55.2% 55.0% 54.4% (40) bps (80) bps Operating income $ 23 $ 44 $ 25 $ 22 (4.3%) (50.0%) Operating margin 14.0% 21.0% 14.0% 11.9% (210) bps (910) bps Consolidated Revenue $ 1,067 $ 1,189 $ 1,162 $ 1,211 $ 1, % 1.9% Total growth: core 5.0% 5.9% 5.3% 9.9% 490 bps 400 bps Total growth: FX (1.1%) 1.0% 2.9% 0.7% 170 bps (30) bps Total growth: other (0.1%) 0.2% 0.7% 3.0% 310 bps 280 bps Total revenue growth 3.8% 7.0% 8.9% 13.5% 970 bps 650 bps Source: Company Data, FactSet, & Wells Fargo Securities, LLC estimates 2 Wells Fargo Securities, LLC
3 Agilent Technologies, Inc. Exhibit 2: Estimate Changes FY ending December 2018E 2019E In MM except EPS Prior Current Change Prior Current Change Total net revenue $ 4,744 $ 4, % $ 5,048 $ 5, % Cost of sales 2,098 2, % 2,210 2, % Gross profit 2,646 2, % 2,838 2, % R&D % % SG&A 1,229 1, % 1,293 1, % Operating income 1,052 1, % 1,157 1, % Int. & other income (expense) (46) (37) (37) (46) Pretax income 1,006 1, % 1,120 1, % Provision for income taxes % % Net income continuing ops $ 830 $ % $ 924 $ % Non-GAAP EPS $ 2.54 $ % $ 2.97 $ % Diluted shares outstanding (0.2%) (0.4%) EBITDA $ 1,153 $ 1,206 $ 1,269 $ 1,318 MARGIN ANALYSIS Cost of sales / net revenue 44.2% 43.9% (30) bps 43.8% 43.4% (40) bps Gross margin 55.8% 56.1% 30 bps 56.2% 56.6% 40 bps R&D / net revenue 7.7% 7.6% (10) bps 7.7% 7.7% 0 bps SG&A / net revenue 25.9% 26.1% 20 bps 25.6% 25.9% 30 bps Operating margin 22.2% 22.4% 20 bps 22.9% 23.0% 10 bps Pretax margin 21.2% 21.6% 40 bps 22.2% 22.1% (10) bps Tax rate 17.5% 18.0% 50 bps 17.5% 18.0% 50 bps Net margin 17.5% 17.7% 20 bps 18.3% 18.1% (20) bps EBITDA margin 24.3% 24.6% 30 bps 25.1% 25.3% 20 bps SEGMENT ANALYSIS LSAG Segment Revenue $ 2,278 $ 2, % $ 2,426 $ 2, % Growth: core 3.3% 6.5% 320 bps 6.5% 6.5% 0 bps Growth: FX 1.4% 2.4% 100 bps 0.0% 0.0% 0 bps Growth: other 0.3% 0.8% 50 bps 0.0% 0.0% 0 bps Growth: total 5.0% 9.7% 470 bps 6.5% 6.5% 0 bps Gross profit $ 1,373 $ 1, % $ 1,467 $ 1, % Gross margin 60.3% 60.8% 50 bps 60.5% 61.0% 50 bps Operating income $ 520 $ % $ 565 $ % Operating margin 22.8% 23.5% 70 bps 23.3% 24.0% 70 bps ACG Segment Revenue $ 1,643 $ 1, % $ 1,742 $ 1, % Growth: core 5.4% 5.9% 60 bps 6.0% 6.0% 0 bps Growth: FX 2.0% 3.4% 140 bps 0.0% 0.0% 0 bps Growth: other 0.0% 0.6% 60 bps 0.0% 0.0% 0 bps Growth: total 7.3% 10.0% 260 bps 6.0% 6.0% 0 bps Gross profit $ 821 $ % $ 879 $ % Gross margin 49.9% 50.3% 40 bps 50.4% 50.8% 40 bps Operating income $ 367 $ % $ 401 $ % Operating margin 22.3% 22.7% 40 bps 23.0% 23.2% 20 bps DGG Segment Revenue $ 823 $ % $ 881 $ % Growth: core 5.2% 5.6% 40 bps 7.0% 7.0% 0 bps Growth: FX 0.9% 1.5% 70 bps 0.0% 0.0% 0 bps Growth: other 0.5% 0.9% 40 bps 0.0% 0.0% 0 bps Growth: total 6.6% 8.1% 150 bps 7.0% 7.0% 0 bps Gross profit $ 453 $ % $ 493 $ % Gross margin 55.0% 54.4% (60) bps 56.0% 56.0% 0 bps Operating income $ 165 $ 154 (6.5%) $ 190 $ 176 (7.4%) Operating margin 20.0% 18.5% (160) bps 21.5% 19.7% (190) bps Consolidated Revenue $ 4,744 $ 4, % $ 5,048 $ 5, % Total growth: core 4.3% 6.2% 180 bps 6.4% 6.4% 0 bps Total growth: FX 1.5% 2.6% 110 bps 0.0% 0.0% 0 bps Total growth: other 0.2% 0.8% 50 bps 0.0% 0.0% 0 bps Total revenue growth 6.1% 9.5% 340 bps 6.4% 6.4% 0 bps Source: Company Data; Wells Fargo Securities, LLC estimates Wells Fargo Securities, LLC 3
