安捷倫 (A) 2001 Q3 法說會逐字稿

Good day everyone. Welcome to the Agilent third quarter earnings conference call. Today’s call is being recorded. At this time, for opening remarks and introductions, I will turn the call over to investor relations Director, Mr. Elliot Tilley. Please go ahead sir.

Thanks, Eric and welcome to Agilent’s third quarter conference call. With me are Edward W. (Ned) Barnholt, President and Chief Executive officer and Robert R. (Bob) Walker, Executive Vice President and Chief Financial Officer. Today the overview of Agilent’s results for the third quarter format will be as follows. After my introductory comments, Ned will provide his perspective on the quarter and then Bob will go into more detail. After that we will open the call up for questions. In case you have not had a chance to view our release, you can find it on our website at www.agilent.com. As most of you are aware, on August 1, 2001, we completed the sale of our healthcare business at Philips. Therefore, the financial results we discuss and review today reflect Agilent’s continuing operations, which exclude the healthcare business. Also, I would like to remind you that in our prepared remarks and to our answers to your questions, we will make forward-looking statements that will involve risks and uncertainties. These risks and uncertainties could cause Agilent’s results to differ materially from management of current expectations. We encourage you to look at the company’s filings with the Security and Exchange Commission including our 2000 annual report and form 10-K and our form 10-Q for the quarter ended April 30, 2001 and in our current reports on form 8-K on June 29, 2001 and August 15, 2001, to get a more complete picture all the factors that are discussed. Finally, I should mention that the guidance we will review today is valid only at the time we have given. The company assumes no obligations to update the guidance provided on this call as we move through the quarter. Now let me turn it over the Ned. EDWARD W. (NED) BARNHOLT: Thanks Elliot and hello everyone. I am going to cover three topics. First, I will review the difficult quarter we have reported today. I will offer my perspective on our results and on the actions we announced. Second, I will cover some of the bright parts of the quarter including strong new products, excellent expense control, and good cash outcome. And I will finish with some thoughts on the outlook and our guidance for Q4. Let us start with Q3. Like many others in the industry, earlier this year, we believe business would begin to improve by this point in 2001, but the downturn is deeper and clearly will last longer than we thought. That what drove our order results this quarter and the actions we are taking. Our orders were down 5% from last quarter and we are half from what they were a year ago. Even when you take into account that Q3 last year was extremely strong this is a steep decline. About 70% of our business is in markets that are the weakest right now; communications, semiconductors, and computers. Other indication that we may be at the bottom in some businesses is that we are not yet seeing definitive signs of upturn. Customers are telling us that we have the right products and they know they will need to invest in the next generation technologies at some point. However, they are delaying their investments as long as they can. Many customers have made progress in working down their inventories, but excess capacity is still a major issue across the industry. So we are navigating longer and deeper downturns than have been expected. We said last quarter that we would take further actions if we needed to. That time has come. We are accelerating our efforts to align our cost with the level of business that we are likely to have in the next few quarters. We are committed to returning Agilent to profitability as quickly as possible. To help do that we are going to reduce our work force by about 4000 people by the middle of next year. This is a very difficult step to take, but we simply have to size the company to a lower level of business. The 4000 figure include people who leave through normal attrition as well as those affected by some smaller restructuring that has been going on over the last quarter. We will make these cuts in many of our businesses, geographies, and functions. We expect the reductions to yield annualize savings of about $500 million, which will lower our quarterly breakeven point to around $1.9 million. At the same time, we are going to preserve our investments in R&D, our customer phasing activities, and the operational improvements that are making us faster and more efficient. These efforts along with a healthier business climate are the key to getting Agilent back to strong consistent earnings growth. So, while the difficult environment has slowed new orders dramatically, there are several bright spots this quarter. Let me mention a few. First is our new product offering? I think we are in the strongest product position that we have been in many years. We had major introductions at superconductors, semiconductors, and other events in Q3, and there is more in the pipeline. The fourth quarter and Q1 will be very strong new product quarters for us. I said that the downturn is an opportunity for us to gain market share and that remains the key goal. The strong product lineup enhances our ability to do that and we believe we are holding our gaining share across our markets. Of course, customers are taking longer to evaluate products and are constrained on spending, but we have a powerful offering through the business that is out there and we are well positioned for any upturn. I am very pleased that the work we have done to reduce spending has produced great results. Our people have responded with energy and commitment. I think the 10% pay cut, while it undeniably put financial pressure on our people, also made the need to cut spending much more real across the company. So for example, the use of audio conferencing has grown by 70% this year at Agilent. This has meant a lot less travel and net monthly savings of more than $10 million. We are also moving ahead on the transformation effort that we have spoken to you about. The downturn enables us to accelerate programs to streamline our operations. One example is the creation of IT systems that match our company’s needs and another is our growing ability to tailor www.agilent.com to the individual needs of our customers. As you know, we completed the sale of our healthcare business to Philips on August 1, 2001. We now have an even stronger balance sheet with about $1.5 billion in cash and virtually no debt. During tough times like this, cash is critical and it is noteworthy that while we did have negative earnings this quarter, we had a positive operating cash flow. We will continue to manage cash carefully while we invest for growth and operational improvement. Now at times like these it can be difficult to talk about the future, but I will take the risk and conclude with a few thoughts on the outlook. Let me start with the needed contracts. As I said earlier, customers are making strides in reducing their inventories. Our capacity is still far in excess of demand in some of our markets. These issues are going to be with us for the next few quarters. We expect our semiconductors product business and other parts of the company that address the computer and enterprise markets to be the first to make the slow gradual improvement that we foresee over the next few quarters. Our semiconductor product group has a number of significant new products and has had a number of design wins that position us well when conditions improve. For those parts of Agilent that sell capital equipment, new technologies will be the key. Technology role stimulates growth. For example, we continue to see new semiconductor devices that cannot be tested on last year’s testers. We also believe that there will be some business for 2.5 and 3G wireless and 40-gigabit optical systems, especially in R&D as we go forward into next year. Agilent is also building new