Agilent Beats on Q3 Earnings, Guides Below Expectations - Analyst Blog

Agilent Technologies' (A) fiscal third-quarter 2014 earnings per share of 78 cents exceeded the Zacks Consensus Estimate by 4 cents, driven by continued improvement in the company's end markets.

Revenues

Agilent's third-quarter revenues of $1.77 billion were up 2.0% sequentially and 6.9% year over year. Also, revenues were above the management guidance range of $1.74 to $1.76 billion and Zacks Consensus Estimate of $1.75 billion.

The Asia/Pacific remained the biggest contributor to revenues with a 38% share, and the Americas was also significant with a contribution of 36%, followed by Europe contributing 26%. Both, Americas and Europe increased both sequentially and year over year. The Asia/Pacific, on the other hand, rebounded to a 4.5% year-over-year improvement but declined 5.1% sequentially.

Agilent's revenues from all end markets were up from the year-ago quarter, except Industrial, Computers and Semiconductor market, which were flat.

Revenues by Segment

Agilent has three reporting segments — Life Sciences and Diagnostics Group (LDG), Chemical Analysis Group (CAG) and Electronic Measurement Group (EMG).

LDG generated 33% of revenues, up 2.6% sequentially and 5.0% year over year. The quarter's results were driven by the ramp up of new products in food & environmental and diagnostics/clinical markets.

CAG generated 24% of revenues, up 1.5% sequentially and 7.8% year over year. The reported quarter benefited from an increase in food and chemical & energy revenues that were supported by a steadier environmental and forensics business. 

EMG remained the largest contributor, accounting for 43% of total revenues. The segment was up 1.9% sequentially and 8.0% year over year. 

Orders

Agilent's orders were down 4.0% sequentially but up 8.7% year over year. The sequential decrease was due to weak performance in all the segments.

On a sequential basis, all three segments – Life Sciences, Chemical Analysis and Electronic Measurement – decreased 0.2%, 2.8% and 7.7%, respectively. On a year-over-year basis, Life Sciences, Chemical Analysis and Electronic Measurement increased 11.4%, 7.7% and 7.1%, respectively.

Margins

Reported gross margin for the quarter was 51.8%, down 10 basis points (bps) sequentially but flat year over year.

Operating expenses decreased 0.6% sequentially but increased 10.5% 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 13.0%, up 90 bps sequentially but down 130 bps year over year.

Life Science and Chemical Analysis segment operating margins improved 90 bps and 30 bps, respectively, from the previous quarter, while Electronic Measurement margins shrank 10 bps sequentially. On a year-over-year basis, both Chemical Analysis and Electronic Measurement operating margins improved 50 bps and 60 bps, respectively, while Life Science margins shrank 20 bps.

Net Income

Agilent generated pro-forma net income of $262 million, or 14.8% of sales compared with $244 million, or 14.1% in the previous quarter and $233 million, or 14.1% 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 $147 million (43 cents per share) compared with $150 million (45 cents per share) in the previous quarter and $168 million (49 cents per share) in the year-ago quarter.

Balance Sheet

Inventories were down 0.09% sequentially to $1,099 million. The company ended with cash and cash equivalents of $2.95 billion, down $559 million during the quarter. Agilent's total debt (long-term plus short-term) was $2.22 billion at quarter end.

Cash generated from operations was $28 million compared with $325 million generated in the second quarter. Important uses of cash during the quarter included $64 million as capex, $44 million as dividends and $50 million for share repurchases.

Guidance

Agilent provided guidance for fourth-quarter and fiscal 2014.

For the fourth quarter, Agilent expects revenues of $1.81 billion to $1.85 billion, with core revenues (excluding currency and M&A) growth of 6.3%. The expected earnings are 87 cents to 91 cents a share. Analysts polled by Zacks expect earnings of 95 cents, well above the guided range. 

For fiscal 2014, Agilent expects revenues between $6.99 billion and $7.03 billion and earnings of $3.04 to $3.08 a share. Analysts polled by Zacks expect earnings of $3.07, which is on the higher end of the guided range. 

Recommendation

Agilent's results in the reported quarter were helped by good cost control and a 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) business makes perfect sense under the circumstances.

The company had named the new EM company as Keysight Technologies which began to operate as a wholly owned subsidiary from Aug 1, 2014. The new subsidiary's common stock is expected to trade on the New York Stock Exchange with the ticker symbol KEYS.

We remain positive on Agilent's broader portfolio and increased focus on segments with a higher growth potential. Further, the company 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 #4 (Sell). Better-ranked stocks include Emulex Corp (ELX), Research Frontiers Inc. (REFR) and Garmin Ltd. (GRMN). All these stocks carry a Zacks Rank #2 (Buy).