4 Life Science Tools, Services, & Diagnostics Exhibit 3: Guidance Guidance FQ FQ FQ FQ FY 2018 Notes Revenue (MM) 11/20/17 $1,145-1,165 $4,720-4,740 2/14/18 $1,200-1,220 $4,885-4,905 Revenue growth (core) 11/20/17 5.3% 4.3% 0.2% M&A and 1.3% FX; 10/31 FX rates 2/14/18 4.3% 5.5% 0.2% M&A and 3.8% FX; 1/31 FX rates Operating margin 11/20/ % 22.4% when adjusted for KEYS billings 2/14/ % 22.6% when adjusted for KEYS billings Net Interest ($MM) 11/20/17 $59 2/14/18 $55 Other Income ($MM) 11/20/17 $14 includes $12MM of KeySight billings 2/14/18 $16 includes $12MM of KeySight billings Tax Rate 11/20/17 18% 2/14/18 18% Non-GAAP EPS 11/20/17 $ $ /14/18 $ $ Diluted shares (MM) 11/20/ /14/ Dividend (MM) 11/20/17 $190 2/14/18 $190 Share repurchases (MM) 11/20/17 $380 "subject to market conditions" 2/14/18 $380 Stock comp (MM) 11/20/17 $72 2/14/18 $77 Depreciation (MM) 11/20/17 $101 2/14/18 $103 Operating cash flow (MM) 11/20/17 $970 2/14/18 $1,050 Capex (MM) 11/20/17 $200 2/14/18 $200 Source: Company press releases and transcripts; Wells Fargo Securities, LLC Agilent IT and real estate billings to KEYS booked as other income; Costs in SG&A Long-Term Guidance Revenue 6-Mar-14 1-Oct Oct May May-16 Gross margin 6-Mar May-15 Operating margin 1-Oct Feb May May-16 Tax rate 6-Mar-14 20% Cash flow 6-Mar Oct May %/5.8% in FY15/FY16 Core revenue growth at top of market 5% or more 5% in FY16 and FY17 (4-5% in LSAG; 5-6% in ACG; 6-7% in DGG) 4.5% in FY16 and FY %/55.1% in FY15/FY /55.0/55.6% in FY15/FY16/FY17 >30% incremental margin leading to 22% operating margin by FY17 >30% incremental margin leading to 22% operating margin by FY %/21.7% in FY16/FY17 (unadjusted). 22% in FY17 is adjusted for KEYS billings (23% LSAG+ACG; 20.4%/22.0% in FY16/FY17 adjusted for KEYS billings FCF of $620/750MM in FY15 and FY16 45% of FCF is in the U.S. Will return this to shareholders FCF of $555/620/650/690MM in FY15-FY18; $380MM of repos in FY16-18; Dividends: $155/180/210MM in Source: Company press releases and transcripts; Wells Fargo Securities, LLC 4 Wells Fargo Securities, LLC
5 Agilent Technologies, Inc. Agilent Summary Data (FY Ending October) In millions, except per share Q Q Q Q Q Q Q Q INCOME STATEMENT Q1 Q2E Q3E Q4E 2018E Q1E Q2E Q3E Q4E 2019E 2020E 2021E Total revenue $ 4,038 $ 4,202 $ 4,472 $ 1,211 $ 1,207 $ 1,204 $ 1,276 $ 4,898 $ 1,289 $ 1,284 $ 1,281 $ 1,358 $ 5,212 $ 5,559 $ 5,929 Cost of sales 1,869 1,898 1, , ,259 2,384 2,516 Gross profit 2,169 2,304 2, , ,952 3,174 3,413 R&D SG&A 1,086 1,120 1, , ,352 1,437 1,527 Operating income , ,199 1,310 1,430 Interest & other inc (exp), net (38) (55) (37) (5) (11) (10) (11) (37) (10) (11) (12) (13) (46) (52) (46) Pretax income , ,153 1,258 1,383 Provision for income taxes Net income $ 583 $ 652 $ 768 $ 216 $ 204 $ 209 $ 239 $ 868 $ 233 $ 224 $ 228 $ 260 $ 945 $ 1,031 $ 1,134 Non-GAAP EPS $ 1.74 $ 1.98 $ 2.36 $ 0.66 $ 0.63 $ 0.64 $ 0.74 $ 2.67 $ 0.73 $ 0.72 $ 0.75 $ 0.87 $ 3.06 $ 3.51 $ 3.91 Diluted shares outstanding EBITDA $ 864 $ 