Agilent Q2 Earnings In Line

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Agilent Technologies’ (A) fiscal second-quarter earnings per share of 72 cents were in line with the Zacks Consensus Estimate.

Revenues

Agilent’s revenues of $1.73 billion were up 3.1% sequentially but down 0.1% year over year. Second-quarter revenues were slightly below the Zacks Consensus Estimate of $1.74 billion.

The Asia/Pacific remained the biggest contributor to revenues with a 41% share, but the Americas was almost equally important with a contribution of 32%, followed by Europe contributing 27%. The Asia/Pacific was the only region to have increased both sequentially and year over year. The Americas, however, declined both sequentially as well as year over year. Europe, on the other hand, rebounded to a 7.4% year-over-year improvement but declined 6.1% sequentially.

The communications, aerospace/defense, environmental & forensics 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 Group (:LDG), Chemical Analysis Group (CAG) and Electronic Measurement Group (:EMG).

Agilent’s LDG segment generated 33% of revenues, up 1.1% sequentially. The quarter’s results were driven by strong performance in pharma and diagnostics/clinical markets.

The CAG segment generated 24% of revenues, up 2.5% sequentially. The reported quarter benefited from an increase in food and chemical & energy revenues that were supported by a steadier environmental and forensics business. 

In the last quarter, Agilent’s EMG segment remained the largest contributor, accounting for 43% of its revenues. The segment was down 2.2% sequentially. 

Orders

Agilent’s orders were up 8.0% sequentially and 7.3% year over year due to strong performance by all the segments. On a sequential basis, Life Sciences, Chemical Analysis and Electronic Measurement increased 3.3%, 5.9% and 11.6%, respectively. On a year-over-year basis, Life Sciences, Chemical Analysis and Electronic Measurement increased 6.0%, 4.1% and 11.9%, respectively

Margins

Reported gross margin for the quarter was 51.9%, down 70 basis points (bps) sequentially but up 50 bps from the year-ago quarter.

Operating expenses increased 3.6% sequentially and 1.6% from the year-ago quarter. Research & development expenses decreased as a percentage of sales from the year-ago quarter, while selling, general & administrative expenses increased. The net result was an operating margin of 12.1%, up 70 bps sequentially but down 20 bps year over year.

The LDG operating margin declined 240 bps, CAG 10 bps and Electronic Measurement declined 70 bps sequentially.

Net Income

Agilent generated pro-forma net income of $244 million or 72 cents per share compared to $226 million or 67 cents in the previous quarter and $269 million or 77 cents 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 $150 million (45 cents per share) compared with $195 million (58 cents per share) in the previous quarter and $166 million (48 cents per share) in the year-ago quarter.

Balance Sheet

Inventories were up 0.9% sequentially to $1.10 billion. The company ended with cash and cash equivalents of $2.95 billion, up $21 million during the quarter. Agilent’s long-term debt was $2.69 billion at quarter-end.

Cash generated from operations was $325 million compared with $194 million generated in the first quarter. Important uses of cash during the quarter included $53 million as capex, $44 million as dividends and $50 million for share repurchases.

Guidance

Agilent provided guidance for third-quarter and fiscal 2014.

In the third quarter, Agilent expects revenues of $1.74 to $1.76 billion, with core revenues (excluding currency and M&A) expected to grow 5%. The expected earnings are 72 to 74 cents a share. Analysts polled by Zacks expect earnings of 79 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 reported quarter were helped by good cost control and better product mix. The company continues to do well in the Life Sciences and Chemical Analysis segments and its decision to divest the underperforming Electronics Measurement (EM.V) business makes perfect sense under the circumstances.

Management expects to complete the spin-off by early November this year and 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.

However, weakness in several end markets because of government sequestration in the U.S., macro weakness in the U.S. and Europe, and sluggish semi capex spending are concerns for the company.

Agilent carries a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include NetScout Systems, Inc. (NTCT), Infinera Corp. (INFN) and QLogic Corp. (QLGC). All these stocks sport a Zacks Rank #2 (Buy).

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