Agilent Technologies’ (A) first quarter earnings beat the Zacks Consensus by 3 cents, or 5.3%. Revenue growth, expansion in Electronic Measurement segment margins, a lower interest expense and a lower tax rate helped drive results in the last quarter.
Revenue
Agilent’s revenue was down 3.3% sequentially (normal seasonality) and up 25.6% year over year. Excluding the impact of Varian, Agilent’s revenues were down 3.6% sequentially and up 25.2% from last year, more or less in line with management’s expectations.
Currency had a slight positive impact on Agilent’s Life Sciences and Chemical Analysis comparisons and was slightly negative to Electronic Measurement comparisons (when compared with year-ago results). The overall impact of currency on Agilent’s year-over-year comparisons was neutral. Agilent stated that logistics issues caused Varian-based revenue to fall $30 million below expectations.
While revenue declined sequentially across all geographies, the decline was most significant in the Americas (6.0%), followed by the Asia/Pacific, which was down 2.9% and then Europe (down 1.2%). However, all regions saw higher revenue than last year.
Asia witnessed the strongest growth at 29.6%, followed by the Americas, which grew 25.5% and then Europe, which grew 19.2%. Agilent’s consistent performance in Asia is on account of regulatory moves to improve safety standards across industry. The company continues to see particular strength in China and India, which increased in the high 20s percentage range.
All end markets were up from the year-ago quarter, although the strongest by far was Academic/Government (up 75.9%), followed by Chemical testing (up 48.5%) and Communications (up 40.4%). Forensics/Environmental, Industrial, computing and semiconductor, and pharma and biotech markets were also up double-digits.
Food and Aerospace/Defense were the softest markets in the last quarter. Sequential comparisons were mixed, with four markets growing and four declining.
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 fourth quarter revenue. The Energy and Chemical testing markets drove the strength in the last quarter, helped by environment and forensics. Food was sluggish in the last quarter, although it came on the back of a quarter of triple-digit sequential growth.
Segment revenue dropped 10.3% sequentially, while growing 43.0% from last year. The GC and GC/MS platforms were particularly strong in the last quarter.
The Life Sciences segment generated 27% of revenue, down 6.3% sequentially and up 18.8% from last year. Both Academic and Pharma markets helped growth in the last quarter. 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. Liquid chromatography platforms continue to drive the segment, although Agilent stated that it was seeing increasing demand for its genomics, informatics, automation, NMR and MRI products.
Agilent’s Electronic Measurement segment saw the strongest growth. This remains Agilent’s largest segment, with a revenue contribution of 51% in the last quarter. The communications market drove the 24.1% increase from last year. The business continues to be driven by LTE and 3G deployments, both on the infrastructure side and on the handset side.
The general purpose business slowed down in the last quarter, with industrial, computing and semiconductor markets, as well as aerospace and defense markets performing moderately. Segment revenue was down 2.6% sequentially, mostly on account of the general purpose business.
Agilent remains one of the largest providers of spectrum analyzers and oscilloscopes. Agilent stated that its oscilloscope revenue was up 70% from last year, so it is likely that share gains continued in the last quarter.
Orders
Agilent grew orders 33.4% from last year. The Chemical Analysis segment was the largest driver, growing 60.3%, followed by Life Sciences, which was up 31.5% and Electronic Measurement, which was up 24.1%. The three segments saw sequential order declines of 3.2%, 5.6% and 2.6%, respectively.
Agilent’s book-to-bill ratio was positive in all segments, resulting in backlog accumulation.
Margins
The proforma gross margin for the quarter was 55.2%, down 34 basis points (bps) sequentially and 88 bps from the year-ago quarter. The operating expenses of $571 million were flattish sequentially and up 14.4% year over year.
As a result, the operating margin, at 17.7% declined 151 bps sequentially, while increasing 279 bps from last year. The sequential increase was on account of increases in all costs as a percentage of sales, particularly SG&A expenses.
However, both R&D and SG&A declined as a percentage of sales from the year-ago quarter, which was the reason for the operating margin expansion from last year. Agilent stated that salary increases in December, front-end loading of stock based compensation expenses and higher payroll expenses were the reasons for incremental operating expenses in the last quarter.
The year-over-year increase in operating margin was entirely on account of the Electronic Measurement segment, which saw a margin expansion of 1,101 bps. The Chemical Analysis margin dropped 883 bps, while the Life Sciences margin dropped 430 bps.
The Electronic Measurement margin was up 21 bps sequentially, not enough to offset the 348 bp decline in the Life Sciences and 250 bp decline in the Chemical Analysis segment margins.
Net Income
Agilent generated a pro forma net income of $212 million, or a 13.9% net income margin compared to $228 million or 14..5% in the previous quarter and $135 million, or 11.1% in the first 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 on a tax adjusted basis.
On a fully diluted GAAP basis, the company recorded a net income of $204 million ($0.57 per share) compared to income of $232 million ($0.66 per share) in the previous quarter and $79 million ($0.22 per share) in the year-ago quarter.
Balance Sheet
The balance sheet shows a net cash position of $499 million, a significant improvement over the net debt position of $1.04 billion at the beginning of the quarter. The improvement was on account of repayment of $1.5 billion in debt during the quarter.
As a result, the debt to total capitalization ratio also dropped to 39.0% from 54.2% at the beginning of the quarter. The interest coverage ratio of $11.7X also improved. The interest coverage ratio has continued to increase over the past 4 quarters.
Inventories at quarter-end were up 11.3%, with annualized inventory turns dropping from around 3.9X to 3.4X. Days sales outstanding (DSOs) went from around 50 to around 51. Agilent generated around $120 million of cash from operations, spent $38 million on capex, $1.5 billion on debt repayment and $270 million on share repurchases.
Guidance
Agilent expects fiscal second quarter revenue of $1.59 billion to $1.61 billion (a 4-6% sequential increase). The non GAAP EPS for the quarter is expected to come in at around 63 to 65 cents.
For fiscal 2011, Agilent now expects revenues of $6.3 billion to $6.4 billion (previous $6.1 billion to $6.3 billion) and non-GAAP earnings of $2.53 to $2.63 (previous $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 carries a Zacks #2 Rank of #2, implying a short-term Buy recommendation, similar to competitors such as National Instruments Corp. (NATI). We are slightly more positive about short-term prospects for competitor Teradyne Inc (TER), which is Zacks #1 ranked (short-term Strong Buy recommendation).
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