Agilent Technologies’ (A) fiscal second-quarter
earnings per share of 77 cents beat the Zacks Consensus Estimate by
10 cents, or 6.7%.
Revenue
Agilent’s revenue of 1.73 billion was up 3.1% sequentially and
flat year over year, just short of the Zacks Consensus Estimate of
1.74 billion.
The Americas remained the biggest contributor to revenues with a
36% share. The Asia/Pacific was next with 39%, followed by Europe,
which accounted for the balance. While the Americas and Europe grew
4.9% and 9.0% on a sequential basis, Europe declined 7.1%. However,
Europe was up 8.6% from last year, the only region to have posted
year-over-year growth.
Overall, government spending patterns and policies are impacting
Agilent’s revenues in both the U.S. and Europe and not all of this
can be tracked to a specific market. Industrials, defense,
environmental/forensics, academia are some of the areas seeing the
impact. The fact that Japanese government initiatives have not
kicked in yet also paint a gloomy picture.
Revenue by Segment
Agilent reports results under four segments—Chemical Analysis,
Life Sciences, Electronic Measurement and Diagnostics &
Genomics.
In the last quarter, Agilent’s Electronic
Measurement segment remained the largest contributor,
accounting for 44% of its revenue. However, while the 5.3%
sequential increase was encouraging, the 13.2% year-over-year
decline indicates continued softness in key areas.
Still-modest capacity additions and over capacity conditions (in
some cases) in the semiconductor equipment market, the secular
decline in the PC market and the negative macro impact on the
industrial market are the main reasons for this softness. Handset
manufacturing test was also weak, as Agilent lost a big customer
account, with wireless R&D also declining slightly. Strong
overseas sales offset weak domestic sales in the aerospace/defense
market.
Agilent’s Life Sciences segment generated 23%
of revenues, which was up 1.0% sequentially and 2.5% year over
year. This segment suffered the brunt of government spending
decisions, with U.S. sequestration having a significant impact on
the academia and government business. Technology upgrades on the
pharma side remained a positive for both the sequential and
year-on-year comparisons. The LC/LCMS lines and recurring revenue
remained strong.
The Chemical Analysis segment generated 23% of
revenue, which was up 1.8% sequentially and 3.4% from the year-ago
quarter. Despite the lower government spending that impacted the
environmental and forensics business, Agilent saw continued
strength in chemical, energy and food testing segments across
several emerging markets (particularly China).
The recently-added Diagnostics and Genomics
segment accounted for 10% of revenue in the last quarter, up 1.8%
sequentially. The core business (excluding Dako) was up 38% year
over year. Expanding partnerships are driving growth for the
segment. New product launches and expansion in Asia are also
helping.
Orders
Agilent’s orders were down 1.3% sequentially and 8.3% from the
year-ago quarter. Electronic Measurement remained a disappointment,
with orders shrinking 6.4% and 26.8%, respectively, from the
previous and year-ago quarters. Diagnostics and Genomics orders
were up 147.0% year over year (due to the addition of Dako), but
were down slightly on a sequential basis.
The Life Sciences and Chemical Analysis segments saw business
improving. These two segments grew 4.8% and 2.3%, respectively on a
sequential basis and 1.5% and 0.0%, respectively from last year.
Life Sciences and Chemical Analysis segments built some backlog,
while the other two segments depleted.
Margins
The pro forma gross margin for the quarter was 54.8%, down 15
basis points (bps) sequentially and up 67 bps from the year-ago
quarter. The sequential increase was volume-related. Additionally,
the high-margin EM business saw the most significant increase, so
there was a mix factor as well. 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 dropped 3.1% sequentially while increasing
2.3% from the year-ago quarter. Therefore, the operating margin
expanded 214 bps sequentially while shrinking 16 bps year over year
to 19.3%, as all expenses increased as a percentage of sales.
The Electronic Measurement operating margin expanded 321 bps
sequentially and shrank 288 bps year over year. The Life Sciences
margin shrank 15 bps sequentially while expanding 392 bps from the
year-ago quarter. The Chemical Analysis margin expanded 164 bps
sequentially and 338 bps from last year. The Diagnostics and
Genomics margin expanded 398 bps and shrank 340 bps from the
year-ago quarter.
Net Income
Agilent generated a pro-forma net income of $269 million or
15.5% net income margin compared to $222 million or 13.2% in the
previous quarter and $275 million or 15.9% 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 $166 million
($0.48 per share) compared with income of $179 million ($0.51 cents
per share) in the previous quarter and $255 million ($0.72 cents
per share) in the year-ago quarter.
Balance Sheet
Inventories were flat sequentially and stayed at $1.04 billion
with turns up slightly from 2.9X to 3.0X. The company ended with
cash and cash equivalents of $2.52 billion, up $69 million during
the quarter. Agilent’s long-term debt was $2.11 billion at
quarter-end.
Cash generated from operations was $315 million compared to $245
million in generated in the first quarter. Important uses of cash
during the quarter included $51 million on capex, $41 million on
dividends and $140 million on share repurchases.
Guidance
Agilent provided guidance for the third quarter of 2013 and
updated the guidance for the year.
In the second quarter, Agilent expects revenue of $1.63 billion
to $1.66 billion and non-GAAP earnings of 60 to 64 cents a share.
Analysts polled by Zacks were expecting earnings of 75 cents, much
lower than the guidance.
For fiscal year 2013, Agilent expects revenue of between $6.75
billion and $6.85 billion (previous $6.9 and $7.1 billion).
Non-GAAP earnings are expected to be $2.70 to $2.85 a share
(previous $2.70 to $3.00).
Recommendation
While Agilent reported a strong second quarter and share prices
also responded positively, management cautioned against persistent
weakness in several end markets because of government sequestration
in the U.S., macro weakness in the U.S. and Europe, sluggish semi
capex spending, secular decline in PCs and the loss of a major
wireless customer.
The persistent weakness is going to result in weaker margins and
thereby, earnings for Agilent, which is reflected in its lowered
2013 guidance. On the positive side, a restructuring initiative was
announced 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.
While the current outlook for this Zacks Rank #3 (Hold) stock is
negative, we remain positive about Agilent’s broader portfolio and
diversification into 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.
We note that peers Teradyne (TER) and
Ametek Inc (AME) also have a Zacks Rank #3, while
National Instruments Corp (NATI) carries a Zacks
Rank #4, reflecting the difficult market conditions. Therefore,
Agilent, which remains one of the largest providers of spectrum
analyzers, network analyzers, signal sources and oscilloscopes to
government and research organizations, should see a quick
turnaround once market conditions improve.
AGILENT TECH (A): Free Stock Analysis Report
AMETEK INC (AME): Free Stock Analysis Report
NATL INSTRS CP (NATI): Free Stock Analysis Report
TERADYNE INC (TER): Free Stock Analysis Report
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