Agilent Technologies’ (A) fiscal first quarter earnings per share of 63 cents missed the Zacks Consensus Estimate by 4 cents, or 6.0%.
Revenue
Agilent’s revenue of $1.68 billion was down 4.9% sequentially and up 2.8% year over year, just short of the Zacks Consensus Estimate of $1.70 billion. Revenue growth was greatly helped by the Dako acquisition.
Revenue by Segment
Agilent reports results under three segments—Chemical Analysis, Life Sciences, Electronic Measurement and Diagnostics & Genomics.
In the last quarter, Agilent’s Electronic Measurement segment remained the largest contributor, accounting for 43% of its revenue. However, segment revenue declined both sequentially and year over year for the third straight quarter.
Management attributed the 11.5% sequential and 7.2% year-over-year declines to continued softness in base station investment and reduction in investment in the wireless handset segment following a period of strong investment. The weakness was made worse by delivery issues at Agilent.
The Life Sciences segment generated 24% of revenues, which was flat sequentially and up 1.5% year over year. The increase from last year is attributable to a stronger pharma market, supported by consistent academic and government markets. Management stated that while the consumables and service offerings remained robust, some products, such as the LC/MS platform suffered from tougher compares.
The Chemical Analysis segment generated 23% of revenue, which was consistent with both the previous and year-ago quarters. Lower government spending was responsible for the slight decline in the environmental business. All other areas held up.
The newly added Diagnostics and Genomics segment accounted for 10% of revenue in the last quarter, up 4.5% sequentially. Expanding partnerships, such as those with Eli Lilly and Pfizer (PFE) are driving growth for the segment. New product launches and expansion in Asia are also helping.
Broadly, the aerospace/defense and Food markets were the strongest on a sequential basis although pharma also increased. Industrial/semi and communications were particularly weak (down double-digits), with academic/government and forensics/ environmental down mid-single-digits.
Aerospace/defense was also the strongest in the year-over-year comparison, with chemical/energy, academic/government and food also posting some growth. Revenue from other markets shrunk.
Orders
Agilent’s orders were down 2.3% sequentially and up 5.4% from the year-ago quarter. Diagnostics and Genomics was the lone bright spot (up 4.4% sequentially, 139.1% year over year). Life Sciences orders were down 4.8% sequentially and up 0.8% from the year-ago level.
The Chemical Analysis segment saw orders declining 5.2% sequentially and 1.0% from last year. Electronic Measurement remained a disappointment, with orders shrinking 0.8% and 1.1%, respectively, from the previous and year-ago quarters.
Margins
The pro forma gross margin for the quarter was 54.9%, down 80 basis points (bps) sequentially and up 8 bps from the year-ago quarter. The sequential decline is unsurprising, given the lower volumes. Additionally, the high-margin EM business saw the most significant decline, so there was likely a mix factor as well.
The strength in the new Diagnostics segment remains a positive for the overall gross margin, since the segment generates significantly higher gross margins than the legacy Agilent business.
Operating expenses increased 5.5% sequentially and 8.9% from the year-ago quarter. Therefore, the operating margin shrunk 453 bps sequentially and 206 bps year over year to 17.1%, as all expenses increased as a percentage of sales.
The Electronic Measurement operating margin shrunk 585 bps sequentially and 325 bps year over year. The Life Sciences margin shrunk 249 bps sequentially while expanding 53 bps from the year-ago quarter.
The Chemical Analysis margin shrunk 406 bps sequentially and 166 bps from last year. The Diagnostics and Genomics margin shrunk 378 bps and expanded 76 bps from the year-ago quarter.
Net Income
Agilent generated a pro-forma net income of $222 million or 13.2% net income margin compared to $303 million or 17.1% in the previous quarter and $244 million or 14.9% in the year-ago quarter. Our pro-forma estimate excludes acquisition-related costs, amortization of intangibles and other one-time items, as well as tax adjustments.
Including these items, the GAAP net income was $179 million ($0.51 per share) compared with income of $425 million ($1.20 cents per share) in the previous quarter and $225 million ($0.64 cents per share) in the year-ago quarter.
Balance Sheet
Inventories grew 2.6% sequentially to $1.04 billion with turns dropping from 3.1X to 2.9X. The company ended with cash and cash equivalents of $2.45 billion, up $99 million during the quarter. Agilent’s long-term debt was $2.11 billion at quarter-end.
Cash generated from operations was $245 million compared to $485 million in generated in the fourth quarter. Important uses of cash during the quarter included $59 million on capex, $10 million on acquisitions, $35 million on dividends and $79 million on share repurchases.
Guidance
Agilent provided guidance for the second quarter of 2013 and updated the guidance for the year.
In the second quarter, Agilent expects revenue of $1.74 billion to $1.77 billion and non-GAAP earnings of 64 to 70 cents a share. Analysts polled by Zacks were expecting earnings of 74 cents, much higher than the guidance.
For fiscal year 2013, Agilent expects revenue of between $6.90 billion and $7.10 billion (previous $7.0 and $7.2 billion). Non-GAAP earnings are expected to be $2.70 to $3.00 a share (previous $2.80 to $3.10).
Recommendation
We are positive about Agilent’s broader portfolio and diversification into segments with higher growth potential. Further, it continues to introduce new products (with higher margins), which along with those acquired from Dako and Varian continues to improve its growth prospects.
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. The company already enjoys a strong position in its markets and its attempt to strengthen its position in segments with better growth potential is encouraging.
On the other hand, lingering macroeconomic concerns are affecting the spending environment, which other test equipment providers such as Teradyne (TER) and Advantest Corp (ATE) are also witnessing. This could remain a dampener for Agilent, as it remains one of the largest providers of spectrum analyzers, network analyzers, signal sources and oscilloscopes to government and research organizations.
