Agilent Technologies, Inc Value Assessment Dec 29, 2008.

Agilent Technologies, IncValue AssessmentDec 29, 2008

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Analysis Summary

• Agilent Technologies Inc (Agilent) is operating in bio-analytical and electronic measurement solutions industry which is facing issues around:

– Accelerate innovation cycle– Ensure compliance & quality

• In order to drive growth, Agilent is embarking on the following key strategic initiatives:– Growth initiatives in the chosen fields– Targeted mergers and acquisition

• Successful execution of these opportunities can help Agilent realize benefits like:– Increase revenue (USD 48 Mn – USD 96 Mn)– Cost savings (USD 38 Mn – USD 61 Mn)– Working capital improvement (USD 7 Mn – USD 13 Mn)


Electronic Measurement Market Will Be Driven By Network Convergence, Mobile Internet, Homeland Security, And R&D And Electronic Manufacturing In Asia

Source: Company Investor Presentation, June 2008; Company 10K for FY 2008

Electronic Measurement

Market

Communications Test Market

General Purpose Market

Network Equipment Mfg

Handset Mfg

Communications service provider

• Network convergences• Mobile internet• R&D and design verification spending• Digital and Radio Frequency (RF)

Convergence

• Current Market Size: USD 9 bn

• Expected market growth rate: 5-6%

Electronics industry

Aerospace & defense

Computer & semiconductor

• Homeland Security driving surveillance

• Growing R&D & electronic manufacturing in Asia

• A/D test modernization



SUB- MARKETS END CUSTOMERS GROWTH DRIVERS MARKET SIZE


Growth in Generics and CRO’s, Academic & Govt. Investment, and Food & Environmental Testing Will Drive Bio-Analytical Measurement Market

*Contract research organization (CRO); Contract manufacturing organization (CMO)Source: Company Investor Presentation, June 2008; Company 10K for FY 2008

Bio-Analytical Measurement

Market

Life Sciences Market

Chemical Analysis Market

Pharma & biotech

CRO & CMO market*

Academic & Govt.

• Life Science applications – “omics”• Growth in generics and CROs• Academic and government investment



Petroleum & Chemical

Forensics & homeland security

Environment market

• Food and environmental testing• Secular growth in developing

countries• Petrochemical demand



SUB- MARKETS END CUSTOMERS GROWTH DRIVERS MARKET SIZE


KEY TRENDS DETAILS IMPLICATIONS

Growth in telecommunications industry

• As the largest end-use market, telecommunication networks are exceedingly dependent on the functionality of electronic test and measurement instruments, as the minutest distortion of signals can result in failure to communicate. Establishment of new networks in developing economies and the need to upgrade existing communication infrastructure are the major demand drivers for electronic test and measurement instruments market• Definite shift in telecommunications market towards 3G mobile

systems has opened up a world of opportunities for select product segments capable of high-resolution measurements such as signal analyzers. Future demand for electronic test and measurement instruments is expected to stem from new emerging application areas in communication, such as, satellite-based personal networks, home automation networks, wireless local area networks, and wireless Internet

• Players need to reduce time to market to avail growing market

• Customer service will be of utmost importance to ensure stable customer base

• Industry players will leverage technological benefits in consolidating varied business operations

• Companies will further invest in R&D for developing new technology products

Growth in analytical instruments market

• Growth of sales to the pharmaceutical industry was propelled by Asian markets, CROs, and biotech• Demand from industrial and applied markets remained robust, with

companies reporting no signs of any adverse effects due to the global economic slowdown. However, players did note rising freight and material costs, which many indicated they have successfully passed on to customers

Key Trends Include Growing Telecom Market Riding On Growth Of 3G And New Emerging Applications And Growing Asian Markets

Source: Electronic Test and Measurement Instruments Market- A Global Strategic Business Report, Oct 2007; Instrument Business Outlook, Aug 2008


Factors Impacting Agilent Technologies

FAVORABLE FACTORS

• Rising Mobile Phone’s Market– There is a continuous increase in mobile phone

market. The global mobile phones market may rise to $211.9 billion in 2011. In addition, the Americas shared 39.1% of the worldwide mobile phone market in fiscal year 2007

• Consistent Growth in Revenues– Agilent recorded consistent increase in its

revenues since past few years. The revenues of the company has shown a growth of 7.8% during the period 2006-2008

• Diversified Geographic Operations– Agilent has operations well spread across

several countries and generated considerable amount of revenues from each region. The company is having operations across 110 markets worldwide

• Focused R&D Activities– Agilent has strong R&D capabilities through the

Agilent Labs. Agilent Labs is engaged in the applied research related to technology in communications, electronics, life sciences and chemical analysis, and research to create new businesses within its existing markets

+ UNFAVORABLE FACTORS

• Industry Consolidation

– The company’s key markets, test and measurement industry and the global telecommunication industry are sensing the increased consolidation. Recently, the company’s competitors called Danaher Corporation acquired Tektronix, operating in the same industry. Verizon acquired MCI to form communications and IT business serving business and government customers. Consolidation in the key industries might have adverse effect on Agilent’s business and growth

• Slowdown in the U.S. Economy

– There is a slowdown in the GDP of U.S. economy in the recent years. GDP was declined in the third quarter of 2008 to -0.3%. In addition, the forecasted GDP of the U.S. in the year 2009 is -0.9%

