Agilent Beats on Q4 Earnings, Guides Above Expectations

Agilent Technologies’ (A) fiscal fourth-quarter 2014 earnings per share of 88 cents exceeded the Zacks Consensus Estimate by a good 38 cents. Earnings increased 12.8% sequentially and 8.6% on a year-over-year basis. Revenue growth and sustained improvements in cost efficiency led to the increase in earnings.

Agilent Technologies, Inc. - Earnings Surprise | FindTheBest

Revenues

Agilent’s fourth-quarter revenues of $1.81 billion were up 2.2% sequentially and 5.1% year over year. Also, revenues were in line with the lower end of management guidance range of $1.81 to $1.85 billion and the Zacks Consensus Estimate.

Agilent recently exit its Nuclear Magnetic Resonance business since the business failed to meet growth and profitability goals. It had started the NMR business in 2010, with the purchase of Varian.

Agilent’s revenues from all end markets were up from the year-ago quarter, except Chemical and Energy, which was flat.

Revenues by Geography

Asia/Pacific remained a significant contributor to revenues with a 36% share, while the Americas contributed 37% of the revenues. Europe contributed 26%. Both, Americas and Europe increased both sequentially and year over year. The Asia/Pacific, on the other hand, increased 1.7% year over year but declined 3.4% sequentially.

Revenues by Segment

Agilent has three reporting segments — Life Sciences and Diagnostics Group (:LDG), Chemical Analysis Group (CAG) and Electronic Measurement Group (:EMG), which has recently been spun off into Keysight Technologies.

LDG generated 34% of revenues, up 3.4% sequentially and 1.8% year over year. CAG generated 24% of revenues, flat sequentially and up 4.6% year over year.

EMG remained the largest contributor, accounting for 42% of total revenue. The segment was up 0.7% sequentially and 8.1% year over year.

The company is divesting or winding up underperforming units to rationalize its operations.

Agilent recently completed the spinoff of its electronic measurement segment into a new company named Keysight Technologies, making it an independent, publicly traded company.

Following the spin-off, Agilent now consists of the Life Science, Chemical Analysis, and Diagnostics and Genomics businesses (:LDA) only.

It recently announced the closure of the NMR business, which will have a negative impact to the tune of $20 million to $30 million on fiscal 2015 revenues but will be accretive to operating profit by about $10 million in the same period.

Orders

Agilent’s orders were down nearly 10.0% sequentially and 4.0% year over year.

On a sequential basis, all three segments – Life Sciences, Chemical Analysis and Electronic Measurement – increased 11.4%, 14.3% and 5.3%, respectively. On a year-over-year basis, Life Sciences, Chemical Analysis and Electronic Measurement increased 3.6%, 7.9% and 2.4%, respectively. Following the closure, Agilent stopped taking new NMR instrument orders.

Margins

Pro forma gross margin for the quarter was 54.6%, up 44 basis points (bps) sequentially but down 49 bps year over year.

Operating expenses were flattish sequentially but up 2.9% from the year-ago quarter. Both research & development expenses and selling, general & administrative expenses were up from the previous and year-ago quarters. The net result was an operating margin of 20.7%, up 147 bps sequentially and 23 bps year over year.

Life Science, Chemical Analysis and Electronic Measurement segment operating margins improved 180 bps, 120 bps and 130 bps respectively from the previous quarter.

Net Income

Agilent generated pro-forma net income of $297 million, or 16.5% of sales compared with $262 million, or 14.8% in the previous quarter and $271 million, or 15.8% 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, GAAP net income was $16 million (5 cents per share) compared with $147 million (43 cents per share) in the previous quarter and $211 million (63 cents per share) in the year-ago quarter.

Balance Sheet

Inventories were down 0.03% sequentially to $1,072 million. The company ended with cash and cash equivalents of $3.02 billion, down $78 million during the quarter. Agilent’s long-term debt was $2.76 billion at quarter end.

Cash generated from operations was $1.66 million compared with $28 million generated in the third quarter. Important uses of cash during the quarter included $45 million as capex and $44 million as dividends.

Guidance

Agilent provided guidance for the first quarter and fiscal 2015.

For the first quarter, Agilent expects revenues of $1.02 billion to $1.04 billion and earnings in the range of 39 cents to 43 cents a share. Analysts polled by Zacks expect earnings of 42 cents, towards the higher end of the company provided range.

For fiscal 2015, Agilent expects revenues between $4.12 billion and $4.18 billion and earnings of $1.68 to $1.78 a share. Analysts polled by Zacks expect earnings of $1.74, which is toward the higher end of the guided range.

Recommendation

Agilent delivered encouraging fiscal fourth quarter 2014 results with the bottom line beating the Zacks Consensus Estimate while the top line matched the same.

The company continues to do well in the Life Sciences and Chemical Analysis segments and its decision to divest the underperforming EM business makes perfect sense under the circumstances. The separation will enable management of both companies to focus on their respective growth opportunities.

This enhanced focus on the new Agilent will enable management to expand a solid base of recurring revenues and diversify geographic and industrial operations to achieve growth strategies.

In addition, 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 continue to improve its margin profile.

Agilent carries a Zacks Rank #5 (Strong Sell). Better-ranked stocks include Akamai Technologies, Inc. (AKAM), Baidu, Inc. (BIDU) and Rackspace Hosting, Inc. (RAX). All these stocks carry a Zacks Rank #2 (Buy).

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