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Agilent Technologies’s (A - Analyst Report) fiscal fourth quarter 2012 earnings per share of 86 cents beat the Zacks Consensus by 6 cents.

Revenue

Agilent’s revenue of 1.77 billion was up 2.6% sequentially and 2.3% year over year. Reported revenue beat the Zacks Consensus Estimate of 1.76 billion.

Revenue by Segment

Agilent has been reporting results under three segments—Chemical Analysis, Life Sciences and Electronic Measurement. However, the Dako acquisition (closed in the fiscal third quarter) now makes up the fourth segment, named Diagnostics and Genomics.

Agilent’s Electronic Measurement segment remained the largest contributor, accounting for 46% of its revenue in the last quarter. However, segment revenue was down 3.4% sequentially and 4.6% year over year to $816.0 million. Communications was the sore point in the last quarter, with Agilent seeing softness on the R&D and manufacturing sides of the business.

The Life Sciences segment generated 23% of revenues. The segment revenue of $401.0 million was up 2.6% sequentially and down 0.2% from last year. Revenue from the pharma/biotech market grew from both the previous and year-ago quarters. However, academic/government markets were softer in the year-over-year comparison.

The Chemical Analysis segment generated 22.0% of fourth quarter revenue. The segment revenue of $394.0 million rose 3.4% sequentially but was down 2.7% year over year. This decline from last year was largely on account of food testing but forensics and testing for drugs of abuse witnessed growth. Environmental was weak when compared with both the previous and year-ago quarters.

The newly added Diagnostics and Genomics segment accounted for 9.0% of revenue in the last quarter, up 47.2% sequentially.

Orders

Agilent’s were up 5.4% sequentially and consistent with the year-ago quarter. Diagnostics and Genomics had the most significant impact (up 49.1% sequentially, 107.9% year over year).

Life Sciences orders were up 11.8% sequentially, but they shrunk 3.7% from the year-ago levels. The Chemical Analysis segment saw orders increasing 13.2% sequentially, although they were flat with the year-ago level. Electronic Measurement was the big disappointment, with orders shrinking 6.9% and 8.2%, respectively, from the previous and year-ago quarters.

Margins

The GAAP gross margin for the quarter was 52.2%, up 50 basis points (bps) sequentially and down 110 bps from the year-ago quarter. On a pro forma basis, the gross margin increased 206 bps sequentially and 77 bps year over year to 55.7%.

The strength in gross margin was due to efficient cost management. The strength in the new Diagnostics segment was a positive for the overall gross margin, since the segment generates significantly higher gross margins than the legacy Agilent business.

Operating expenses increased 4.7% sequentially and 4.3% from the year-ago quarter. However, the operating margin expanded 136 bps sequentially and 9 bps year over year to 21.7%, as the higher gross margin offset the impact of higher R&D and flattish SG&A expenses as a percentage of sales in both cases.

The Electronic Measurement operating margin contracted 15 bps sequentially and 128 bps year over year. The Life Sciences segment margin expanded 313 bps sequentially and 353 bps from the year-ago quarter. The Chemical Analysis margin expanded 362 bps sequentially and 67 bps from the year-ago quarter. The Diagnostics and Genomics margin expanded by 157 bps and 72 bps from the previous and year-ago quarters, respectively.

Net Income

Agilent generated a pro-forma net income of $303.0 million or 17.1% net income margin compared with $278.0 million or 16.1% in the previous quarter and $292.0 million or 16.9% 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.

On a fully diluted GAAP basis, the company recorded a net income of $425.0 million ($1.20 per share) compared with income of $243 million (69 cents per share) in the previous quarter and $289.0 million (82 cents per share) in the year-ago quarter.

Balance Sheet

Inventories declined 2.1% sequentially to $1.014 billion in the fourth quarter. The company ended with cash and cash equivalents of $2.351 billion, up from $1.923 billion in the previous quarter. Agilent’s long-term debt was $2.112 billion in the fourth quarter.

Agilent generated $485 million in cash from operations in the fourth quarter, up from $240.0 million in the previous quarter. Important uses of cash during the quarter included $61 million for capex, $30 million for acquisitions, $34 million for dividends and $94 million for share repurchases.

Guidance

Agilent expects fiscal first quarter revenue in the range of $1.68 billion to $1.70 billion. Non-GAAP earnings are expected to be 65 to 67 cents a share.

For fiscal year 2013, management expects revenue between $7.0 and $7.2 billion. Non-GAAP earnings are expected to be $2.80 to $3.10 per share.

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 Varian should continue to generate higher growth.

Agilent also offers something for in come-seeking investors - it has paid out cash in the form of both share repurchases and dividends  over the past 3 years.

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 markets and its attempt to strengthen its position in segments with better growth potential is encouraging.

On the contrary, the lingering macroeconomic conditions are affecting the spending environment, which other test equipment providers such as Teradyne (TER - Analyst Report) and Advantest Corp are also witnessing. The U.S. economy is also apprehensive about the impending Fiscal Cliff, which may reduce its spending in defence contracts. This may impact Agilent, as it remains one of the largest providers of spectrum analyzers, network analyzers, signal sources and oscilloscopes into these markets,

We have a short-term Hold rating on Agilent’s shares, supported by the Zacks #3 Rank.

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