Agilent Sees Improving Trends - Analyst Blog

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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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: A , FORM , TER

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