Agilent Technologies
' (
A
) fiscal second quarter earnings exceeded the Zacks Consensus by 5
cents (6.8%), led by strength across multiple end markets and
product lines.
Revenue
Agilent's revenue was up 6.0% sequentially and 3.3% year over
year, better than management's expectations of a 4-5% sequential
increase ($1.70 billion to $1.72 billion). Currency was a slight
negative in the year-over-year comparison.
Europe was the weak point in both the sequential and
year-over-year comparisons, declining 6.2% and 4.9%, respectively.
However, Agilent saw strength in both the Americas and
Asia/Pacific, where revenues were up 9.6% and 10.8%, respectively
from the previous quarter. Revenues were also up 12.7% and 0.9%
from the year-ago quarter.
The Americas, Asia and Europe generated 36%, 23% and 41%, of
quarterly revenue, respectively. Agilent's consistent performance
in Asia is on account of regulatory moves to improve safety
standards in the region.
The strongest year-over-year growth came from the
chemical/energy market (up 11.3%) and communications (up 9.4%). All
other end-markets grew a little over 3%, with the exception of
academic/government, which declined 9.6%.
Communications was the strongest market in the sequential
comparison, having grown 19.2%. Chemical/energy and
industrial/comps were close on its heels with 14.1% and 11.0%
growth from the previous quarter. However, the pharma/biotech and
aerospace/defense markets disappointed, declining 7.3% and 3.6%
respectively.
Revenue by Segment
Agilent reports results in three segments: Chemical Analysis,
Life Sciences and Electronic Measurement.
Agilent's
Electronic Measurement
segment remains its largest, with a revenue contribution of 51% in
the last quarter. The April quarter was a very good one for the
segment, with revenue growing 12.6% sequentially and 5.0% year over
year. Agilent's general purpose product line did well, with
industrial, computing and semiconductor markets growing from both
the previous and year-ago quarters.
Agilent stated that macro-economic trends in both Asia and the
Americas helped the company in the last quarter. However, the
aerospace/defense business remains sluggish, impacted by lower
business from defense contractors in the last quarter.
Communications revenue growth was solid in on both sequential
and year-over-year bases, as Agilent's wireless testing business
rebounded. Segment revenue is very well diversified across
geographies, with only Europe contributing a smaller percentage (a
positive in the current environment).
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.
The
Life Sciences
segment generated 27% of revenue, up 1.7% sequentially and 1.1%
from last year. Agilent was impacted by weakness in the
academic/government segment, which offset the slight increase in
pharma/biotech relative to the year-ago quarter.
However, the opposite was true for the sequential comparison,
where weakness in pharma/biotech offset the slight increase in
academic/government. Agilent remains well positioned to take
advantage of the replacement cycle for lab instrumentation.
The
Chemical Analysis
segment generated 22% of second quarter revenue. The
forensics/environmental market was relatively soft, with both
chemical/energy and food markets making a good contribution to
Agilent's quarterly revenue growth.
Orders
Agilent saw orders growing 13.4% sequentially and 8.1% year over
year. Electronic Measurement, being the largest segment by far had
the most significant impact (up 26.4% sequentially, 13.4% year over
year). Life Sciences orders were up 2.8% sequentially, but dropped
0.6% from year-ago levels. The Chemical Analysis segment saw orders
growing 1.2% sequentially and 7.4% from a year ago.
Agilent's book-to-bill ratio rose above unity, being positive
BTB across all segments.
Margins
The proforma gross margin for the quarter was 54.1%, down 74
basis points (bps) sequentially and 121 bps from the year-ago
quarter. The strength in the wireless manufacturing segment drove
up costs for Agilent, thus impacting the overall numbers.
Operating expenses grew 3.1% sequentially and were down nearly
one percentage point from the year-ago quarter, as Agilent
continued cost containment efforts. As a result of these efforts,
the operating margin, at 19.4% expanded 24 bps sequentially and 25
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 fo sales increased.
The Electronic Measurement operating margin expanded 284 bps
sequentially and 50 bps year over year. However, Life Sciences and
Chemical Analysis were down 174 bps and 341 bps, respectively, from
the previous quarter and 57 bps and 8 bps, respectively, from the
April quarter of 2011.
Net Income
Agilent generated a pro forma net income of $275 million, or a
15.9% net income margin compared to $244 million or 14.9% in the
previous quarter and $259 million, or 15.4% in the second 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 net income
of $255 million ($0.72 per share) compared to income of $225
million ($0.64 per share) in the previous quarter and $200 million
($0.56 per share) in the year-ago quarter.
Balance Sheet
The balance sheet shows a net cash position of $1.72 billion, an
improvement over the net cash position of $1.48 billion at the
beginning of the quarter. Agilent generated $353 million from
operations in the last quarter, spending $37 million on capex, $21
million on acquisitions, $35 million on dividends and $44 million
on share repurchases. The debt to total capitalization ratio also
dropped to 31.5% from 32.6% at the beginning of the quarter.
Inventories at quarter-end were up 1.1% from the previous
quarter, with annualized inventory turns up from 3.2X to
3.4X. Days sales outstanding (DSOs) went from 45 to around 48.
Guidance
Agilent expects fiscal third quarter revenue of $1.77 billion to
$1.79 billion (a 2-3% sequential increase). Consensus expectations
were at $1.76 billion when the company announced guidance, below
the guided range. Non-GAAP earnings are expected to be 82 to 84
cents a share, slightly softer than the Zacks Consensus Estimate of
84 cents (at the mid-point).
Agilent expects 2012 revenue of $6.94 to 7.00 bilion (previous
$6.9-7.02 billion) at current exchange rates, with the non-GAAP
earnings coming in the range of $3.18 to $3.24 a share (previous
$3.13 to $3.23 a share). The increase is due to lower non-GAAP tax
rate expectations of 16%.
Recommendation
The improved results and satisfactory guidance seem to indicate
stronger end markets overall. Additionally, given that revenues are
significantly diversified across end markets, we expect stability
and growth in Agilent's business this year. Other companies with a
testing focus, such as
Teradyne
(
TER
) and
FormFactor
(
FORM
) are also seeing improving trends. Agilent being significantly
more diversified, should benefit more from macro-economic
strength.
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 (with
higher margins), which along with those acquired from Varian should
generate continued growth. Cost control has also been
commendable.
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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