Agilent Technologies’ (A) second quarter earnings beat the Zacks Consensus by 3 cents, or 11.0%. Strong revenue growth across markets and product lines, expansion in Electronic Measurement segment margins and a lower tax rate helped drive results in the last quarter.
Japan did not have any material impact on results, either in terms of the supply chain or in terms of demand and Agilent stated that it does not expect any impact on results in the coming quarters.
Revenue
Agilent’s revenue was up 10.0% sequentially (normal seasonality) and 31.9% year over year, much better than management’s expectations of a 4-6% sequential increase ($1.59 billion to $1.61 billion). The overall impact of currency on Agilent’s year-over-year comparisons was a positive 3%. Product lines acquired from Varian accounted for $188 million of revenue in the last quarter.
While revenue grew sequentially across all geographies, the Americas saw the smallest increase (1.0%), followed by Europe, which was up 3.5% and then the Asia/Pacific, which was up 24.4%.
Revenue growth was very strong across geographies when compared with the year-ago quarter. Europe was the strongest, growing 37.4%; Asia was next, with a growth rate of 35.2%. The Americas was the slowest, but still growing very strongly at 24.4%.
Agilent’s consistent performance in Asia is on account of regulatory moves to improve safety standards. The company continues to see particular strength in China and India, which increased at strong double-digit percentage rates.
All end markets were up from the year-ago quarter, although the strongest by far was Academic/Government (up 75.9%), Chemical testing (up 71.5%) followed by Forensics/Environmental and Pharma/Biotech markets, which were up 46.6% and 42.1%, respectively.
Communications (up 31.9%), Food (up 13.1%), Industrial, Computing & semiconductor (up 11.6%) and Aerospace/Defense (up 10.0%) were the softest markets in the last quarter.
All except the Communications market also grew on a sequential basis. The communications market was down 1.5% sequentially.
Revenue by Segment and Product Line
Agilent reports results in three segments—Chemical Analysis, Life Sciences and Electronic Measurement.
The Chemical Analysis segment generated 23% of second quarter revenue. The 9.2% sequential and 60.1% year-over-year growth was the result of strength across all regions and all core product lines.
The Energy and Chemical testing markets were very strong, particularly in China and higher oil prices and alternative energy investments helped results in the last quarter. The strength in Food safety was driven by emerging markets in general, although China proved to be the strongest. Environmental products were also driven by emerging markets.
The GC and GC/MS platforms and spectroscopy product lines strengthened in the last quarter. Consumables and services were particularly strong.
The Life Sciences segment generated 28% of revenue, up 14.9% sequentially and 38.9% from last year. Both Academic and Pharma markets helped Agilent’s growth in the last quarter, although the increase in Pharma was particularly encouraging, since the big pharma companies stepped up investment in replacement and upgrades of lab instruments.
Academic continued to be helped by stimulus programs, both in the U.S. and internationally. Pharma companies are restructuring and transferring operations to low-cost regions, which is pushing up demand for testing products.
Agilent stated that there was strong growth across its LC, LC/MS, genomics, micro-arrays, automation and informatics product lines.
Agilent’s Electronic Measurement segment had another good quarter. This remains Agilent’s largest segment, with a revenue contribution of 50% in the last quarter. The segment saw year-over-year revenue growth of 19.3%, which would be 26% excluding the contribution of the since disposed of network solutions business from the year-ago quarter. Segment revenue was up 8.2% sequentially.
Agilent’s commentary was generally positive for both the communications and general purpose test categories. The communications market continues to be driven by LTE and 3G deployments, both on the infrastructure side and on the handset side.
Agilent also stated that the near-term outlook for the aerospace/defense market had improved since the government cleared the budget in March. The company was less optimistic about the industrial and computing markets and stated that semiconductor strength was moderating.
Agilent remains one of the largest providers of spectrum analyzers, network analyzers, signal sources and oscilloscopes, revenues from all of which grew in the last quarter.
Orders
Agilent grew orders 26.5% from last year. The Chemical Analysis segment was the largest driver, growing 64.5%, followed by Life Sciences, which was up 44.7% and Electronic Measurement, which was up 7.7%. On a sequential basis, the three segments witnessed order growth of -2.1%, 8.4% and 5.9%, respectively.
Agilent’s book-to-bill ratio was positive in all segments, resulting in backlog accumulation in all except the Chemical Analysis segment.
Margins
The proforma gross margin for the quarter was 55.3%, up 15 basis points (bps) sequentially and down 155 bps from the year-ago quarter. The operating expenses of $606 million were up 6.1% sequentially and 16.8% year over year.
As a result, the operating margin, at 19.2% jumped 148 bps sequentially, while increasing 315 bps from last year. The sequential increase was on account of declines in all costs as a percentage of sales. The expansion from the year-ago quarter was mostly on account of lower SG&A expenses as a percentage of sales, helped by lower R&D and partially offset by higher cost of sales.
The year-over-year increase in operating margin was entirely on account of the Electronic Measurement segment, which saw a margin expansion of 860 bps. The Chemical Analysis margin dropped 505 bps, while the Life Sciences margin dropped 122 bps. The Electronic Measurement margin was up 267 bps sequentially, helped by a 127 bp increase in the Life Sciences and 27 bp increase in the Chemical Analysis segment margins.
Net Income
Agilent generated a pro forma net income of $259 million, or a 15.4% net income margin compared to $212 million or 13.9% in the previous quarter and $151 million, or 11.9% in the second quarter of last year. Our pro forma estimate excludes restructuring charges, acquisition-related costs, amortization of intangibles, impairment of long-lived assets and other one-time items and tax adjustments.
On a fully diluted GAAP basis, the company recorded a net income of $200 million ($0.56 per share) compared to income of $204 million ($0.57 per share) in the previous quarter and $108 million ($0.31 per share) in the year-ago quarter.
Balance Sheet
The balance sheet shows a net cash position of $831 million, an improvement over the net cash position of $499 million at the beginning of the quarter. The company paid of a substantial portion of its debt in the fiscal first quarter and grew its cash balance in the last quarter, which has improved the net cash balance.
The debt to total capitalization ratio also dropped to 35.1% from 39.0% at the beginning of the quarter. The interest coverage ratio of around 16.1X also improved. The interest coverage ratio has continued to increase over the past few quarters.
Inventories at quarter-end were up 7.0%, although annualized inventory turns increased slightly from around 3.4X to 3.5X. Days sales outstanding (DSOs) went from around 51 back to around 50.
Agilent generated around $378 million of cash from operations, spent $51 million on capex and $96 million on acquisitions in the last quarter. The company did not repurchase any shares.
Guidance
Agilent expects fiscal third quarter revenue of $1.64 billion to $1.66 billion (a 1-2% sequential decline). The non GAAP EPS for the quarter is expected to come in at around 71 to 73 cents.
For fiscal 2011, Agilent now expects revenues of $6.55 billion to $6.60 billion, up from its previous expectation of revenues of $6.3 billion to $6.4 billion. The 20% growth from 2010 (or 16% on an organic basis) will be supported by a 19% increase in EM revenue, 13% increase in LSG revenue and 11% increase in CAG revenue.
The non-GAAP earnings is now expected to be $2.84-$2.88 a share (previous expectation was $2.53 to $2.63) based on a diluted share count of 356 million. Agilent stated that around 4 cents of the increase was on account of lowering the tax rate to 17%.
Agilent also expects non GAAP earnings of $950 million to $1.05 billion, capex of $200 million, netting a free cash flow of $800 to $850 million.
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