Agilent Technologies Earnings Call Insights: Cost Control and Tax Repatriation

Agilent Technologies Inc (NYSE:A) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Cost Control

Jon Groberg – Macquarie Securities: So obviously a lot of questions to go through here. So I will let others hop in. But I guess very big picture on some of your last comments, Didier around cost control. Can you maybe just, given the fact that things seem to be a little bit slower and I guess you are not anticipating them getting much better even though some macro indicators actually suggests like things could get better in the second half. Can you maybe just walk us through exactly what you’re doing on the costs side and maybe why you are not being a little bit more aggressive?

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William P. Sullivan – President and CEO: Let me make that comment Jon if you don’t mind for Didier the details. Fundamentally I’m actually more optimistic than I was last quarter. As you know I have tended to be somewhat pessimistic. If you look at where some of our growth opportunities are, the introduction of our new products, there is actually signs that things are going to get better. So I believe that not continuing to expand in emerging markets, not continuing our R&D investments, not continuing in our reach, is just a bad strategy moving forward right now. As result of that, Ron and Didier put together a detailed plan of ensuring not only are we going to drive $40 million of manufacturing cost out and this is the first time we’ve announced the quantity of that, that we are in the process of eliminating our temporary workforce, managing all non-customer and non-new product introductions. If you go back to the 2009 downturn, which is quite severe, where we in fact were making 17% operating profit, we were able to take substantial amount of money out of the system. So we are aggressively implementing that moving forward. Our guidance policy has been the same at this point in time. The forecast for the rest of the year is $7.1 billion of revenue and $3 a share, that’s our outlook. But we are widening the downside because of the continued volatility that we are seeing that – over that we’ve seen over the last four quarters.

Jon Groberg – Macquarie Securities: So just maybe on those cost savings that you just announced, maybe just give us a little better sense of kind of how long it will take and when we will start to see those in the numbers, I mean those are immediate, eliminating the temporary workforce, I guess, but maybe some of the manufacturing cost out and some of the other savings initiatives, when should those start to – when should we start to see the full impact of those?

William P. Sullivan – President and CEO: You will see the full impact of this as we go through quarter per quarter. John quite frankly and for the other analysts, we’ve had to stop the volatility of our announcement. We are going to take a broader range to set fair expectations moving forward and we are going to do everything possible as a management team to ensure that we become more predictable in this slow growth environment moving forward. So we have built into the $3 upper end range, the manufacturing cost reduction, and if we are successful getting more variable cost that will become a hedge against any volatility in the top line.

Jon Groberg – Macquarie Securities: Then if I can just one more on the guidance itself. It looks like your revenue outlook is slightly you were saying the mid-point before was flat, now you’re kind of minus 1%. If I do the quick math, you get to the $0.10 that you’re talking about, it just seems like you’re letting flow-through 100%. Am I missing anything else or any other things going on for that $0.10 that you are lowering the guidance for the year.

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Didier Hirsch – SVP and CFO: Well, it’s just $100 million of lower revenue that would translate into $0.14, just to be precise, some offset to that and that’s why we – I mentioned those offsets in my scripts and that’s why we are reducing the EPS by $0.10 and not by $0.14.

Tax Repatriation

Jon Wood – Jefferies & Company: Didier, did you mention how much buyback you have put into your numbers at this point for the rest of ’13? Then I’d love to hear Bill’s perspective if anything has changed on the political front, on the tax repatriation issue. Do you see any resolution to that dynamic in 2013? Anything you’re willing to offer there would be great.

Didier Hirsch – SVP and CFO: The forecast assumes we’ll utilize all of the $500 million before the end of the fiscal year, and that we finish the year with 347 – in the last quarter 347 million share versus 352 we had in Q1.

William P. Sullivan – President and CEO: In terms of regards the likelihood of the change of tax policy this year, I remain skeptical, that’s anything will be accomplished.

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Jon Wood – Jefferies & Company: If you look at the remainder of the year Bill, can you just talk about, it seems like with the surge in orders in the last months, it just seems like you sound more positive yet the numbers are coming down. Help us reconcile what incremental caution you have baked in from here? I guess it’s not clear to me if orders are improving, why you are not a little bit more bullish about the top line?

William P. Sullivan – President and CEO: Well as I said, I think that first of all there is a likelihood of defense cutbacks, again we will know on March 1st, as we’ve said and there is evidence out there that the cellphone market after huge investment may in fact be slowing down. Again there have been some other independent articles written on that. So you couple those two, the outlook and again when we give guidance it’s very clear the top line is what our forecast is and then we decrement for there for the volatility and unfortunately we have been too narrow in this environment. So if you combine the likely outcome in U.S. defense spending coupled with any sort of slowing in the communication markets that is why we took the top line number of last quarter’s $7.2 billion and lowered it to $7.1 billion.

Didier Hirsch – SVP and CFO: The third factor I have mentioned is that in the last three months the yen has weakened 20% versus the dollar and overall the currency impact is a reduction in revenue for the whole year at present exchange rates of about $35 million. So that’s also a component of the $100 million. It’s just pure currency.

William P. Sullivan – President and CEO: That’s a good point. So 65 is business, s business, 35 is just the currency exchange.

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Jon Wood – Jefferies & Company: Lastly are you likely to know what form the defense cuts will take on March 1st and what I mean by that is, are you just assuming a ubiquitous cut in your defense business or do you actually have clarity on specific programs that you’re in that may receive funding reductions or basically the mix of the cuts.

William P. Sullivan – President and CEO: The preliminary work was done by Guy’s team and again, I don’t Guy has any additional color, but right now, if you assume they muddled through with a moderate cut, the impact we believe would be 10% on our U.S. defense. Worst case scenario would be 20%. So they’ve modeled that to the best they can.

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Guy Sene – SVP, Agilent, and President, Electronic Measurement Group: This is Guy. I just second what Bill said that clearly, this is what we’ve modeled in, a 10% decrease.

William P. Sullivan – President and CEO: But in the low-end of the guidance, assumes a 20%.