954 $ 1,069 $ 295 $ 287 $ 293 $ 331 $ 1,206 $ 323 $ 314 $ 321 $ 361 $ 1,318 $ 1,436 $ 1,562 MARGIN ANALYSIS Cost of sales / net revenue 46.3% 45.2% 44.4% 43.1% 44.4% 44.4% 43.8% 43.9% 42.6% 43.8% 43.8% 43.2% 43.4% 42.9% 42.4% Gross margin 53.7% 54.8% 55.6% 56.9% 55.6% 55.6% 56.2% 56.1% 57.4% 56.2% 56.2% 56.8% 56.6% 57.1% 57.6% R&D / revenue 7.8% 7.7% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% 7.7% SG&A / revenue 26.9% 26.7% 26.2% 27.1% 26.5% 26.0% 24.9% 26.1% 26.9% 26.4% 25.8% 24.8% 25.9% 25.8% 25.7% Operating margin 19.0% 20.5% 21.8% 22.2% 21.5% 22.1% 23.7% 22.4% 22.8% 22.2% 22.7% 24.3% 23.0% 23.6% 24.1% Pretax margin 18.1% 19.2% 21.0% 21.8% 20.7% 21.2% 22.8% 21.6% 22.0% 21.3% 21.7% 23.3% 22.1% 22.6% 23.3% Tax rate 20.0% 19.0% 18.0% 18.2% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% Net margin from continuing ops 14.4% 15.5% 17.2% 17.8% 16.9% 17.4% 18.7% 17.7% 18.1% 17.5% 17.8% 19.1% 18.1% 18.6% 19.1% EBITDA margin 21.4% 22.7% 23.9% 24.4% 23.8% 24.4% 25.9% 24.6% 25.1% 24.5% 25.0% 26.6% 25.3% 25.8% 26.3% CHANGE ANALYSIS (Y/Y) Total revenue (0.2%) 4.1% 6.4% 13.5% 9.5% 8.1% 7.3% 9.5% 6.4% 6.4% 6.4% 6.4% 6.4% 6.7% 6.7% Cost of revenues (0.7%) 1.6% 4.6% 9.0% 10.4% 6.8% 7.0% 8.3% 5.1% 5.1% 5.1% 5.1% 5.1% 5.5% 5.5% Gross profit 0.2% 6.2% 7.9% 17.2% 8.9% 9.0% 7.5% 10.5% 7.4% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% R&D (8.4%) 2.5% 4.6% 12.2% 10.5% 6.3% 10.2% 9.8% 7.9% 7.9% 7.9% 7.9% 7.9% 6.7% 6.7% SG&A 2.6% 3.1% 4.7% 15.9% 9.2% 7.1% 4.3% 9.0% 5.7% 5.8% 5.7% 5.7% 5.7% 6.3% 6.3% Operating income 0.6% 12.0% 13.3% 20.6% 7.8% 12.5% 10.3% 12.6% 9.3% 9.5% 9.4% 9.2% 9.3% 9.2% 9.2% Net incomes 4.7% 11.7% 17.8% 25.6% 9.3% 9.5% 9.4% 13.1% 7.8% 9.7% 9.1% 8.9% 8.9% 9.1% 10.0% EPS 5.7% 13.8% 18.9% 25.2% 8.9% 9.8% 10.1% 13.2% 10.2% 14.4% 16.0% 18.1% 14.6% 15.0% 11.3% Diluted shares outstanding (0.9%) (1.8%) (0.9%) 0.3% 0.4% (0.3%) (0.6%) (0.1%) (2.2%) (4.1%) (5.9%) (7.7%) (5.0%) (5.1%) (1.2%) EBITDA 10.3% 12.1% 19.4% 8.8% 12.8% 11.0% 12.8% 9.5% 9.4% 9.3% 9.0% 9.3% 8.9% 8.8% SEGMENT ANALYSIS LSAG Segment Revenue $ 2,046 $ 2,073 $ 2,169 $ 618 $ 573 $ 573 $ 616 $ 2,380 $ 658 $ 610 $ 610 $ 656 $ 2,534 $ 2,712 $ 2,902 Growth: core 4.5% 3.1% 5.2% 11.0% 5.0% 5.0% 5.0% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 7.0% 7.0% Growth: FX (4.8%) (1.4%) (0.4%) 0.6% 4.1% 2.9% 2.1% 2.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth: other (1.3%) (0.3%) (0.2%) 2.9% 0.4% 0.0% 0.0% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth: total (1.5%) 1.3% 4.6% 14.4% 9.5% 7.9% 7.1% 9.7% 6.5% 6.5% 6.5% 6.5% 6.5% 7.0% 7.0% Operating income $ 380 $ 429 $ 487 $ 159 $ 124 $ 125 $ 152 $ 560 $ 173 $ 135 $ 137 $ 165 $ 609 $ 660 $ 714 Operating margin 18.6% 20.7% 22.5% 25.7% 21.6% 21.9% 24.6% 23.5% 26.2% 22.1% 22.4% 25.1% 24.0% 24.3% 24.6% ACG Segment Revenue $ 1,330 $ 1,420 $ 1,531 $ 408 $ 418 $ 421 $ 437 $ 1,684 $ 432 $ 444 $ 446 $ 463 $ 1,785 $ 1,892 $ 2,005 Growth: core 8.9% 9.0% 8.2% 9.0% 5.0% 5.0% 5.0% 5.9% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Growth: FX (7.1%) (2.4%) (0.5%) 0.8% 5.7% 4.0% 3.1% 3.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth: other 0.0% 0.1% 0.1% 2.6% 0.0% 0.0% 0.0% 0.