Agilent Technologies’ (A) fourth quarter earnings beat the Zacks Consensus by 5 cents, or 8.3%. Revenue growth and margin expansion helped drive results in the last quarter. While the gross margin declined sequentially after 5 quarters of increase, Agilent saw both operating and net margins continuing to expand.

Revenue

Agilent’s revenue grew 14.5% sequentially and 35.7% year over year. Excluding the impact of Varian, Agilent’s revenues were up 27.3% sequentially and 35.0% from last year, much better than management’s expectations of a 16-19% year-over-year increase excluding Varian. While sequential growth was evenly balanced across geographies, increase from the year-ago quarter was varied.

Asia witnessed the strongest growth at 39.5%, followed by Europe, which grew 35.7% and then the Americas, which grew 32.2%. Agilent’s strong growth in Asia was fueled by China and India, which grew 37% and 31%, respectively.

All end-markets were up from the year-ago quarter, although the strongest by far was Petro/Chemical testing (up 103.6%), followed by Forensics/Environmental and Academic/Government, both of which grew 81.0%. Food Safety was the only area to see triple-digit sequential growth (up 104.7%), with industrial and semi following closely behind at 92.5% growth. The Communications, Academic/Government and Petro/Chemical testing markets declined sequentially.

Revenue by Segment and Product Line

At the beginning of the fiscal year, management changed the reporting structure. Therefore, Agilent is now reporting results in three segments—Chemical Analysis, Life Sciences and Electronic Measurement.

The Chemical Analysis segment generated 25% of fourth quarter revenue. The Food and Environment markets fueled the increase in the last quarter, helped by resurgence in Energy and Petro/Chemical markets. Segment revenue was up a whopping 72.9% from a year ago and up 18.2% sequentially. The platform (GC/MS and ICP/MS instrumentation) grew strongly.

The Life Sciences segment generated 27% of revenue, up 35.1% from the year-ago quarter and 15.2% sequentially. Excluding Varian and Hycor, revenues were up 17% from the fourth quarter of 2009. Both Academic and Pharma markets helped growth in the last quarter. Academic was greatly helped by stimulus programs, both in the U.S. and internationally.

Agilent stated that Pharma companies continue to restructure and transfer operations to low-cost regions. Liquid chromatography platforms grew 21%, driven by the 1290 and 1260 tools. The LCMS and genomics lines also grew. Additionally, Agilent saw continued demand for the recently launched SureSelect sample preparation category.

Agilent’s Electronic Measurement segment continued on the growth path. This is the company’s largest segment, with a revenue contribution of 55% in the last quarter. The 22.6% increase from the year-ago quarter came from the general purpose business, largely offset by continued weakness in the communications business. Part of the softness is on account of the network solutions disposal.

The business continues to be driven by 3G deployments, both on the infrastructure side and on the handset side. Segment revenue was up 10.4% sequentially, fueled by the general purpose business. While most of the strength was attributable to industrial, computing and semiconductor markets, aerospace and defense markets also witnessed very strong growth.

Agilent remains one of the largest providers of spectrum analyzers and oscilloscopes, which continued to grow in the last quarter. The company’s high performance oscilloscopes witnessed particularly strong demand. Agilent believes that share gains continued in the last quarter.

Orders

Agilent’s orders grew strong by double-digits in the last quarter, compared to both sequential and year-over-year bases. The strength was driven by the Chemical Analysis segment, which saw sequential and year-over-year increases of 14.6% and 68.5%, respectively.

Life Sciences increased 19.7% and 33.0%, respectively from the previous and year-ago quarters. Electronic Measurement was the slowest segment, although here too revenues were up 9.1% and 19.6%, respectively from the previous and year-ago quarters.

Agilent’s book-to-bill ratio was positive in all segments, resulting in backlog accumulation.

Margins

The pro forma gross margin for the quarter was 55.2%, down 76 basis points (bps) sequentially and 37 bps from the year-ago quarter. The operating expenses of $572 million were up 9.1% sequentially and 14.6% year over year.

However, the operating margin, at 19.1% continued to expand, increasing 99 bps sequentially and 628 bps from the year-ago quarter. The sequential increase was driven by lower SG&A expenses (as a percentage of sales), partially offset by the slightly higher COGS and R&D expenses (as a percentage of sales). However, the year-over-year comparison was helped by a significant reduction in both SG&A and R&D, partially offset by slightly higher COGS.

The year-over-year increase in operating margin was entirely on account of the Electronic Measurement segment, which saw a margin expansion of 1,361 bps. The Chemical Analysis margin dropped 545 bps, while the Life Sciences margin dropped 35 bps. Both Electronic Measurement and Chemical Analysis margins expanded sequentially.

Net Income

Agilent generated pro forma net income of $228 million, or a 14.4% net income margin compared to $191 million or 13.8% in the previous quarter and $111 million, or 9.5% 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, gain on sale of the network solutions business and other one-time items on a tax adjusted basis.

On a fully diluted GAAP basis, the company recorded a net income of $232 million ($0.66 per share) compared to income of $205 million ($0.58 per share) in the previous quarter and $25 million ($0.07 per share) in the year-ago quarter.

Balance Sheet

The balance sheet shows a net debt position of $1.04 billion. The debt-to-total-capitalization ratio was 54.2%, which is not bad. The interest coverage ratio is 11.2X, which means the company should not have trouble servicing the debt. The interest coverage ratio has continued to increase over the past 3 quarters.

Inventories at quarter-end were up 4.1%, with annualized inventory turns increasing from around 3.5X to 4.0X. Days sales outstanding (DSOs) went down from around 52 to around 50. Agilent generated around $367 million of cash from operations, spent $32 million on capex and $51 million on share repurchases.

Guidance

Agilent expects fiscal first quarter revenue of $1.53 billion to $1.55 billion (a 2-3% sequential decline). The non-GAAP EPS for the quarter is expected to come in at around 55 to 57 cents.

For fiscal 2011, Agilent expects revenues of $6.1 billion to $6.3 billion and non-GAAP earnings of $2.30 to $2.50 a share.

Our Take

We believe Agilent shares will benefit from a strengthening domestic market as well as a growing opportunity pipeline abroad, especially in Asian countries, such as China and India. The company has a very well-diversified business and has prudently supplemented organic growth with acquisitions.

Agilent sports a Zacks #2 Rank, implying a short-term Hold recommendation, similar to competitors such as Ametek Inc. (AME). We are slightly more positive about short-term prospects for competitors Cognex Corp (CGNX) and Itron Inc (ITRI), which are Zacks #1 Ranked (short-term Strong Buy recommendation).

Our longer-term view (3-6 months) remains Neutral at this point, given the softening in the equipment sector, which could have some impact on Agilent’s testing business.

 
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