businesses. This quarter our life science business did well. We continue to see an exciting opportunity in helping customers develop new drugs and therapies that are based on genetics. Finally, I feel very good about how our operational improvements are making us faster and more responsive. So what does all this mean for the outlook? I will summarize it this way; great for the longer term, but difficult in the short term. In Q4, we anticipate a slight increase in orders over this quarter’s total of $1.3 billion. On the revenue side, Q4 is likely to be well below this quarter’s $1.8 billion. We think $1.3-1.5 billion is more realistic. Given this much lower revenue and the wide range, we are now anticipating a loss in Q4 up between $0.50 and $0.70 per share on an EBIT basis, excluding restructuring charges. At this point, we are not able to give meaningful guidance on fiscal year 2002. So, while the short term will be tough, I remain very optimistic about the longer-term opportunities in our core markets. The downturn is severe and a solid upturn appears distant, but fundamental growth drivers in communication and semiconductors remain in place. The telecom and semiconductor markets will recover. When they do, Agilent will be ready with the products, services, and support our customers need to innovate and win. The actions we are taking to reduce our work force are difficult, but necessary part of getting the company to that point. We will continue to work on expense management and asset performance and we will also stay focussed on new products as a top priority. Thanks very much for being with us today. At this point, I will turn it over to Bob. ROBERT R. (BOB) WALKER: Thanks Ned. When we talked last quarter, I said this downturn was the biggest, more severe drop than I have ever seen; that is even more true today. The decline in the communications, semiconductors, and computer markets has hit so many companies so hard and affected our results dramatically. When we spoke with you in May 2001, we thought we would see some improvement in Q3. But during the quarter, we saw only a few signs of an upturn. It is now clear that the downturn will be deeper and longer that what most people would have thought only a few months ago. Before I get to the details, I want to remind you of what we said from the beginning. We are product leadership company. We are continuing our leadership across our businesses. This year is already our best ever for our new products area and we have a lot more in the pipeline. Our customers tell us that we have the right product to address their needs, but they are delaying purchases now. We are confident that our results reflect the fundamental weakness in the industry’s reserve, not a loss in market share or problems with our products. Our Q3 revenue and earnings before goodwill were slightly better than we expected. As Ned said, the real story this quarter is orders, which remained very weak. We did not get anything close to the orders we need to breakeven for Q4. We told you that if we needed to take more actions based on our assessment and the situation, we would. Because of the weak orders this quarter and the lower level of business we anticipate over the next several quarters, we are implementing the actions Ned described. Today, I will comment on orders overall and by business and an overview of the earning statement and the balance sheet. Total net orders were $1.3 billion compared to a very strong third quarter last year. Orders were down 54% in dollars and 52% in local currency. Sequentially orders declined by 5%. Cancellations continued to be an issue and were about $240 million this quarter; that is less than half of the $500 million we reported in Q2 and more than twice from what we expected. We now expect about $100 million cancellations next quarter. I would like to remind you that our policy is only to report orders on which customers plan to take shipments within the next six months. As you know, the dynamics in the markets we serve could not be more different this year than compared to last year. In Q3 last year, demand was exceptionally strong and when we set was non-attainable. Customers were in a panic buying orders. However, even if Q3 last year had been more normal, our comparison still would be way down. Customers are very cautious now about placing orders. Now, I will comment on orders by business. First, Test and Measurement: In communication tests, orders from R&D and service providers were modestly encouraging, but overall orders fell 26% from the second quarter. We continue to see very low orders from our network equipment customers for their manufacturing activities. When the business environment turns around, our customers would want to increase revenue and profit, so we are delivering new products to help our customers save time, money, and generate new revenue. For example, [Super Com] in June introduced a dozen new products in the areas of instillation and maintenance, and operational support systems. Early demand has been very strong for our new transmission testers; the 10-gigabit and 2.5-gigabit. These portable testers will allow network equipment manufacturers and service providers to complete their installation and the maintenance tests more quickly and more cost effectively. At the National Fiber Optics Engineers conference last month, we introduced two new test systems that support the emerging 40-gigabit technology. These systems, coupled with our existing products demonstrate our role as an industry leader in supporting 40-gigabit components and systems for optical network. In general purpose tests, sales to contract manufactures remained very weak. We said in Q2, that we expected softness in this area for several quarters because sales are driven more by capacity rather than the technology. Some good news is the reporting recent study by prime research group that the share of the market by inserting the test systems has grown from 39% to 44%, and assure that the imaging inspection industry has grown from 15% to 25%. Orders in the aerospace defense are relatively good, in two new products the signal analyser and the signal source are getting good acceptance in these markets. In semiconductor tests, cancellations slowed this quarter, but the incoming orders remained very weak and the customers do not need the initial capacity. Although we do not see signs of recovery in this market in the near term, we believe that the 25 strategic application-wins this quarter in semiconductors test help position us to gain market share in the upturn. Also, a survey by BSLI research recognized Agilent as number one in customer satisfaction in semiconductor test process diagnostics. At the semiconductor tests, we introduced several new products to address new applications, to deliver higher performance and to lower the cost of test. At the show, customers, industry watchers, and journalist gave a strong positive feedback about the continued rollout of our systems on the equipped product. Our semiconductor product business depends on end user demand, while our customer products and our near inventory levels. Demand was still weak in the third quarter, but inventory levels were more balanced in most areas. So orders were up sequentially. Thus, cancellations subsided significantly. Our customers however, remain extremely cautious about placing any new orders. Although we are vending designs, these programs will not provide substantial revenue until next year. In networking and communication components, the slowdown in communications industry continued to impact this business. We received push out requests as customers continued to work through remaining inventory. During the quarter, we introduced a new chip that maps Ethernet protocol versus Sun Networks, sparking strong interest with network equipment manufacturers. We also had success with our two-gigabit fiber channel transceivers. In wireless, semiconductors new products such as our FR duplexer and EPM power nodules are beginning to be designed and the products will be ready for the market when it is approved. Imaging orders