Is Agilent On The Right Track?

Aug.27.14 | About: Agilent Technologies (A)

Summary

Agilent’s management expects revenue growth of 3.4% for full fiscal year 2014. The core revenue growth is projected to be 3.7% for the full year.

The loss on early extinguishment of debt hurts Agilent Technologies’ net earnings and operating cash flows in the third quarter of FY 13.

Overall, the debt reduction has improved the company’s financial stability by improving its debt-to-equity ratio and net cash position.

The current economic situation in North America, Europe and the Asia Pacific region suggests that Agilent Technologies will be able to generate even higher revenues in the next quarter.

Increased government spending on fixing environmental issues, life science research and forensics and the higher spending of the Chinese government on 4G research and development paved the way for Agilent Technologies (NYSE:A) to generate higher revenues in the third quarter. The higher spending on food in the US and Europe, surging demand from mid-sized and specialty pharmaceutical companies along with some other factors resulted in positive sales growth for the company.

The reported orders in this quarter went up 9% whereas the revenues went up 7% compared to the third quarter of the fiscal year. The sales growth was positive in all geographic segments. The highest growth of 11% was observed in Europe whereas the American and Asia Pacific regions reflected growth of 7% and 8% respectively.

Source: Earnings Presentation

The economic conditions in these regions are improving so Agilent's revenues are anticipated to grow considerably in the next quarter as well. The Asia Pacific region, excluding Japan, is expected to show the highest growth. The countries in the East Asia Pacific region could help Agilent to expand its customer base. Unexpected growth in the U.S. labor market, consumers' willingness to spend more (according to the latest consumer index) and higher government spending on environmental issues makes the U.S. a strong revenue source for Agilent as well.

Agilent's management expects revenue growth of 3.4% for full fiscal year 2014. The core revenue growth is projected to be 3.7% for the full year.

Operational Highlights

Like the revenue growth, Agilent's operating profits, in all three product segments, also improved in this quarter due to higher revenue and better margins. The operating profits in the Life Sciences, Diagnostics and Applied Markets segments jumped 9.2%, the EMG segment's operating profits reflected an improvement of 15.5% whereas the LDG segment's profits went up by 2.2%.

Agilent Technologies has increased its research and development costs and its selling, general and administrative expenses have also increased in this quarter compared to the figures reported in the third quarter of FY13. The company's year-over-year income from operations declined 3% in the quarter. Operating margin was down by approximately 150 basis points.

Besides the lower operating profit, the factor that significantly hurt Agilent's net earnings was the loss on early extinguishment of debt. Net earnings were down by 13% year-over-year. However, per share earnings in this quarter were the same compared to Q3FY13's per share earnings after adjustments for the non-recurring loss on debt retirement.

Despite lower net profits, Agilent raised its year-over-year cash dividends by 10% to 13.2 cents per share.

Debt Profile and Liquidity Position

The management at Agilent Technologies is putting great efforts into improving the company's debt profile by reducing its debt. In the first three quarters of FY14 the company has shed debt worth $483 million. Now the total debt stands at $2,216 million compared to $2,699 million at the end of FY13. Its debt-to-equity ratio in this period has improved significantly reaching 0.393 compared to 0.511 at the end of the last fiscal year. Even if we compare the company's figures to the industry average the ratio is quite impressive as the industry currently has an average ratio of 0.62.

In the last quarter Agilent Technologies also announced it would redeem all of its outstanding 5.5% senior notes that were due in September 2015. The aggregate principal amount of the notes currently outstanding is $500 million. The redemption price is equal to the sum of the principal amount. The redemption would save $27.5 million worth of interest payments on these notes, consequently improving Agilent's profit margin, and would further improve its debt-to-equity ratio.

The healthier debt profile, as a result of the company's debt reduction plans, would expand its future operating cash flows and decrease its vulnerability to any downturn in the business, competitive pressures and any adverse economic or industry conditions. The higher operating cash flows would increase the chances of higher returns to investors in the form of dividends and share buybacks.

However, the extinguishment of debt squeezed Agilent's net income and cash from operations in the third quarter. Net loss on extinguishment of debt measured for the quarter was $21 million, or 6 cents per share. The operating cash flows in this quarter were only $28 million compared to $215 million in the third quarter of FY13 mainly as a result of lower net income and charges on early extinguishment of debt.

However, Agilent's net cash (cash minus debt) is $211 million in this quarter compared to the negative net cash of $315 million in the third quarter of FY13 indicating the company's ability to easily pay off its other obligations even after paying its debt. Despite lower operating cash flows in this quarter its current ratio of 3.06 is considerably better than the industry average of 1.27 reflecting its strong liquidity position.

Final Thoughts

Although Agilent's net earnings and operating cash flows were down in the quarter, the adverse effect was only due to the non-recurring loss of early debt retirement. If the company improves its operating margin then the next quarters could bring handsome profits for the company as the current economic situation appears and is expected to bring good revenue growth. The debt reduction also improved its financial stability as the debt-to-equity ratio and net cash position have both improved. The debt reduction would also help to generate better profits by reducing interest expenses.

Therefore, based on this optimistic scenario I suggest investing in this stock because it also reflects upside potential based on its price-to-earnings multiple. Currently, it has a P/E of 27.55 compared to the industry average of 34.25.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.