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Agilent Technologies' (A - Analyst Report) fiscal fourth-quarter earnings per share of 81 cents beat the Zacks Consensus Estimate by 5 cents, or 6.1%. Despite a revenue miss in the last quarter, good expense control and stronger mix helped results. The shares were languishing during the day but shot up 5.62% after the company reported earnings.

Revenue

Agilent’s revenue of $1.72 billion was up 4.0% sequentially and down 2.8% year over year, missing our estimate by 13.0%. Unfavorable currency changes accounted for a 1.5% decline in revenue 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 at 36%, followed by Europe with 27%. The Asia/Pacific was the only region to have declined both sequentially and year over year. The Americas grew 4.3% sequentially while remaining 9.1% below year-ago levels. Europe staged something of a comeback, growing 10.9% sequentially and 7.6% year over year.

The communications, aerospace/defense and industrial/comp/semi markets declined from the year-ago quarter, while all other end markets were flat or up.

Revenue 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, which was up 6.6% sequentially. The last quarter’s results were driven primarily by an increase in pharma/biotech revenues due to technology upgrades and offshoring to emerging markets.  Academia and government, Dako and genomics also helped results. Services, consumables (LCs) and diagnostic products were strong.

The Chemical Analysis segment generated 24% of revenue, which was up 6.5% sequentially. The last quarter benefited from the increase in food and chemical & energy revenues that were supported by a steadier environmental and forensics business.  Spectroscopy, consumables and services were the strongest offerings in the last quarter.

In the last quarter, Agilent’s Electronic Measurement segment remained the largest contributor, accounting for 41% of its revenue. The segment was up 0.6% sequentially.

The weakness compared to the year-ago quarter was partly on account of the loss of a major handset manufacturing test customer, which continued to impact results in the last quarter. Aerospace & defense markets were impacted by tougher comps according to management. Both the U.S. and Asia softened, while Europe strengthened. The semiconductor business was also weak but orders appear to be picking up.

Orders

Agilent’s orders were down 14.3% sequentially with all segment contributing. Life Sciences orders increased 19.8%, followed by Chemical Analysis, which grew 14.1%. Electronic Measurement was the biggest surprise, reversing a multi-year negative trend to grow 10.1%.

Margins

The pro forma gross margin for the quarter was 55.1%, up 77 basis points (bps) sequentially and down 68 bps from the year-ago quarter. Gross margins expanded significantly in both the Life Sciences and Chemical analysis segments. Good cost control almost totally offset volume declines in the Electronics Measurement 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 were flattish sequentially while declining 1.2% from the year-ago quarter. As a result, the operating margin expanded 209 bps sequentially while shrinking 124 bps year over year to 20.4%. All expenses declined sequentially and increased year over year as a percentage of sales.

The Life Sciences operating margin expanded 300 bps sequentially, Chemical Analysis 331 bps and Electronic Measurement 60 bps.

Net Income

Agilent generated a pro-forma net income of $271 million or 15.8% net income margin compared to $233 million or 14.1% in the previous quarter and $303 million or 17.1% 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 $211 million ($0.63 per share) compared with income of $168 million ($0.49 cents per share) in the previous quarter and $425 million ($1.20 per share) in the year-ago quarter.

Balance Sheet

Inventories were up 1.1% sequentially to $1.07 billion with turns roughly flat at 2.9X. The company ended with cash and cash equivalents of $2.68 billion, up $345 million during the quarter. Agilent’s long-term debt was $2.70 billion at quarter-end.

Cash generated from operations was $377 million compared to $215 million generated in the third quarter. Important uses of cash during the quarter included $32 million on capex and $39 million on dividends. There were no share repurchases during the quarter.

Guidance

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

In the first quarter, Agilent expects revenue of $1.68 billion to $1.70 billion, with core revenue (excluding currency and M&A) expected to grow 2%. The expected earnings were 65 to 67 cents a share. Analysts polled by Zacks were expecting earnings of 73 cents, well above the guided range. The fiscal first quarter is typically slower for Agilent and this quarter will also not see any impact of the Chinese New Year. Pay raises, higher stock compensation booking and higher payroll taxes will also impact results.

For fiscal year 2013, Agilent expects revenue of between $6.95 billion and $7.15 billion  and earnings of $3.03 to $3.33 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 extremely well in Life Sciences and Chemical Analysis segments and its decision to spin off the underperforming electronics measurement business makes perfect sense under the circumstances.

Management expects to complete the spin-off by the middle of next year, which will allow them to focus on the faster-growing segments.  That said, order trends in the EM business have started to improve, so there should be some impact on revenue in the next quarter.

While the current outlook for this Zacks Rank #3 (Hold) stock is negative, 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.

We note that peers Teradyne (TER - Analyst Report) and National Instruments Corp (NATI - Snapshot Report) have a Zacks Rank #5 (Strong Sell), reflecting the difficult market conditions. However, Ametek Inc (AME - Snapshot Report) carries a Zacks Rank #2 (Buy) indicating that this stock would be a safer bet for investors looking for exposure to the segment.

We continue to expect that Agilent, which remains one of the largest providers of spectrum analyzers, network analyzers, signal sources and oscilloscopes to government and research organizations, will see a quick turnaround once market conditions improve.

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