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth: total 1.8% 6.8% 7.8% 12.4% 10.7% 9.0% 8.1% 10.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Operating income $ 299 $ 316 $ 338 $ 88 $ 93 $ 100 $ 102 $ 383 $ 95 $ 101 $ 108 $ 110 $ 415 $ 453 $ 494 Operating margin 22.5% 22.3% 22.1% 21.6% 22.2% 23.8% 23.3% 22.7% 22.1% 22.7% 24.3% 23.8% 23.2% 23.9% 24.6% DGG Segment Revenue $ 662 $ 709 $ 772 $ 185 $ 216 $ 210 $ 223 $ 834 $ 198 $ 231 $ 225 $ 239 $ 893 $ 955 $ 1,022 Growth: core 7.3% 8.0% 8.1% 8.0% 5.0% 5.0% 5.0% 5.6% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Growth: FX (7.8%) (1.4%) (0.3%) 0.6% 2.4% 1.7% 1.3% 1.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth: other 0.4% 0.5% 1.1% 4.2% 0.0% 0.0% 0.0% 0.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Growth: total (0.2%) 7.1% 8.9% 12.8% 7.4% 6.7% 6.3% 8.1% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Operating income $ 88 $ 114 $ 149 $ 22 $ 43 $ 40 $ 49 $ 154 $ 26 $ 49 $ 45 $ 55 $ 176 $ 197 $ 222 Operating margin 13.3% 16.1% 19.3% 11.9% 20.0% 19.0% 22.0% 18.5% 13.1% 21.2% 20.2% 23.2% 19.7% 20.7% 21.7% Consolidated Revenue $ 4,038 $ 4,202 $ 4,472 $ 1,211 $ 1,207 $ 1,204 $ 1,276 $ 4,898 $ 1,289 $ 1,284 $ 1,281 $ 1,358 $ 5,212 $ 5,559 $ 5,929 Total growth: core 6.4% 5.9% 6.9% 9.9% 5.0% 5.0% 5.0% 6.2% 6.4% 6.4% 6.4% 6.4% 6.4% 6.7% 6.7% Total growth: FX (6.1%) (1.7%) (0.4%) 0.7% 4.3% 3.1% 2.3% 2.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total growth: other (0.6%) (0.1%) (0.1%) 3.0% 0.2% 0.0% 0.0% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total revenue growth (0.2%) 4.1% 6.4% 13.5% 9.5% 8.1% 7.3% 9.5% 6.4% 6.4% 6.4% 6.4% 6.4% 6.7% 6.7% OTHER Cash and equivalents $ 2,245 $ 2,289 $ 2,678 $ 2,887 $ 2,971 $ 3,038 $ 3,128 $ 3,128 $ 2,600 $ 2,215 $ 1,813 $ 1,436 $ 1,436 $ 1,921 $ 2,517 Total debt 1,655 1,912 2,011 2,145 2,145 2,145 2,145 2,145 2,045 2,045 2,045 2,045 2,045 2,045 2,045 Net cash (debt) $ 590 $ 377 $ 667 $ 742 $ 826 $ 893 $ 983 $ 983 $ 555 $ 170 $ (232) $ (609) $ (609) $ (124) $ 472 Debt to TTM EBITDA 1.9x 2.0x 1.9x 1.9x 1.9x 1.8x 1.8x 1.8x 1.7x 1.6x 1.6x 1.6x 1.6x 1.4x 1.3x Cash flow from operations $ 491 $ 793 $ 889 $ 215 $ 280 $ 240 $ 287 $ 1,022 $ 237 $ 300 $ 257 $ 306 $ 1,100 $ 1,196 $ 1,307 Capital expenditures (98) (139) (176) (60) (47) (47) (47) (200) (44) (44) (44) (44) (175) (170) (170) Free cash flow $ 393 $ 654 $ 713 $ 155 $ 234 $ 193 $ 240 $ 822 $ 193 $ 256 $ 213 $ 262 $ 925 $ 1,026 $ 1,137 FCF conversion 67% 100% 93% 95% 98% 99% 100% Headcount (actual) 11,800 12,500 13,600 13,700 13,800 13,900 14,000 14,000 14,100 14,200 14,300 14,400 14,400 14,800 15,200 ROIC 11% 12% 13% 15% 17% 19% 20% Source: FactSet.com and Wells Fargo Securities, LLC estimates Price Target Wells Fargo Securities, LLC 5
