I agree. I've been watching and waiting but haven't pulled the trigger.
DENVER (Dow Jones)--Agilent Technologies Inc. (A) is "not yet seeing
definitive signs of an upturn," but continues to see excess industry capacity
as a major issue, Chief Executive Ned Barnholt said Monday.
In a conference call following the release of the company's fiscal third
quarter ended July 31, Barnholt said the industry downturn was deeper than
executives had expected. Yet the company anticipates a "slow, steady recovery
through '02," he added.
Chief Financial Officer Bob Walker said he foresees continued pricing
pressure for several quarters ahead.
On the positive side, Walker stressed the company's strong cash position.
Agilent has about $1.5 billion in cash and virtually no debt following the
Aug. 1 closing of the sale of Agilent's Healthcare Solutions Group to Royal
Philips Electronics (PHG) for EUR$2 billion, which was partially used to pay
down debt.
The company wants to remain in a strong cash position, and it's not going to
make any share buy-back commitments and will be very selective in its
acquisitions over the next year, Walker said.
Another positive highlighted by Barnholt and Walker is the company's
new-product position. Agilent expects that its fiscal fourth and first
quarters "will be very strong new-product quarters," and the company is
"holding or gaining share across our markets," Barnholt said.
Agilent, a technology company in communications, electronics and life
sciences, reported a fiscal third quarter loss of $219 million, or 48 cents
per diluted share, versus net income of $155 million, or 34 cents a share a
year ago.
On a pro forma basis, it posted a pro forma net loss from continuing
operations of $109 million, or 24 cents a share, versus pro forma earnings of
$158 million, or 35 cents a share, a year ago. Those results represent
continuing operations and exclude Agilent's recently sold healthcare business.
The loss of 24 cents beat the Thomson Financial/First Call analysts' consensus
estimate of a loss of 35 cents for the quarter.
Agilent, Palo Alto, Calif., posted fiscal third-quarter net revenue of $1.81
billion, compared with $2.35 billion a year ago.
The "newsworthy item" about the fiscal third quarter was the "lack of
orders," CFO Walker told Dow Jones Newswires after the conference call Monday.
Agilent reported orders of $1.3 billion for the quarter, and Walker said
analysts would probably have preferred to see orders that were equal to, or
greater than, Agilent's third-quarter revenue of $1.81 billion.
The break-even level for Agilent, factoring in a restoration of previous pay
levels and other actions, will be $1.9 billion in revenue for a quarter,
Walker said. The company expects that it will reach that level some time in
fiscal 2002; it just doesn't know when, he added.
The first area in which Agilent has seen a firming of demand has been
semiconductor components, in which Agilent makes products such as
application-specific semiconductors used in printers and computers, Walker
said. It is also starting to see some firming of demand for its semiconductor
test equipment, although at very low levels, and for its wireless products, he
said. The company expects its optical component testing equipment to be the
last to recover since it was the last to be hit by the downturn, he said.
Agilent expects $100 million in order cancellations in the fiscal fourth
quarter, compared with $240 million in cancellations in the fiscal third
quarter, $500 million in the fiscal second quarter and no cancellations in the
fiscal first quarter, Walker said. Although some of the decline in order
cancellations is due to fewer orders coming in, at least the trend is in the
right direction, he said.
The company is sticking by its capital expenditures budget of $800 million
for this fiscal year, much of which consists of wrapping up projects already
under way, Walker said.
Agilent shares were down $2.34, or 9%, at $23.75 in after-hours trading as
of 5:50 p.m. Monday, compared with the 4 p.m. EDT closing price Monday of
$26.09.
Analysts said the decline was due to the company's guidance for the fourth
quarter, which projected revenue of $1.3 billion to $1.5 billion and a loss of
50 cents to 70 cents a share, before goodwill and excluding restructuring
charges.
"It was the guidance. It was pretty shocking," said Banc of America
Securities microelectronics analyst Mark FitzGerald.
FitzGerald said he had expected a fourth quarter operating loss of 15 cents
a share, considerably narrower than Agilent's new guidance. He had thought
Agilent's break-even point was much lower, at $1.6 billion in quarterly
revenue. Instead, the break-even point is $1.9 billion in revenue for a
quarter, according to executives in the conference call Monday.
Agilent's operating margins have been traditionally lower than its
competitors, giving it less cushion during a downturn, FitzGerald said. That's
because of its former ties to Hewlett-Packard Co. (HWP), from which it was
spun off, he added.
Agilent's cost structure has been higher than it needed to be, partly
because of Hewlett-Packard's company culture of avoiding layoffs, he said. And
its pricing has been dominated by a cost-plus mentality - as opposed to
pricing to what the market will bear - because of Agilent's history of pricing
tied to internal charges to other Hewlett-Packard units, he said.
"The good thing is that they finally bit the bullet," FitzGerald said,
referring to Agilent's Monday announcement that it will reduce its work force
by about 4,000 people, or 9%.
Chief Executive Barnholt said in the Monday conference call that about half
the reductions will be in manufacturing. Barnhholt also noted that Agilent's
attrition rate is running at about 4% to 5% a year, lower than the historical
attrition rate of 7% to 8% a year. If attrition eliminates 4% of the work
force of 44,000, that would account for 1,760 of the 4,000 in total job cuts.
The rest of the reduction would need to occur through layoffs.
Third quarter orders of $1.3 billion weren't surprising, FitzGerald said,
and the revenue guidance for the fourth quarter was in line with his
expectations. "Our revenue line isn't changing here," he said. "It's the
profitability of those orders that is the problem."
FitzGerald now doesn't expect Agilent to regain profitability until the
fourth quarter of fiscal 2002.
For 2002, FitzGerald had projected operating earnings of 54 cents a share,
but with Monday's results and guidance he has shifted that outlook to an
operating loss of $1.20 a share for 2002. He is keeping his 2002 revenue
estimate at $6.7 billion, he said.
FitzGerald is maintaining his accumulate rating on the stock, partly because
he thinks the share price is reaching a "totally washed-out level." He expects
the stock might stay in the $23 to $30 range for the next six to nine months.
Agilent has been trading near its 52-week low of $25 and well below its
52-week high of $68.
Chief Financial Officer Walker said Agilent is near its 52-week low because
the industry is cyclical. He noted that other companies in the space are also
near their 52-week lows. Walker also noted that Agilent was able to beat the
Thomson Financial consensus estimate of a loss of 35 cents - posting a loss of
24 cents - because expense-reduction moves kicked into high gear and employees
became very conscious about spending on such items as travel.
Like FitzGerald, Salomon Smith Barney analyst Cindy Shaw blamed the
after-hours stock drop on fourth quarter guidance. But unlike FitzGerald, Shaw
was surprised not only by loss-per-share guidance, but also by revenue
guidance. She had been projecting $2.05 billion for fourth quarter revenue,
37% higher than the top end of the guidance provided Monday.
For profitability, Shaw had projected a loss of 5 cents for the fourth
quarter, although she had warned investors that the number might prove
optimistic. Still, the guidance of a loss of 50 cents to 70 cents a share for
the fourth quarter was a more extreme negative than she had expected.
The work force reductions announced Monday indicate that 'it's going to be
ugly for a while," Shaw said. In light of the company's non-layoff culture, it
was a difficult step for management to take and demonstrates the seriousness
of the downturn, she said.
-By Tom Locke, Dow Jones Newswires; 303-293-9294; tom.locke@dowjones.com |