were down significantly and the core optic business also remained down. Our chemical analysis business turned in a solid quarter even with a normal seasonal decline in orders. Orders for chemical and petrochemical continue to be soft. The new LC and LC/MS products achieved good growth and orders increased by and large. We are ramping manufacturing of micro arrays to meet very strong customer demand, but orders are limited by our ability to ship. Margins in chemical analysis improved from a bright breakeven in Q3 last year, resulting over 10% this year. Year over year revenue declined 23%. Sequentially, revenue declined 24%. We achieved $1.8 billion in revenues because we did a good job in shipping all available orders. With a significant reduction in our backlog, we are now even more dependent on incoming orders going forward including the level, timing, and composition of orders. In the third quarter, we have seen portfolio sales to CIT $26 million. Also in Q3, we recognized $35 million in revenue related to changes in the agreement with the [ADAPTA]. This helped our earnings by $0.05 per share. Our cost of sales was down 19% sequentially in dollars, it was only down 4% from the prior years. The business downturn continued to negatively impact cost of sales. Cost of sales increased to 63% OF revenues in Q3 from 59% in the second quarter. During the second quarter, we continued our ongoing review of inventory in light of lower build plans that reflected the lower order rate. As a result we increased inventory reserves in Q2 by $100 million abnormal. In the third quarter as we lowered our shipment plans it reflect even lower order expectations, our review of inventory results was within about $70 million or $0.10 per share for above normal increases in the majority of results. Also, in the second quarter we reflected about a $100 million in unabsorbed manufacturing capacity; we expected this to continue in Q3. In the third quarter, the unabsorption was about $70 million. The amount in Q3 was lower because of weight reductions, cutback in the use of temporary employees, and other activities. We still have more manufacturing capacity than we need for the next year, which is why we are announcing further actions today. Given the environment, we told you we expected to see some pricing pressure. Although it was not a major fact in our margin decline, it was certainly noticeable and we expect it to continue over the next several quarters. We continue our investments in new product development. R&D expense increased 8% year over year but decreased 10% sequentially. The increase year over year reflects our investment in new product introductions, while selected program reductions, wage cuts, and expense control measures show sequential decrease. SG&A spending declined 23% year over year and 15% sequentially consistent with our plan to lower SG&A more aggressively in our business model. Our original plan was to hold general administrative expenses flat for six quarters beginning with Q3 last year. In the second quarter, we said we expected them to decrease. The decrease reflects our efforts to reduce cost structures and discretionary expenses and we are investing in our operational transformation in our ERP program to improve our cost in the years ahead. Compared to last year, total cost and expenses declined 8% including the impact of the 10% wage cut. The expense controls are working well and even exceeding our expectations. The organization has done a great job of rallying behind this effort, cutting back in spending in virtually every category. Since Q3 last year, discretionary spending is down more than half of travel, PCs, and meals. Temporary labor is down by almost half, equivalent about 4000 people. We are pleased that regular head count came down by about a 1000 people during the third quarter. Finally, let me update you on some of the interim effects of the sale of the healthcare solution business to Philips. By Agilent providing transition services to Philips, we will absorb approximately $50 million in fixed expenses over the next 12 months with about $14 million in Q4. The company has lost about $0.24 per share in earnings before goodwill basis and this excludes a $74 million one time non-cash charge which reflects our change in strategy in providing information systems for customer support, and $39 million in net non-cash gains on equity investments. The $74 million charge would capitalize the offer resulted from having an option now that we did not have before, to work with HP for our customer support systems. When we separated from HP we planned to implement our own customer support systems by November 1, 2001. As we evaluated our overall systems plan, we decided to work with HP to extend the support life of the current systems. Now we can develop a long-term solution, it is better aligned with our overall IT architecture. We have recognized $39 million net gains resulting from our investment holdings, primarily related to the [MERCK] acquisition of [ROSETTE] in July. Last May, we told you we expected a loss for Q3 up $0.20 to $0.30 per share underneath the G basis including the results of our healthcare solution business. Without the healthcare solutions business, we expected the loss to be between $0.30-$0.40 per share including our anticipated $0.05 for restructuring. In Q3, the restructuring was actually $0.01 per share because we delayed the implementation of several programs to coordinate them with the additional plans we announced today. Revenue was higher than expected. We had a good outcome on expenses as a result of the management actions we have already taken. As a percentage of revenue, cost to sales ratio remained a little higher because of the $0.10 per share for above normal increase in inventory reserves associated with our lower order rate. We gained $0.05 per share because of the income from [ADAPTA]. Now, I will turn over to key points from the balance sheet. Our cash situation is very good. Operationally, we have generated about $50 million cash in Q3 net of capital expenditures. Reduction in our accounts receivable balance generated around $400 million in cash. DSO was reduced slightly from 60 days in Q2 to 59 days in Q3 and down from 73 days last year. Inventory turns declined from 3.1 in the second quarter to 2.7 in Q3. Inventory balances were stable. As we have announced, a portion of the proceeds from the sales of our healthcare solutions business is being used to pay our outstanding short-term debt. By the end of this month, we are expecting to virtually have no outstanding debt. Now let me give you some additional information for your financial models. In terms of PPNE, we still expect to spend about $800 million in fiscal 2001. It is a very high year for PPNE because we added and equipped facilities with our new technologies in invested and re-engineered all IT systems. Our Q4 depreciation and non-goodwill amortization would be about $150 million. We expect net interest income to be about $11 million for Q4. Our EBG tax rate is 33%. We will adopt SAB 101 in Q4 this year and do not expect to have any material impact on our annual revenue. As Ned said, we expect a slight increase in total Q4 orders over the $1.3 billion in the third quarter. We expect revenue to be $1.3 to $1.5 billion. We expect this level of revenue to lead to a loss between $0.50 and $0.70 per share on our earnings before goodwill basis excluding the restructuring. I would like to emphasize what Ned said about the actions we are taking in this difficult business cycle. We are cutting back in many areas. We will not sacrifice critical long-term programs with short-term earnings. Our financial position is solid. It is about 1.5 billion in cash and virtually no debt. We have a very strong product portfolio. The current weakness affects companies throughout the industry, not just Agilent. Finally, although our view beyond this quarter is very cloudy, we are confident we have the resources to wither this downturn and emerge in a stronger position. Thanks for joining us today. Now I will turn it back over to Elliot.

