) fiscal third quarter earnings missed the Zacks Consensus by 4
cents (4.8%). Revenue was also short of our expectations, missing
Agilent's revenue was flat sequentially and up 1.9% year over
year, short of management's expectations of a 2-3% sequential
increase($1.77 billion to $1.79 billion). Management attributed the
decline to weakness in the manufacturing sector all over the world,
which resulted in order push-outs into the fiscal fourth quarter.
Currency and acquisitions taken together were neutral to the
comparison with the year-ago quarter.
The Asia/Pacific was notably weak in the last quarter, declining
10.3% and 4.7% from the previous and year-ago quarters,
respectively. Growth in China is slowing down, which impacted
Agilent in the last quarter and has the potential to continue
impacting revenue through the rest of 2012.
Management indicated that some of the decline was also
attributable to more orders pertaining to Asia being taken outside
the region, as a result of which the related revenue was also being
booked outside. The sequential and year-over-year declines of 0.6%
and 1.7%, respectively in Europe were less than in the April
quarter, although spending remains weak due to economic
The Americas did rather well all things considered, with
revenues growing 10.5% sequentially and 11.2% from last year. The
Americas, Asia and Europe generated 40%, 37% and 23%, of quarterly
Revenue by Segment
Agilent has been reporting results in three segments-Chemical
Analysis, Life Sciences and Electronic Measurement. However, after
it closed the Dako acquisition in the last quarter, it now has a
fourth segment, which has been named Diagnostics and Genomics.
segment remains its largest, with a revenue contribution of 49% in
the last quarter. The weakness was on the computing/semiconductor
sides of the business. Communications was very strong, driven by
wireless testing activity, although it was partially offset by
weakness on the optical side of the business and a softer
infrastructure market overall.
The industrial business was impacted by macro concerns all over
the world and declining spending levels. Computing was also soft,
in line with broader market trends. Additionally, the
aerospace/defense business remains sluggish, impacted by lower
business from defense contractors in the last quarter.
Relatively stable U.S. government spending was offset by
weakness at defense contractors in the last quarter. Agilent
remains one of the largest providers of spectrum analyzers, network
analyzers, signal sources and oscilloscopes into these markets, so
its market position is a positive for the longer term. Segment
revenue is very well diversified across geographies, with only
Europe contributing a smaller percentage (a positive in the current
segment generated 23% of revenue, down 1.0% sequentially and up
2.1% from last year. The academic/government market remained weak
compared to the year-ago quarter and was joined by the
pharma/biotech segment in the last quarter. Pharma/biotech was
particularly weak relative to the previous quarter, offsetting the
flat revenues in academic/government.
segment generated 22% of third quarter revenue, down 8.8%
sequentially and 7.0% year over year. The sequential decline was
largely on account of weakness in food testing, although
chemical/energy was also down significantly and the
forensics/environmental was flattish. All three markets fared
similarly when compared with the year-ago quarter.
The newly added
Diagnostics and Genomics
segment accounted for 6% of revenue in the last quarter.
Agilent saw orders declining 9.7% sequentially and 1.5% year
over year. Electronic Measurement, being the largest segment by far
had the most significant impact (down 15.3% sequentially, 3.7% year
over year). Life Sciences orders were down 9.0% sequentially and
2.4% from year-ago levels.
The Chemical Analysis segment saw orders dropping 8.8%
sequentially and 7.0% from a year ago. Diagnostics and Genomics
accounted for 6% of revenue.
Agilent's book-to-bill ratio rose above unity, as BTB was
positive across all segments.
The proforma gross margin for the quarter was 53.7%, down 44
basis points (bps) sequentially and 72 bps from the year-ago
quarter. The strength in the wireless manufacturing segment
continued to drive up costs for Agilent, thus impacting the overall
Operating expenses dropped 4.3% sequentially and were flattish
with the year-ago quarter, as Agilent continued cost-containment
efforts. As a result of these efforts, the operating margin, at
20.3%, expanded 87 bps sequentially and 15 bps from last year. Both
R&D and SG&A declined as a percentage of sales from the
previous and year-ago quarters, although cost of sales
The Electronic Measurement operating margin contracted 9 bps
sequentially and 52 bps year over year. However, Life Sciences and
Chemical Analysis expanded 344 bps and 218 bps, respectively from
the previous quarter and 126 bps and 37 bps, respectively from the
July quarter of 2011.
Agilent generated a pro forma net income of $278 million, or a
16.1% net income margin compared to $275 million or 15.9% in the
previous quarter and $275 million, or 16.3% in the third quarter of
last year. Our pro forma estimate excludes acquisition-related
costs, amortization of intangibles and other one-time items, as
well as tax adjustments.
On a fully diluted GAAP basis, the company recorded a net income
of $243 million ($0.69 per share) compared to income of $255
million ($0.72 per share) in the previous quarter and $330 million
($0.95 per share) in the year-ago quarter.
The balance sheet shows a net debt position of $291 million,
compared to a net cash position of $1.72 billion at the beginning
of the quarter. Agilent generated $240 million from operations in
the last quarter, spending $49 million on capex, $2.2 billion on
acquisitions and $35 million on dividends but did not repurchase
any shares. The debt-to-total-capitalization ratio dropped slightly
to 31.2% from 31.5% at the beginning of the quarter.
Inventories at quarter-end were up 9.4% from the previous
quarter, with annualized inventory turns down from 3.4X to
3.1X. Days sales outstanding (DSOs) went from 48 to around 50.
Agilent expects fiscal fourth quarter revenue of $1.76 billion
to $1.78 billion (a 2-3% sequential increase). Consensus
expectations were at $1.87 billion when the company announced
guidance, above the guided range. Non-GAAP earnings are expected to
be 80 to 82 cents a share, much softer than the Zacks Consensus
Estimate of 93 cents (at the mid-point).
Agilent expects 2012 core revenue growth of around 3% at current
exchange rates, with the non-GAAP earnings coming in the range of
$3.07 a share (previous $3.18 to $3.24 a share). The weak guidance
was on account of a softer demand environment.
Agilent's results are reflective of the same factors that have
hit other test equipment providers, such as
). Agilent's broader portfolio and diversification into segments
with better growth potential make us more positive about the
In recent times, Agilent's focus has shifted to life sciences,
genomics, diagnostics and wireless test markets, where the company
has made a few important acquisitions (Varian and more recently
Dako). The company already enjoys a strong position in its served
markets and its attempt to strengthen its position in these
segments is sound strategy.
Agilent also continues to introduce new products (with higher
margins), which along with those acquired from Varian should
generate continued growth. Cost control has also been
Despite these positives, we think that macro conditions will
continue to weigh on the shares. We therefore have a short-term
Hold rating on Agilent shares, as indicated by the Zacks #3
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