Agilent Technologies’ (A - Analyst Report) fiscal third-quarter 2015 earnings per share of 44 cents beat the Zacks Consensus Estimate by 3 cents and came above the guided range of 38–42 cents. Earnings increased 15% sequentially and 8.6% year over year.

Agilent Technologies Inc. - Earnings Surprise | FindTheBest

Revenues

Agilent’s third-quarter revenues of $1.01 billion were up 5.3% from the last quarter and 0.5% year over year. Revenues were toward the higher end of management’s guidance range of $995 million to $1.02 billion and surpassed the Zacks Consensus Estimate of $1.00 billion.

Revenue growth was supported by continued strength in the diagnostics, pharma, environmental and forensics markets, and across all geographies. The company witnessed strong customer acceptance of its new instrument product introductions. Another positive was the strength in CrossLab services and consumables, diagnostics and genomics offerings.

The company resolved previous start-up issues in the Americas Logistics Center, which postponed $15 million of shipments in the previous quarter.

Revenues by Geography

Asia/Pacific was a significant revenue contributor with 35.8% share, while the Americas and Europe accounted for 30% and 34.2%, respectively. All the three regions increased on a sequential basis.

Revenues by Segment

Agilent now has three reporting segments — Life Sciences & Applied Markets Group (LSAG), Agilent Cross Lab Group (ACG) and Diagnostics and Genomics Group (DGG). Its Electronic Measurement Group (EMG) segment has been spun off into Keysight Technologies, an independent, publicly traded company. Agilent also exited the Nuclear Magnetic Resonance business which failed to meet its growth and profitability goals. The company divested or winded up underperforming units to streamline operations.

LSAG was the largest contributor and accounted for $511 million or 50.4% of total revenue, up 1% year over year. The improvement was driven by strong performance in pharma, environmental and forensics markets. Revenue growth was driven by all regions and management said that logistics efficiencies helped shipments.

ACG contributed $336 million or 33.1% to revenues, flat year over year, led by continued strong preference for the company’s CrossLab services and consumables offerings. The points of strength included consumable supplies, columns, sample prep and services.

DGG garnered $167 million or 16.5% of revenues. The segment remained flat year over year. All businesses under this umbrella (Dako, Genomics, Nucleic Acid Solutions) were roughly equal contributors.

Orders

Agilent’s orders worth $953 million were down 8.3% sequentially and 6.3% from last year.

LSAG brought in $471 million or 49.4% of total orders. ACG accounted for $314 million, i.e., 33%, while DGG contributed $168 million or 17.6%.

Margins

Pro-forma gross margin for the quarter was 53.5%, down 34 basis points (bps) sequentially.

Adjusted operating expenses were down 17.5% from the year-ago quarter. Research & development expenses fell year over year. Selling, general & administrative expenses also decreased year over year. The net result was an operating margin of 19.6%, up 43 bps from the year-ago period.

Operating margins of LSAG, AGG and DGG segments were 18.7%, 22.6% and 16.8%, respectively.

Net Income

Agilent generated pro-forma net income of $147 million, or 14.5% of sales, compared with $137 million, or 13.6%, in the year-ago quarter. Our pro-forma estimate excludes acquisition-related costs, restructuring charges, amortization of intangibles and other one-time items, as well as tax adjustments.

Including these items, GAAP net income was $103 million (31 cents per share) compared with $147 million (43 cents per share) a year ago.

Balance Sheet

Inventories were down 2% sequentially to $545 million. The company had cash and cash equivalents of $2.07 billion, up $143 million year over year. Agilent’s long-term debt was $1.65 billion at the end of the quarter.

Net cash provided in operations was $93 million compared with $183 million in the previous quarter. The company used $33 million for cash dividends and repurchased $99 million shares.

Guidance

Agilent issued guidance for the fourth quarter and fiscal 2015.

For the fourth quarter, Agilent expects revenues within $1.03 billion to $1.05 billion and non-GAAP earnings in the range of 45 cents to 49 cents a share. Analysts polled by Zacks expect earnings of 50 cents, and revenues of $1.07 billion.

For fiscal 2015, Agilent projects revenues between $4.03 billion and $4.05 billion (previously: $4.05 billion to $4.11 billion) and non-GAAP earnings per share of $1.68 to $1.72 (previously: $1.67 to $1.73). Analysts polled by Zacks expect earnings of $1.70, and revenues of $4.06 billion.

Recommendation

Agilent delivered decent fiscal third-quarter 2015 results with both the top line and the bottom line surpassing the respective Zacks Consensus Estimate.

The company’s decision to divest and wind up underperforming businesses has enhanced focus on the new Agilent, while enabling management to expand the solid recurring revenue base and diversify geographic and industrial operations to achieve growth. Also, the company’s focus on aligning investment toward more attractive growth opportunities and innovative product launches will fuel growth

In addition, we remain positive on Agilent’s broader portfolio and increased focus on segments with higher growth potential. Further, the company continues to introduce high-margin products.

Moreover, the company recently launched the multi-year “Agile Agilent” Program to increase efficiency and customer focus.

Foreign currency headwinds may have a negative impact on revenues and profits, but the company seems prepared to counter it.

Agilent carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the technology sector are Stamps.com Inc (STMP - Snapshot Report), MeetMe, Inc. (MEET - Snapshot Report) and Amazon.com Inc. (AMZN - Analyst Report). Both sport a Zacks Rank #1 (Strong Buy).