Agilent Technologies’ (A) fiscal fourth quarter earnings beat the Zacks Consensus by a couple of cents. However, revenue fell short of street expectations, missing by 1.3%. Shares dipped 3.14% after-hours Tuesday, an initial reaction to the revenue miss, as well as earnings guidance for the next quarter that was a penny shy of the Zacks Consensus.
Revenue
Agilent’s revenue was up 2.2% sequentially and 9.6% year over year, not reaching management’s expectations of a 3-4% sequential increase ($1.74 billion to $1.76 billion). Management stated that excluding the unfavorable impact of currency, Agilent’s quarterly revenue was in line guidance, which still puts it just short of consensus expectations.
Agilent saw revenue growth across all geographies, although the Americas was strongest in the sequential comparison, while Asia was strongest compared to the year-ago quarter. Europe was the weakest overall despite the fact that it grew both sequentially and year over year.
The Americas, Asia and Europe generated 37%, 39% and 24%, of quarterly revenue, respectively. The regions saw sequential growth of 3.1%, 0.7% and 2.9%, respectively and year-over-year growth of 9.6%, 15.6% and 1.2%, respectively.
Agilent’s consistent performance in Asia is on account of regulatory moves to improve safety standards. Both China and India remained strong, growing over 30%. However, Brazil and Russia outgrew these markets in the last quarter (70% and 40%, respectively).
The strongest year-over-year growth came from the communications (up 23.4%), chemical and energy (up 18.8%), and industrial/computing/semiconductor markets (up 15.1%). Forensics/environmental and academic/government were the weakest, declining 8.6% each.
Industrial/computing/semiconductor and communications markets were down 2.5% and 3.2%, respectively. All other end markets grew sequentially, with the strongest growth coming from food (up 22.6%).
Revenue by Segment
Agilent reports results in three segments—Chemical Analysis, Life Sciences and Electronic Measurement.
The Chemical Analysis segment generated 23% of fourth quarter revenue. The 5.7% sequential and 4.1% year-over-year growth was driven by replacement sales, as well as continued strength in the food segment across emerging markets and environmental in China.
The Life Sciences segment generated 27% of revenue, up 4.0% sequentially and 9.3% from last year. Agilent stated that growth was broad-based across end markets when compared on a year-over-year basis, although uncertainties in the U.S. and European pharma sectors were leading to temporary sluggishness. However, Agilent remains well positioned to take advantage of the replacement cycle for lab instrumentation. The Academic/Government segment in emerging markets was a strong growth driver.
Agilent’s Electronic Measurement segment had another good quarter. This remains Agilent’s largest segment, with a revenue contribution of 49% in the last quarter. Although flat on a sequential basis, the segment was up 11.9% from last year, a reflection of the success of management’s turnaround strategy.
Agilent’s commentary was generally positive for both the communications and general purpose test categories. The communications market was driven by renewed strength in wireless manufacturing, as well as 4G infrastructure builds and growth in 3G smartphones. The general purpose test business was primarily driven by strength in industrial and a 2% increase in aerospace/defense revenue.
The aerospace/defense market has been sluggish on account of U.S. budget concerns that are pushing out programs. There is relatively less uncertainty in the smaller international business (33% of revenue from the market in the last quarter).
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 3.9% both sequentially and from last year. The Life Sciences business was particularly strong in the last quarter, with revenue growing 14.4% sequentially and 8.8% year over year. The Chemical Analysis segment grew 5.2% sequentially and 5.0% year over year. Electronic Measurement orders were impacted by increased caution at customers that pushed out orders due to uncertainty in spending.
Agilent’s book-to-bill ratio was positive overall, with Chemical Analysis and Life Sciences segments staying well over unity, while Electronic Measurement stayed short.
Margins
The proforma gross margin for the quarter was 55.0%, up 57 basis points (bps) sequentially and down 54 bps from the year-ago quarter. The sequential improvement in the last quarter was the result of Varian-related cost synergies and generally good expense control in the core business.
Operating expenses were flattish on both sequential and year-over-year bases As a result, the operating margin, at 21.6% jumped 142 bps sequentially and 236 bps from last year. Both R&D and SG&A declined as a percentage of sales from the previous and year-ago quarters. The sequential improvement in gross margin was an added positive.
Opex control was very good across all segments. Operating margins on a GAAP basis were up 332 bps, 119 bps and 61 bps, respectively in the Chemical Analysis, Life Sciences and Electronic Measurement segments. Additionally, they were up 184 bps, 5 bps and 442 bps from last year.
Net Income
Agilent generated a pro forma net income of $292 million, or a 16.9% net income margin compared to $275 million or 16.3% in the previous quarter and $228 million, or 14.5% in the fourth 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, as well as tax adjustments.
On a fully diluted GAAP basis, the company recorded a net income of $289 million ($0.82 per share) compared to income of $330 million ($0.95 per share) in the previous quarter and $232 million ($0.66 per share) in the year-ago quarter.
Balance Sheet
The balance sheet shows a net cash position of $1.34 billion, an improvement over the net cash position of $933 million at the beginning of the quarter. Agilent generated $510 million from operations in the last quarter, spending $50 million on capex, $2 million on acquisitions and $35 million on share repurchases.
The debt to total capitalization ratio also dropped to 33.6% from 34.0% at the beginning of the quarter. The interest coverage ratio of around 16.2X also improved. The interest coverage ratio has shown consistent improvement over the past few quarters.
Inventories at quarter-end were flat with the previous quarter, with annualized inventory turns flat at 3.4X. Days sales outstanding (DSOs) went down from around 49 to around 45.
Guidance
Agilent expects fiscal fourth quarter revenue of $1.65 billion to $1.67 billion (a 3-5% sequential decline). Consensus expectations were at $1.66 billion when the company announced guidance, within the guided range. Non GAAP earnings are expected to be 67 to 69 cents a share, lower than the Zacks Consensus Estimate of 69 cents.
Agilent did not provide detailed guidance for 2011, although they do expect to spend 10% of revenue on R&D.
Recommendation
The modest results and disappointing guidance seem to indicate temporary sluggishness in results. However, revenues are significantly diversified across end markets, so we do not expect any major weakness. Agilent appears to have done much better than other testing companies, such as Teradyne (TER), which are less diversified.
The Varian acquisition is an added positive that is expected to generate significant cost synergies, thus driving further earnings growth. Agilent also continues to introduce new products, which along with those acquired from Varian should generate continued growth.
Additionally, the balance sheet is in much better shape right now, which makes the shares more attractive.
We have a short-term Hold rating on Agilent shares, as indicated by the Zacks #3 Rank.
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