Agilent Beats on Q1 Earnings by a Penny

Zacks

Agilent Technologies’ (A) fiscal first-quarter earnings per share of 67 cents beat the Zacks Consensus Estimate by a penny. Despite a revenue miss in the last quarter, good expense control and stronger mix aided results.

Revenues

Agilent’s revenues of $1.68 billion were down 2.3% sequentially and 0.06% year over year. First-quarter revenues were also below the Zacks Consensus Estimate of $1.69 billion. Unfavorable currency changes accounted for a 1.5% decline in revenues although the impact of acquisitions was immaterial.

The Asia/Pacific remained the biggest contributor to revenues with a 37% share, but the Americas was almost equally important with a contribution of 33%, followed by Europe contributing 30%. The Americas was the only region to have declined both sequentially and year over year. The Asia/Pacific declined sequentially but was flat year over year. Europe rebounded to a 6.0% sequential and 6.2% year-over-year improvement.

The communications, aerospace/defense and academia & government markets declined from the year-ago quarter, while all other end markets improved.

Revenues by Segment

Agilent reports results under three segments — Life Sciences and Diagnostics, Chemical Analysis, and Electronic Measurement.

Agilent’s Life Sciences segment generated 35% of revenues, down 1.7% sequentially. The last quarter’s results were impacted by weak instrument demand in the Americas and China.

The Chemical Analysis segment generated 25% of revenues, up 1.2% sequentially. The last quarter benefited from the increase in food and chemical & energy revenues that were supported by a steadier environmental and forensics business.  

In the last quarter, Agilent’s Electronic Measurement segment remained the largest contributor, accounting for 40% of its revenues. The segment was down 4.8% sequentially.  The weakness was partly on account of the impact of lunar New Year, which continued to impact results in the last quarter. Aerospace & defense markets were impacted by tougher comps according to management.

Orders

Agilent’s orders were down 8.3% sequentially due to soft performance by all the segments. Life Sciences, Chemical Analysis and Electronic Measurement declined 12.1%, 6.7% and 5.8%, respectively.

Margins

Reported gross margin for the quarter was 52.6%, down 30 basis points (bps) sequentially but up 20 bps from the year-ago quarter. Gross margins expanded in the Life Sciences segment, while contracting 100 bps sequentially in the Chemical analysis segment. The strength in the new Diagnostics segment remains a positive for the overall gross margin, since the segment generates significantly higher gross margins than the legacy Agilent business.

Operating expenses increased 6.7% sequentially and 0.3% from the year-ago quarter. As a result, the operating margin shrank 360 bps sequentially but expanded 10 bps year over year to 13.0%. Research & development expenses decreased as a percentage of sales from the year-ago quarter, while selling, general & administrative expenses increased.

The Life Sciences operating margin declined 220 bps, Chemical Analysis 230 bps and Electronic Measurement 380 bps sequentially.

Net Income

Agilent generated pro-forma net income of $226 million or 13.5% net income margin compared to $271 million or 15.8% in the previous quarter and $222 million or 13.2% in the year-ago quarter. Our pro-forma estimate excludes acquisition-related costs, restructuring charges, amortization of intangibles and other one-time items, as well as tax adjustments.

Including these items, the GAAP net income was $195 million (58 cents per share) compared with $211 million (63 cents per share) in the previous quarter and $179 million (51 cents per share) in the year-ago quarter.

Balance Sheet

Inventories were up 2.1% sequentially to $1.09 billion. The company ended with cash and cash equivalents of $2.74 billion, up $67 million during the quarter. Agilent’s long-term debt was $2.70 billion at quarter-end.

Cash generated from operations was $194 million compared to $377 million generated in the fourth quarter. Important uses of cash during the quarter included $45 million on capex, $44 million on dividends and $100 million on share repurchases.

Guidance

Agilent provided guidance for the second quarter and fiscal year 2014.

In the second quarter, Agilent expects revenues of $1.72 billion to $1.74 billion, with core revenues (excluding currency and M&A) expected to grow 1%. The expected earnings were 71 to 73 cents a share. Analysts polled by Zacks were expecting earnings of 81 cents, well above the guided range.  

For fiscal 2014, Agilent expects revenues between $6.90 billion and $7.10 billion and earnings of $2.96 to $3.16 a share.

Recommendation

Agilent’s results in the last quarter were helped by good cost control and better product mix. Earlier, the company announced a restructuring initiative that would, after completion, result in a reduction of its workforce by 450 and generate cost savings in the neighborhood of $50 million a year.

The company continues to do well in the Life Sciences and Chemical Analysis segments and its decision to spin off the underperforming Electronics Measurement (:EM) business makes perfect sense under the circumstances.

Management expects to complete the spin-off by early November this year, which will allow them to focus on the faster-growing segments. The company has named the new EM company as Keysight Technologies.

We remain positive about Agilent’s broader portfolio and increased focus on segments with higher growth potential. Further, it continues to introduce new products (with higher margins), which along with those acquired from Dako and Varian have greatly improved its margin profile.

Agilent shares carry a Zacks Rank #2 (Buy). Other stocks that are performing well at current levels include Melco Crown Entertainment Limited (MPEL), Silicom Ltd. (SILC) and Brocade Communications Systems, Inc. (BRCD). All these stocks sport a Zacks Rank #1 (Strong Buy).

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