6 Life Science Tools, Services, & Diagnostics Price Target: $80 from NC Our price target is DCF-based (WACC = 6.5%; terminal NOPLAT growth = 2%) and represents 26x our FY 2019 EPS estimate. We think primary risks are global macro deterioration, which could hamper uptake of the Intuvo. If recently improved execution falters, it could shake investors' recent willingness to award Agilent a higher multiple. Lastly, if corporate tax reform fails to materialize, Agilent could be stuck with low-return cash held overseas. Investment Thesis Agilent has solid momentum after several consecutive quarters of incremental improvement in operating results (core growth, margins, tax rate, free cash flow) and consistency of execution. We are also bullish about Agilent's Intuvo product cycle, which could accelerate growth materially in FY 2018, particularly if industrial end markets remain strong. Finally, the company should see significant benefits in the event of corporate tax reform by return cash trapped overseas. Company Description Santa Clara, California-based Agilent Technologies, Inc. (NYSE: A) provides analytical instrumentation, consumables, and services to the life sciences, applied, industrial, and clinical markets. Relative to peers, the company has high exposure to applied end markets and high exposure to emerging markets, particularly China. The company operates in three segments: the Life Sciences & Applied Markets Groups (LSAG), the Agilent CrossLab Group (ACG), and the Diagnostics & Genomics Group (DGG). LSAG provides analytical tools such as gas and liquid chromatography, mass spectrometry, and atomic spectroscopy instruments and software. ACG provides services and consumables for both Agilent instruments as well as instruments from competitors. DGG provides diagnostic and genomic tools, with particular strength in anatomical pathology, cytogenetic arrays, and sequencing sample prep. 6 Wells Fargo Securities, LLC
7 Agilent Technologies, Inc. Required Disclosures Additional Information Available Upon Request I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report. Wells Fargo Securities, LLC and/or its affiliates, have beneficial ownership of 0.5% or more of any class of the common stock of Agilent Technologies, Inc.. Agilent Technologies, Inc. currently is, or during the 12 month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to Agilent Technologies, Inc.. Wells Fargo Securities, LLC 7
8 Life Science Tools, Services, & Diagnostics Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Agilent Technologies, Inc. in the past 12 months. Wells Fargo Securities, LLC, or any of its affiliates, intends to seek or expects to receive compensation for investment banking services from Agilent Technologies, Inc. in the next three months. Wells Fargo Securities, LLC maintains a market in the common stock of Agilent Technologies, Inc.. Wells Fargo Securities, LLC or its affiliates has a significant financial interest in Agilent Technologies, Inc.. A: We think primary risks are global macro deterioration, which could hamper uptake of the Intuvo. If recently improved execution falters, it could shake investors' recent willingness to award Agilent a higher multiple. Lastly, if corporate tax reform fails to materialize, Agilent could be stuck with low-return cash held overseas. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue. STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. VOLATILITY RATING V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading. As of: February 14, % of companies covered by Wells Fargo Securities, LLC Equity Research are rated Outperform. 50% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Market Perform. 3% of companies covered by Wells Fargo Securities, LLC Equity Research are rated Underperform. Wells Fargo Securities, LLC has provided investment banking services for 42% of its Outperform-rated companies. Wells Fargo Securities, LLC has provided investment banking services for 30% of its Market Perform-rated companies. Wells Fargo Securities, LLC has provided investment banking services for 28% of its Underperform-rated companies. Important Disclosure for International Clients EEA The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ( WFSIL ). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. For the purposes of Section 21 of the UK Financial Services and Markets Act 2000 ( the Act ), the content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive The FCA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. Australia Wells Fargo Securities, LLC is exempt from the requirements to hold an Australian financial services license in respect of the financial services it provides to wholesale clients in Australia. Wells Fargo Securities, LLC is regulated under U.S. laws which differ from Australian laws. Any offer or documentation provided to Australian recipients by Wells Fargo Securities, LLC in the course of providing the financial services will be prepared in accordance with the laws of the United States and not Australian laws. Canada This report is distributed in Canada by Wells Fargo Securities Canada, Ltd., a registered investment dealer in Canada and member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). Wells Fargo Securities, LLC s research analysts may participate in company events such as site visits but are generally prohibited from accepting payment or reimbursement by the subject companies for associated expenses unless pre-authorized by members of Research Management. 8 Wells Fargo Securities, LLC
9 Agilent Technologies, Inc. Hong Kong This report is issued and distributed in Hong Kong by Wells Fargo Securities Asia Limited ( WFSAL ), a Hong Kong incorporated investment firm licensed and regulated by the Securities and Futures Commission of Hong Kong ( the SFC ) to carry on types 1, 4, 6 and 9 regulated activities (as defined in the Securities and Futures Ordinance (Cap. 571 of The Laws of Hong Kong), the SFO ). This report is not intended for, and should not be relied on by, any person other than professional investors (as defined in the SFO). Any securities and related financial instruments described herein are not intended for sale, nor will be sold, to any person other than professional investors (as defined in the SFO). The author or authors of this report is or are not licensed by the SFC. Professional investors who receive this report should direct any queries regarding its contents to Mark Jones at WFSAL ( wfsalresearch@wellsfargo.com ). Japan This report is distributed in Japan by Wells Fargo Securities (Japan) Co., Ltd, registered with the Kanto Local Finance Bureau to conduct