• Significant Debt Levels

– The company has significant amount of the long term debt in the fiscal year 2007. The high debt levels as well as high debt to equity ratio reveals the company’s insufficient cash position to plan the short term and long term debts

-AGILENT TECHNOLOGIES, INC

• Agilent Technologies, Inc. (Agilent) is a measurement company providing core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries

• Company has two business segments: the electronic measurement business and the bio-analytical measurement business. Agilent's electronic measurement business focuses on the communications and electronics industries, while its bio-analytical measurement business focuses on the life sciences industry and in the environmental, chemical, food and petrochemical industries and in materials sciences

• Company sells its products primarily through direct sales, and also utilizes distributors, resellers, manufacturer's representatives, telesales and electronic commerce

• In March 2008, Agilent acquired Colloidal Dynamics

Source: Global Markets Direct Company Profiles, Dec 2008; Company 10K for FY 2008; Company Website


NOTE: Financials for last 12 months ending Sep, 2008. Financials of Agilent are for FY ending Oct 2008Source: OneSource, Please see Appendix for data analysis

REVENUE GROWTH RATE (1 YR)

Percent

REVENUE / EMPLOYEE

USD

Agilent recorded better than peer average revenue per employee

-5.6%

6.5%

13.0%

19.1%

19.1%

19.4%

Anritsu

Agilent

Peer Average

PerkinElmer

Thermo Fisher

Affymetrix

222,802

226,201

291,431

399,364

317,358

303,895

PerkinElmer

Anritsu

Peer Average

Agilent

Thermo Fisher

Affymetrix

Agilent recorded one of the lowest revenue growth’s in the peer group in last year

Agilent Should Focus On Revenue Growth To Stay Competitive


Agilent Aspires To Achieve Secular Growth Of 10% Through Market Growth, Market Share Gains Achieved Through Growth Initiatives And Acquisitions

Source: Company Investor Presentation

Targeted mergers and acquisition in life sciences workflow solutions, surveillance and materials science

2

Growth initiatives in the field of life science, materials science, wireless R&D, surveillance and homeland security, and low cost instrumentation

1

Achieve secular growth of 10% through market growth, share gain, and acquisitions


KEY CHALLENGES AGILENT’S PAIN POINTS

Accelerate Innovation Cycle Agilent sells its products to the market which is characterized by rapid technological changes, frequent new product and service introductions and changing industry standards. Any delay in introduction of new product, services and enhancements may severely impact the revenue and profitability of the company

Agilent spent USD 704 mn in 2008, USD 685 mn in 2007, and USD 655 mn in 2006 as research and development expenses in order to maintain company’s competitive position with a continuing flow of innovative, high quality products and services

Ensure Compliance & Quality

Agilent’s R&D, manufacturing and distribution operations involve the use of hazardous substances and are regulated under international, federal, state and local laws governing health and safety and the environment

All Agilent properties and operations have to comply in all material respects with applicable environmental laws and worker health and safety laws

Some of Agilent operations are located on the property that are known to have subsurface contamination undergoing remediation by HP, Agilent’s former parent company. Agilent is liable and will indemnify HP for any contamination found at all facilities transferred to Agilent by HP excluding the properties undergoing remediation

Key Issues Revolve Around Accelerating Innovation And Ensuring Regulatory Compliance

Source: Company 10K Report, 2008; Oracle Research


Agilent’s Strategies Broadly Address Key Challenges

AGILENT’s STRATEGIES AGILENT’s CHALLENGES

Source: Oracle Research

Accelerating InnovationGrowth initiatives in the chosen fields1

Targeted mergers and acquisition 2Ensure Compliance & Quality


Financial AnalysisAgilent Technologies

Source: Company 10K for FY 2008

Key Highlights for FY Ending Oct 2008• Net revenue for FY 2007-2008 stood at USD 5,774 mn, up 6.5%. Foreign currency movement accounted for 3

percentage points of revenue growth. Further 1 percentage point of revenue growth in 2008 was attributable to bio-analytical acquisitions. Bio-analytical measurement segment achieved revenue growth of 14% as both life science and chemical analysis businesses recorded growth

• Profit margins increased modestly in FY 2007-2008 on account of hedging gains which were partially offset by comparative weakness of the USD and JPY denominated revenues against Euro and Malaysian Ringgit

In USD Mn FY Ending Oct-2008

FY Ending Oct-2007

FY Ending Oct-2006

1 Yr Growth 2 Yr Growth

Products segment 4,804 4,505 4,125 6.6% 7.9%Services and other segment 970 915 848 6.0% 7.0%Total net revenue 5,774 5,420 4,973 6.5% 7.8%Gross Income 3,196 2,969 2,658 7.6% 9.7%Operating Income 795 584 464 36.1% 30.9%Net Income 693 638 1,437 8.6% -30.6%

Key Margins FY Ending Oct-2008

FY Ending Oct-2007

FY Ending Oct-2006

Gross Margin 55.4% 54.8% 53.4%Operating Margin 13.8% 10.8% 9.3%Profit Margin 12.0% 11.8% 28.9%R&D Expenses to Revenue 12.2% 12.6% 13.2%SG&A Expenses to Revenue 29.4% 31.4% 33.4%


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Agilent Technologies, Inc Value Assessment Dec 29, 2008.

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