Thank you Bob. Operator, at this time we are ready for questions.

Thank you. Today’s question and answer session will be conducted electronically. If you would like to ask a question, please press the * key followed by 1 on your touchtone telephone. We will take our first question from Robert Mayer with Bear Sterns.

Hi. Sorry to hear about the continued issues. In terms of the 4000 departures that you suggested that was going to occur over year’s period of time, what percentage of that is normal attrition and what were are most of those our head count reductions coming from, is it from manufacturing or what could you give us a little further breakdown on that. EDWARD W. (NED) BARNHOLT: If you look at our attrition, as you know historically we have had relatively low attrition as a company. It’s historically averaged around somewhere in the 7-8% range, right now frankly in this kind of environment it is running lower than that. It is actually probably in the 4 or 5% range, so I think we expect that range to continue in terms of average attrition going forward. As far the reductions, they is a significant number reductions in manufacturing, I would say about half or roughly half of the reductions would occur in the manufacturing areas. We will try to address our excess capacity issues.

Okay. On components as such, last quarter you gave us some statistics of some components being down at 85% and some components being down at 90% in terms of orders quarter over quarter. Have those more or less bottomed here or whether there were further reductions in orders or have we seen any uptake at all in any component factors, and may be you could tell us what it has been inventory that is out there? ROBERT R. (BOB) WALKER: Sequentially, we have actually seen an increase in our component business admittedly from very low levels. So we are restarting to see again at least a bottoming of the activity and some increase. EDWARD W. (NED) BARNHOLT: I think we have assumed all of the way along Robert, that we will see a recovery first in our semiconductor products, as I mentioned, some of the inventory adjustments in the computer industry and the enterprise markets appear to be in better shape and say some of the telecom related markets. So we are starting to see a very, very modest stabilization and recovery in our semiconductors product business, but again it is a still from a very low base.

Realizing that it is really early, would it be correct to assume from this that the lot of inventory correction may have passed us and we are starting to get closer to what normal consumption levels are, or reduction in line with the consumption levels. EDWARD W. (NED) BARNHOLT: I think it depends on market. Again, if you look at the computer and the enterprise market I think that is a good assumption. If you go in and look at, say optical components, that is probably the one that is going to take the longest for some of the excess inventory to work its way through and that may be several more quarters.

Okay great thanks. We will take our next question from Edward White from Lehman brothers.

Thank you. Two part questions. First, can you talk about which areas where the heaviest for cancellations during the quarter, and then secondly, you have a good window on sort of the R&D seen out there. What do you think in terms of customer product development cycles? Do you see your customers developing new products on there end and in what sort of time frame do you expect that to sort of kick in and perhaps it has become an important factor. EDWARD W. (NED) BARNHOLT: Yes, regarding cancellations. As we mentioned overall, our cancellations are running about half of what they were in the second quarter and now those cancellations are pretty much. That ratios are pretty much true across the TM test and measurement businesses, as well as our semiconductors product businesses and we have seen some reduction in cancellations in our semiconductors test and automated test areas, but if you look at testing measurements overall, we continue to see cancellations running about half of what they were in our communications test and general purpose tests areas. As far as the R&D markets, there is no question that is a key part of our assumption going forward, if you look at the investments the people are making today, there are still investments in the new optical systems and the new wireless systems. We do believe that those will result in some additional orders to the R&D market and probably as we go into the next year a little bit of business into early manufacturing, particularly in the 2½ key area. If you look at some of our chronic lines that are very focussed on R&D, for example, our electronic design, automation, software business, is actually ahead of plan for the year and showing very nice growth. So that indicates to us that the fundamental strength still is in the R&D areas, and as most companies have cut back, they have tried to preserve their key R&D programs, just like what we are doing in Agilent.

Okay thank you.

Our next question comes from David Ducenberry with Credit Suisse First Boston.

Good afternoon. Can you remind me … tell us again what areas of the networking and computing areas of semiconductors product groups are actually showing some indications or signs of strength on the order side? EDWARD W. (NED) BARNHOLT: Well I think if you look at where that business is, it is in the data networking area. Our strength is more in the networking component business. It is more in the data networking side than it is in the telecom side. And as a result, that business has actually stabilized and started to we think show little signs of like you are going forward as the enterprise market in some of the data networking markets recover.

Are you a major place in the giga [space] right? EDWARD W. (NED) BARNHOLT: Right.

And you are also breaking in on the fiber channel side with the two-giga fiber channel chips. EDWARD W. (NED) BARNHOLT: We have had fiber channel for sometime. You know, we provided the on chip which is used in over half of the storage area and networking systems out there even at one giga … where were we moved into the two giga space very early and we have a very strong position in two giga fiber channels. So, we are certainly seeing some positive signs in the storage area networking and some of the data networking areas, but again I think it is still too early to call a turn what I am talking about is kind of stabilization bouncing along the bottom with may be a little bit of indication of upturn this coming quarter.