broking and dealing of type 1 and type 2 financial instruments and agency or intermediary service for entry into investment advisory or discretionary investment contracts. This report is intended for distribution only to professional investors (Tokutei Toushika) and is not intended for, and should not be relied upon by, ordinary customers (Ippan Toushika). The ratings stated on the document are not provided by rating agencies registered with the Financial Services Agency of Japan (JFSA) but by group companies of JFSA-registered rating agencies. These group companies may include Moody s Investors Services Inc., Standard & Poor s Rating Services and/or Fitch Ratings. Any decisions to invest in securities or transactions should be made after reviewing policies and methodologies used for assigning credit ratings and assumptions, significance and limitations of the credit ratings stated on the respective rating agencies websites. About Wells Fargo Securities Wells Fargo Securities is the trade name for the capital markets and investment banking services of Wells Fargo & Company and its subsidiaries, including but not limited to Wells Fargo Securities, LLC, a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NYSE, FINRA, NFA and SIPC, Wells Fargo Prime Services, LLC, a member of FINRA, NFA and SIPC, Wells Fargo Securities Canada, Ltd., a member of IIROC and CIPF, Wells Fargo Bank, N.A. and Wells Fargo Securities International Limited, authorized and regulated by the Financial Conduct Authority. This report is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments named or described in this report. Interested parties are advised to contact the entity with which they deal, or the entity that provided this report to them, if they desire further information. The information in this report has been obtained or derived from sources believed by Wells Fargo Securities, LLC, to be reliable, but Wells Fargo Securities, LLC does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of Wells Fargo Securities, LLC, at this time, and are subject to change without notice. All Wells Fargo Securities research reports published by its Global Research Department ( WFS Research ) are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Additional distribution may be done by sales personnel via , fax or regular mail. Clients may also receive our research via third party vendors. Not all research content is redistributed to our clients or available to third-party aggregators, nor is WFS Research responsible for the redistribution of our research by third party aggregators. For research or other data available on a particular security, please contact your sales representative or go to For the purposes of the U.K. Financial Conduct Authority's rules, this report constitutes impartial investment research. Each of Wells Fargo Securities, LLC and Wells Fargo Securities International Limited is a separate legal entity and distinct from affiliated banks. Copyright 2018 Wells Fargo Securities, LLC SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Wells Fargo Securities, LLC 9
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