Agilent Technologies’ (A) third quarter earnings beat the Zacks Consensus by 6 cents, or 8.2%. Revenue was more or less in line with the consensus, exceeding by 1.9%.
Revenue
Agilent’s revenue was up 0.8% sequentially and 22.2% year over year, better than management’s expectations of a 1-2% sequential decline $1.64 billion to $1.66 billion). The overall impact of currency on Agilent’s year-over-year comparisons was a positive 5%.
All except the Americas, which grew 12.0% saw revenue decline sequentially. The Asia/Pacific was down 5.0%, while Europe dropped 3.9%. However, on a year-over-year basis, revenues increased double-digits across all geographies. Specifically, the Americas were up 21.1%, Europe 12.0% and the Asia/Pacific 30.6%.
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, which grew 47% in the last quarter and made up over 17% of Agilent’s revenue in the last quarter. India and other parts of South East Asia also performed well.
The strongest year-over-year growth came from the Industrial/Computing/Semiconductor markets (up 126.0%), followed by Food (up 82.1%), Pharma/Biotech (48.9%) and Forensics/Environmental (up 35.9%). Academic/Government (down 31.0%) and Communications (down 8.5%) were the weakest.
Aerospace/Defense (down 9.2%) and Food (down 16.0%) were the softest end markets in the last quarter. All other end markets grew sequentially, with the strongest growth coming from Communications (up 12.7%).
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 third quarter revenue. The 0.5% sequential and 16.4% year-over-year growth was the result of strength across the U.S., China and South East Asia, particularly in the Energy, Chemical and Food segments. Environmental was particularly strong in China.
The GC and GC/MS product lines were particularly strong.
The Life Sciences segment generated 27% of revenue, down 2.4% sequentially and up 21.1% 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 remains a strong growth driver.
Agilent stated that there was strong growth across its product lines, which include LC, LC/MS, genomics, micro-arrays, automation and informatics. Additionally, services revenue also grew double-digits in the last quarter.
Agilent’s Electronic Measurement segment had another good quarter. This remains Agilent’s largest segment, with a revenue contribution of 51% in the last quarter. The segment saw sequential and year-over-year revenue growth of 2.6% and 23.7%, respectively.
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. However, wireless R&D was flattish.
Agilent stated that the near- aerospace/defense market had turned sluggish as a result of U.S. budget concerns, although the relatively smaller international business (35% of revenue from the market) continued to improve.
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 13.1% from last year. The Chemical Analysis segment was the largest driver, growing 14.3%, followed by Life Sciences, which was up 13.8% and Electronic Measurement, which was up 12.3%. On a sequential basis, the three segments witnessed order growth of 5.3%, -7.1% and -0.2%, respectively.
Agilent’s book-to-bill ratio was positive in the Chemical Analysis segment, while the other twp segments were slightly softer. As a result, the Chemical Analysis segment was the only one with backlog accumulation in the last quarter.
Margins
The proforma gross margin for the quarter was 54.4%, down 93 basis points (bps) sequentially and 159 bps from the year-ago quarter. Agilent’s gross margin in the last quarter was impacted by an 80% increase in wireless manufacturing growth, which tends to be a highly competitive market yielding lower margins. The sequential 4.5% decline in operating expenses to $579 million were a saving grace.
As a result, the operating margin, at 20.2% jumped 96 bps sequentially and 203 bps from last year. The improvement, despite the weaker gross margin was mostly on account of significantly lower SG&A (as a percentage of sales). R&D was flattish sequentially, although up from last year.
Opex control was strong across across all segments. Operating margins on a GAAP basis were up 173 bps, 10 bps and 93 bps across the Chemical Analysis, Life Sciences and Electronic Measurement segments, respectively. However, Chemical Analysis and Life Sciences segments were down 35 bps and 173 bps, repectively, from last year. The Electronic Measurement segment also expanded on a year-over-year basis (up 548 bps).
Net Income
Agilent generated a pro forma net income of $275 million, or a 16.3% net income margin compared to $259 million or 15.4% in the previous quarter and $191 million, or 13.8% in the third 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 $330 million ($0.95 per share) compared to income of $200 million ($0.56 per share) in the previous quarter and $205 million ($0.58 per share) in the year-ago quarter.
Balance Sheet
The balance sheet shows a net cash position of $933 million, an improvement over the net cash position of $831 million at the beginning of the quarter. Agilent generated $252 million from operations in the last quarter, spending $49 million on capex and $192 million on share repurchases.
The debt to total capitalization ratio also dropped to 34.0% from 35.1% at the beginning of the quarter. The interest coverage ratio of around 17.1X also improved. The interest coverage ratio has shown consistent improvement over the past few quarters.
Inventories at quarter-end were up 5.2%, with annualized inventory turns dropping slightly from around 3.5X to 3.4X. Days sales outstanding (DSOs) went from around 50 back to around 49.
Guidance
Agilent expects fiscal fourth quarter revenue of $1.74 billion to $1.76 billion (a 3-4% sequential increase). Consensus expectations were at $1.76 billion when the company announced guidance. Non GAAP earnings are expected to be 79 to 81 cents share, lower than the Zacks Consensus Estimate of 81 cents.
For fiscal 2011, Agilent now expects revenues of $6.64 billion to $6.66 billion, up from its previous expectation of revenues of $6.55 billion to $6.60 billion. The 22% increase from 2010 (or 17% on an organic basis).
The non-GAAP earnings is now expected to be $2.84-$2.88 a share (previous expectation was $2.90 to $2.92) based on a diluted share count of 357 million and considering the sametax rate as the third quarter.
Agilent continues to expect that its capital expenses for the year will be around $200 million, resulting in a free cash flow of around $900 million.
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 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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