I guess what I am joining at is I will look at the giga as a bigger variable on overall networking computing revenues within SPG then something like a fiber channel, which is a much smaller market. Can you give me some idea whether giga is one of those areas that was showing some kind of stabilization and if it is not what were the other areas and when do you expect them to have a meaningful impact for you guys. EDWARD W. (NED) BARNHOLT: Well there is no question that the biggest portion of our data networking components is the giga business that is bigger than our fiber channel and our storage area networking business. So, for that business to be stabilizing, obviously we have to see some stabilization in the gigabit Ethernet side of the business. So, as I mentioned already there are also some encouraging science on the horizon we think for storage area networking as well. I do not have the detail breakdown David in front of me … we have to go back and dig through that and see what we have shared and I am sure Edward or somebody can get back to you with that.

Okay thank you. We will take our next question from Richard Chew with SG Cowen.

Yeah, fine thank you. Actually I have two questions and I want a followup on that along the same lines. On the networking compliments founders, do you booked 97 million, revenue 211 million, and you did book I believe only around 20 million last quarter. So, I guess in the context of your guidance for Q4 I wanted to see if you could talk a little bit more about the dynamics there that you were engaging in, is this cancellations subsiding … or you … which is closer to the run rate in this as such you are seeing and not particular segment in networking and computing compliments 100 million or 200 million and perhaps you can give us a little more detail if you have between the optical piece business and the computing fiber optic proportion and the computing compliment as a part of it. EDWARD W. (NED) BARNHOLT: Well, I think as I said I do not have the detail breakdown here of the telecom piece and the data networking piece, but others [seem to say] that the majority of our business today by far the largest part of it is in the data networking side as opposed to the telecom side. So, that is clearly what is driving these numbers. Looking at the orders that we received in the third quarter of roughly 97, revenue was up 211. We clearly shipped off some backlog … continuing to ship off some backlog, but only had a sequential decline there from last year about 4%. So, we were ramping up last year trying to keep up with demand. But if you look at the net revenue quarter to quarter it was roughly flat and we saw pretty significant increase in the order side, which we think is resolved a bit partly a reduced number of cancellations as well as some of the firming in the business as I talked about. I do not have a detail breakdown of cancellations by each of those four segments in semiconductors product other than to say that in semiconductor products overall cancellations were running around 60-65 million I believe for the quarter.

Okay. ROBERT R. (BOB) WALKER: Now the cancellations were a huge impact obviously last year, last quarter Richard. I think it is safe to say we are expecting closer to the 200 million as we move forward. And again most of that is in the enterprise networking space with routers and other components as opposed to computation and …

So your guidance for Q4 is in terms of corporate cut to 3 billions to 5 billions in revenues contemplates this particular segment running closer to current levels to 100 million or so. EDWARD W. (NED) BARNHOLT: I think there is … we certainly see this part of our business the semiconductors products in general being flat to slightly up for Q4 over where it was in Q3 based on the fact what we are seeing a declining rate of cancellations … that 60 million is again down more than half of what it was in Q2, and we expect that cancellation rate will continue to drop in the Q4 as most people we think have their cancellations hopefully behind them. But going forward we do expect some firming and potentially some sequential growth in that part of the market.

Okay, I do not know whether this is a tough question to answer because it cannot be specific, but you said that in selecting the size of the cuts you try to pick a target that will allow you to return to profitability as soon as possible in the sense. And that break-even level that you are dealing with this is around 9 billion. Can you talk about the bias in your thinking, is it your sense that it is uncertain as things are out there that you think you have a short net of 9 billion in the next two to three quarters or is it … even that is obviously well above current run rates or do you contemplate it well into the second half fiscal year before you have a shot at break even. EDWARD W. (NED) BARNHOLT: Well I think clearly nobody can say for sure when the economy is going to turn around. We do believe that the turn around will in fact come. It is just hard to predict when it is going to happen and what we are trying to do is to continue to balance our short-term, long-term view. We want to take actions that can preserve the health of the company in the near term, but keep our core R&D program and much of our core operational transformation programs in place. So it is really a balancing act and I think we will see a 1.9 billion per quarter at sometime in 2002. I cannot call whether that is Q1, Q2, Q3, your numbers may be better than mine on that, but I am confident that we will see that and if we took any deeper cuts, then I think we would certainly have to cut even further into some of our R&D programs and sales and marketing programs that would jeopardize our ability to capitalize on the upturn when it comes.

So if the order rates remained at Q4 levels for another one or two quarters … will that trigger more action on your part? EDWARD W. (NED) BARNHOLT: Yeah I think just like last time when we talked about the 10% wage cut, you could never say never on this and we are trying to lock up a balancing act here between long-term and short-term. We will look at it each quarter … we will decide what the appropriate response is. We think this is the right response now for what our current assumptions are about the economy for next year, but if the economy continues to deteriorate and the prospects for an upturn looks like they are going to be even more prolonged. Obviously, we have to continue to look at other actions. In this point, I cannot really even speculate with those would be. ROBERT R. (BOB) WALKER: Richard it is tight as much to our view of the recovery process as the depth of things over the next couple of quarters. So, in itself disappointment in the next quarter would not trigger additional actions, but if that was coupled with a view that recovery is not going to happen at all or at a much lower pace than we anticipate and again we are anticipating something pretty slow and gradual then we will need to consider something else.

Very good. Thank you very much.

We will go next to Stephen Confer with First Union Securities.

