Agilent Technologies Management Discusses Q3 2012 Results - Earnings Call Transcript

Agilent Technologies (A)

Q3 2012 Earnings Call

August 15, 2012 4:30 pm ET

Executives

Alicia Rodriguez

William P. Sullivan - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Didier Hirsch - Chief Financial Officer and Senior Vice President

Nicolas H. Roelofs - Senior Vice President and President of Life Sciences Group

Lars Holmkvist - President of Dako and Corporate Executive Officer of Dako

Michael R. McMullen - Senior Vice President and President of Chemical Analysis Group

Guy Sene - Senior Vice President and President Electronic Measurement Group

Ronald S. Nersesian - Chief Operating Officer and Executive Vice President

Analysts

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Jonathan P. Groberg - Macquarie Research

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Nandita Koshal - Barclays Capital, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division

Amit Bhalla - Citigroup Inc, Research Division

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Mark Douglass - Longbow Research LLC

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Derik De Bruin - BofA Merrill Lynch, Research Division

Daniel Brennan - Morgan Stanley, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Agilent Technologies Inc. Earnings Conference Call. My name is Caris, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I would now like to hand the call over to your host for today, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please proceed.

Alicia Rodriguez

Thank you, and welcome, everyone, to Agilent's Third Quarter Conference Call for Fiscal Year 2012. With me are Agilent's President and CEO, Bill Sullivan, as well as Senior Vice President and CFO, Didier Hirsch. Joining in the Q&A after Didier's comments will be Agilent's Chief Operating Officer, Ron Nersesian, and the presidents of our Electronic Measurement, Life Sciences and Chemical Analysis Groups, Guy Sene, Nick Roelofs and Mike McMullen. Also joining is Lars Holmkvist, President and CEO of Dako.

You can find the press release and information to supplement today's discussion on our website at www.investor. agilent.com. While there, please click on the link for Financial Results, where you will find revenue breakouts, historical financials for Agilent's operations and an investor presentation. We will also post a copy of the prepared remarks following this call.

For any non-GAAP financial measures, you'll find the most directly comparable GAAP financial metrics and reconciliations on our website. We will make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors.

And now, I'd like to turn the call over to Bill.

William P. Sullivan

Thanks, Alicia and hello, everyone. Agilent's Q3 orders were down 1% and Q3 revenues were up 2% over last year. Non-GAAP EPS was $0.79 per share and operating margin was 20.3%. Agilent's performance in the fiscal third quarter did not meet our revenue and EPS guidance. This was due to a softening of shippable orders, as well as a much higher-than-normal push-out to delivery from our customers at the end of the quarter.

While we are not seeing outright order cancellations, we're seeing all the classic signs of a slowdown. Deals are taking longer to close and customers are delaying shipments. We felt the full effect of this phenomenon in July, the last month of Agilent's third fiscal quarter.

The biggest headwind was in the aerospace and defense sector, where revenue was down 11% year-over-year. While U.S. government spending was stable, it was offset by decline in defense contract business. We would normally see an uptick at the end of the year, but we expect Q4 to be lower than normal due to fears of automatic spending cuts.

The second headwind was in the industrial segment, which declined 10% amid deteriorating economic conditions. We saw more conservative demand from our customers in distribution channels across the industrial markets.

A third headwind was in the environmental markets, which declined 6% amid lower government spending. Finally, Academic and Government research was down 6% while we saw continued softening due to budget concerns. The declines in these submarkets were offset by positive results in other areas. Communications revenues were up 7% over a year ago, reflecting strong wireless manufacturing test demand. Wireless manufacturing growth was driven by smartphone capacity expansion, primarily for devices but also for component manufacturers.

Forensics Markets revenues were up 17%. Strength was driven by increased demand for screening and identification of abused prescription pharmaceuticals and designer drugs. Pharmaceutical and food safety markets also experienced modest growth.

Finally, we saw strong growth in diagnostics, where our acquisition of Dako closed near the end of June. As part of Agilent, Dako's currency adjusted revenue was up 14% over the same period a year ago, and business reported the strongest July in its history. The integration of Dako is proceeding well.

Net result of this market, give-and-take, is that we ended up with 2% revenue growth for the third quarter. Even with Q3's disappointing revenue, our teams continued to leverage the power of Agilent's operating model. Agilent has a number of variable cost mechanisms that we are able to exercise doing economic cycles.

In addition, we are continuing our ongoing process to reduce manufacturing costs throughout the enterprise. Agilent's global fulfillment organization had several initiatives underway to consolidate manufacturing sites, streamline logistics and reduce manufacturing costs. We've been able to react very quickly to the economic uncertainties and we will continue to act conservatively moving forward.

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