I just want to make sure I understand some commentary and potentially reconcile it. We have gone through the third question on semiconductor products group and we see that overall especially due to the less fewer cancellations we have some view of overall firming although not across the board there, but some view overall firming. I want you to please review in test equipment and I think you said test for networking equipment manufacturing, you described that as very weak, is that correct? EDWARD W. (NED) BARNHOLT: That is right. ROBERT R. (BOB) WALKER: And again in the manufacturing function within those networks of …

So, there is the … help us understand that if there is anything to believe. I mean basically we have seen some firming in the output, but we are seeing some weakening in the labs. What is going on there? EDWARD W. (NED) BARNHOLT: We are talking about two different networking businesses. In the semiconductor product side, we are talking mostly about data networking because that is where we are strong … if you take the gigabit Ethernet and storage area networking and things like that. In the test area, our strength is in the optical equipment … optic telecom network equipment for the large telecom equipment providers … Nortel, Lucent, and others of the world. That is the business that actually - I think I mentioned last quarter in our conference call - that was the business that actually declined the last. We did not see that start to decline until some more around the February timeframe and so we expect that business to probably be the last to come out. There is still is as I am sure you know a lot of excess capacity in the optical equipment world, and we think that the recovery for optical test equipment might well be out there in the middle of next year. In the meantime, however, we do see our semiconductor products taking off first. We do believe that there will be some recovery in some of the wireless test equipment and probably even the semiconductor test equipment businesses sooner than that because typically somewhere around 3-6 months after the semiconductor products business turns around, we began to see a recovery in the capital equipment use for semiconductor manufacturers. So I think we expect to see some recovery in that business and some of the wireless businesses before we see recovery in the optical network equipment space. ROBERT R. (BOB) WALKER: We are seeing balance in wireless again if exists. As Ned mentioned, we are getting interest certainly in 2.5G of R&D type, but we have been very, very strong historically in testing our devices and there is simply … there is no demand right now for additional manufacturing components capacity to test our wireless devices.

Okay and just I want to make sure I heard another part right that basically your semi-capital equipment test business, which is not focussed on data networking or telecom equipment is showing earlier size of perhaps a recovery did you say that. EDWARD W. (NED) BARNHOLT: Well, I did not say it is showing, I said we expected it to show because usually the semiconductor equipment markets lags the recovery of the semiconductor industry, the component industry by anywhere from 3-6 months and it depends on excess capacity and how quickly that capacity gets utilized. Now the one thing I would say about the semiconductor capital equipment business is, however, it is also highly dependent on new designs. So, just like in the wireless area, people are buying another production line for [GSM] phones. They already have 30 production lines they are not going to buy the 31st. They will buy a new production line for GPRS or some of the new technology. Similarly in semiconductor capital equipment, they are not going to go and buy additional equipment if they already have capacity for last year’s devices. But a lot of the new devices that are being developed and introduced in the market can be tested on last year’s testers. That is where we are focussing our energy and that is where we had very good success. We mentioned just 25 new design win this quarter … I think it was 47 last quarter and these are all brand new devices that can be tested on last year’s testers. So as those products go into production, for example the new PC 266 chip set that goes into production this fall somebody is going to have to invest in the test equipment to test that. We think that is going to be what begins to bring us out of the semiconductor capital equipment downturn.

Okay thanks. We will take our next question from Daniel Consoler with JP Morgan.

Good afternoon everybody. Lot of my questions have been asked and answered. I just want to go around a little bit from the break-even points that you selected 1.9 billion. In your response to Richard, I think you were intimating that this is pretty much as far as you can go without jeopardizing some of the long-term potential of the company. Did I hear that response correctly? EDWARD W. (NED) BARNHOLT: Actually yes and no. I think that there is new onset continuous series of trade offs and we could certainly … depending on what the business outlook is for the next year we could continue to drive down some of our manufacturing capacity. We could cancel some of our operational improvement programs. We can do all those things from a series of trade offs. Our feeling, for example, on manufacturing capacities, is we do not want to drive it too low, so we can capitalize it on the upturn, but if we were out here in another one or two quarters and it looks like that the upturn is going to come later, and we are starting from a lower base then obviously we do not need as much manufacturing capacity, so we think this is kind of a continuous series of trade offs in this space and we are going to do everything we can to keep our core R&D investment intact. ROBERT R. (BOB) WALKER: Clearly, we do not want to be making a series of decisions in cutting back each quarter. Our view is given an assumption of a gradual recovery in our end markets. We think that is the right trade off point. We have reached the right trade off point between immediate profitability and making sure we have the right investments in the future.

The other day your former sibling company you looked after did mention one area of cost cutting which was in the consolidation in some of their out sourcing agreements obviously recognizing [the products] that are dramatically different from packers. Nevertheless, is this possibly a source of any manufacturing savings for you? EDWARD W. (NED) BARNHOLT: We have actually already embarked on that part Daniel with some of the restructuring that we talked about for last quarter for the second quarter. We had started about 18 months ago on a path to reduce the number of the manufacturing sites that we have. So, we have already announced the move of several manufacturing sites to consolidate on to a larger site and we have also announced the outsourcing of more of our printed circuit assembly activity as well as some of our final assembly and test. For example, today we probably have somewhere around … I should go back may be a year ago we had about 40-50% of our printed circuit assembly work done outside the company. Our goal was to drive that to probably close to 80% and we are in the process of doing that. Similarly, we have already started to out source some of our final assembly and tests and we are in the process of doing that. So, some of this reduction that we are talking about here in our head count is the result of more out sourcing and more consolidation of manufacturing as well as some consolidation of our G&A function. ROBERT R. (BOB) WALKER: And we have already embarked on using fewer contract manufactures. So, we are really concentrating on business. We do believe in procurement in general in this area in particular and that is a source of additional savings.

[So, turning around to those comment] you found that you have consolidated down your contact manufacturers and that could turn against you on the pricing side and … ROBERT R. (BOB) WALKER: The balance we are looking at is to make sure that when the upturn occurs, which we are absolutely convinced it will we are in good shape and we will be able to meet with the increased demand.

Also just to make sure that I understand some of the inventory flows in semiconductor products business. I think that you and Ned mentioned before that the other supplier in the channel of optical components was more severe than for other components. At some point, do we have to restage a threshold where a lot of that stuff just becomes … suddenly also lessens, and does that situation turn you around fairly dramatically? EDWARD W. (NED) BARNHOLT: This may be confusion here, when I talked about the excess of optical components. I was talking mainly about optical telecom components. Again, we play a little bit into that market in our semiconductor product area, but where that will impact us is in the test area. Because as long as there is excess inventory and excess capacity for optical telecom components out there, people are going to buy a lot of new test equipment. ROBERT R. (BOB) WALKER: Right. The recovery is going to happen because some of the existing inventory is simply is not going to be valuable any further. The technology will move on and need to be rebuilding of the inventory and as Ned mentioned, it is going to be based on new technology as well.

But would you have some visibility as to sort it when that might occur? EDWARD W. (NED) BARNHOLT: Well, I think what we see is a slow, gradual recovery. It is really hard to pinpoint a specific rate of acceleration here. We do think we are balancing along the bottom as many people have said we think we are seeing some firming in number of our businesses. We expect to see a slight increase in our order rating in Q4 and then going into next year a continued steady upturn not in acceleration, but a kind of a slow gradual recovery throughout the next year. So, it is hard to predict what that is going to look like out there about a year from now, because there are just so many variable that people are unclear about, but our best guess of the situation now is that we are going to see a slow and steady recovery through 2002 although that will be at lower levels than we thought three months ago, which is why we took the actions that we announced today. ROBERT R. (BOB) WALKER: Just a comment. We think that our customers are being very very cautious and understandably right now of placing orders for more inventories. So, it is going to be coming, but it is going to be coming probably without quite as much more warning as we might think.

I guess the final thing is you have been very proactive in your everyday programs to your five strategic assets. Do you believe … given about the experience as a business now, should we assume that you are going to be considerably more cautious in your own acquisition strategy? EDWARD W. (NED) BARNHOLT: I think this whole year we slow down in our MNA activity. Last 18 months up until last quarter, we were doing about one acquisition a month on average and an average of about 12 a year, I think, by the time we are done this year, we may end up with three or four next year or couple. We are not going to go to zero. We are going to continue to keep our eyes open for opportunities, but there are going to have to beat pretty high hurdle rates these days and it is very strategic for us to be interested. ROBERT R. (BOB) WALKER: We will be very cautious, but there are also a lot of pretty interesting opportunities out there.

Thanks a lot.

We will take our next question from Greg Tosseney with USBancorp Piper Jaffray.

Thank you. Could you remind us what are the top say three or four opportunities that you see in terms of growing the business through market share gains or through entering into the businesses that you want to be part of … what you are doing last 12 months? What are those key markets and opportunities and what you will be looking for the next 12 months? EDWARD W. (NED) BARNHOLT: Well there are a couple of things. First, of all if you look at our semiconductor products business last year when we were on allocation for much of the year. There was a number of companies that got some business that could have very well been ours if we had been able to deliver. This year we can deliver, so we are aggressively pursuing market share growth in our network components business and in some of the wireless component business. In the test area, as Bob mentioned, we are introducing a record number of new products in the next two quarters. We think we have an opportunity to gain market share in our core testing and measurement business and very important new products coming out and even the products that we introduced in the last quarter, for example the 10-gigabit portable optical tester report service providers is a great opportunity to gain some market share. We frankly had ignored that market for a little bit while we prioritized some of the R&D in manufacturing markets, but we introduced a very exciting product at supercom. It is getting a great response and the service provider spending is still looking pretty good. Remember the biggest issue we have is with the manufacturing capacity and manufacturing as part of the market, but the service providers themselves even though their spending is down slightly or flat, it is still a big number and we think we can gain market share in areas like that. In terms of new businesses, as I mentioned, life sciences, this is a brand new business. We are investing today to ramp our capacity in our [SPAR], PM, and SPM wireless components. We are entering some new telecom component markets to take the technology that we use today in the data com network, but to apply it into the telecom market, and we are having a very good response there, so lots of new and adjacent markets that we think we go after. Another one by the way as a result of an acquisition we made is optical inspection, we acquired MVT in February that gives us a very strong position in the optical opening circuit board inspection market, and that is doing quite well. So across the board, we think there are opportunities in a number of our markets. Another acquisition we made, OSI, really strengthens our position in the whole OSS space, and as I said before and I still believe there is a billion dollar market for us somewhere out there in the next several years.

Okay good and a followup to that … how has the appetite been for carriers in terms of spending on technology to improve their existing networks through OSS and another automated test and things like that. Does that seem to be doing better or what has been the response from the carriers for that product line? EDWARD W. (NED) BARNHOLT: Well right now carriers one have spend money on two things either one of those drove the revenues or lower their costs. So, network management solutions and any kind of software solutions that can improve their competitiveness, that can gain them market share is very attractive, and also even products like the 10-gigabit portable product that helped them to do a better job of trouble shooting and maintaining the networks that they have installed has a very short pay back for them. So, the pay back period for the network equipment with the manufacturers is shorter now, the total rate is higher for them as well, but in both the installation and maintenance equipment as well as in the OSS area. We think there is a lot of opportunities in the service provider market.

Okay great. Thank you very much. We will take our next question from Dean Dray with Goldman Sachs.

Good afternoon. Could you give the geographic breakdown of the order decline in year over year between, however you categorize it, is it North America, Europe, and Asia? ROBERT R. (BOB) WALKER: It was not very exciting very honestly in terms of differentiation. A little harder in US, little lighter in Europe, and parts of Asia Pacific, but it was all pretty consistent very honestly. The year over year decline was again more severe in US and less so in Europe. EDWARD W. (NED) BARNHOLT: If you look at the last quarter, we were down 54% for the quarter versus last year was actually 62% in US, 40% in Europe, and 46% in Asia Pacific. So, little bit worse in the US. Again, that is partly may the result … last year it was a pretty hard quarter for the communications market in general in the US. So, it is hard to tell on a year to year basis, but I think you can see that in the markets we are in they tend to be pretty global markets, the semiconductor market whether you are in Europe, Asia or the US or the telecom markets whether it is in the Alcatel, Siemens, Erickson, Motorola, Lucent, or Nortel, they are all tend to be going up and down with the industry and not a big geographic labor on.

I am sorry if you would have said this before, but this is a clarification on the 10% salary reduction, is that still in the fact as that gets phased out with the head count reductions? EDWARD W. (NED) BARNHOLT: That will be in affect through the end of this quarter the fourth quarter. But we announced to employees today that with the reduction in staffing, we will reinstate their full salary on November 1, 2001 in our new quarter.

So, that is as in the new fiscal year. EDWARD W. (NED) BARNHOLT: Yeah.

And then a clarification on the 4000 head count reduction just to be explicit. How much of that is attrition … how much is that their actual terminations? EDWARD W. (NED) BARNHOLT: Well, as I mentioned earlier our attrition rate is running some more around the 4-5% range annual. So, you can go through the math that with about 44,000 employees what that means in terms of annual attrition. Again remember this 4000 are between now and the end of the second quarter of next year.

Okay. And then last question relates to the restatements and the impact of selling the healthcare business. Now, I am just trying to reconcile some numbers that you have given us previously; it was a 176 million I think by the last update that we had in terms of total costs that needs to be reabsorbed. And a portion of those would have been covered by service level agreements. So, could you give us an idea of what the service level agreements turned out to be? How they have been structured? How long there will be an effect? So, we can get the sense of what the total residual overhead absorption might be. ROBERT R. (BOB) WALKER: I am quite comfortable with the 176 is $50 million of [SLA] that we now contemplate. There are somewhat run in load that is as you would expect as more service activity are in the first couple of quarters and what we have mentioned was about $14 million here coming up in the fourth quarter of past that will directly offset the portion of 176. The duration is about a year. We expect $50 million to be there approximately for a year and it will depend on the progress that Philips makes in developing an independent set of processes and systems. So, in some cases some may end up a little sooner, in some cases they may go a little longer.

Okay and then the last question is house keeping. I did not see the release. What was the impact of foreign exchange? ROBERT R. (BOB) WALKER: In terms of growth it was about 2% points.

Okay, thank you.

We will take our next question from Tarun Khanna with Wellington Management.

Yes gentlemen you commented on your relationship with CIT and selling receivables to them. Can you just give us some more color on that and on the status of the relationship given that it is now under Tico? ROBERT R. (BOB) WALKER: Sure. Selling the existing portfolio is what we have been undergoing for sometime in the $26 million I have mentioned is the virtue of the last of those portfolio sales.

So, it is essentially the receivables right? ROBERT R. (BOB) WALKER: It is the ongoing receivable collection. It is not like factory receivables underneath 30 that is the ongoing services and that has been going on for sometime. We are nearly done and it is done geographically. So, it is country by country where those transfers were being made. And certainly we are very encouraged by our conversations with CIT and Tico post the acquisition. I would reveal that Tico is really much serious about being in this business as a broad equipment finding and certainly they are going to do the right things … they are having lots of conversations. We are good about our partnerships moving forward. So, it continues to be we think exactly the right one.

Given the dramatic slow down in the end markets. What kind of bad debts or loan loss provision as a percent of the total lending will you be seeing on the CIT side? ROBERT R. (BOB) WALKER: CIT … that is really their operational decisions and of course they are really good at doing this business and so they think they are pretty well reserved and they are going to be cautious about taking on what they would term to be a very risky business. That is really their responsibilities for this relationship.

One last question. You may have already said this. What was the book-to-bill in the quarter … for the company, for the semiconductor products, or I guess if you can give us some kind of break down testing measurement versus semiconductor product? ROBERT R. (BOB) WALKER: We do not actually confuse those ratios. We go on for the company it was about 0.73. The data is all in the release. It is probably easier to …

Okay, thank you.

We will take our next question from Sayeed Hader Fast Securities.

Hello gentlemen, I have a couple of questions. Regarding the $200 million charge related to work force reduction, how soon are you going to book that charge and over what period. How much of it is going to be a cash impact? ROBERT R. (BOB) WALKER: We are going to try to move through this program as you can imagine just as quickly as possible, and as you know the rules around what is a restructuring that can be taken in advance of the actual payment are corporately quite tight. We are still working through the whole modification process and all of those wings. We hope to make it as much as up front as possible and virtually all of which at least certain of the vast majority of the 200 million is a cash charge related to the efforts programs around the people. There will be probably some write offs of some other things, but you have to look at this primarily as a cash charge.

Okay. During the analyst meeting in earlier this year you had suggested a long-term or an intermediate term offering model if I remember correctly with certain metrics gross margins, R&D. How long now is this revised business we are in and different break-even point? How long or how soon do we see that return to the intermediate business model? ROBERT R. (BOB) WALKER: We are not going to be able to call this with any sort of real position. As Ned mentioned, certainly we feel it is a very reasonable to expect a return to the break even revenues levels of $9 billion sometime during the coming year, and we expect the recovery to move as beyond that point moving as to those models. And we are also working towards the other part of this and continuing to reduce our SG&A expense and we are working aggressively to change our manufacturing models so that they are lowering our cost. So, it is going to converge, but predicting exactly when that is going to happen is beyond our ability right now. EDWARD W. (NED) BARNHOLT: Yeah I think when we did our road show and through the separation from HP, we talked about achieving that long-term model sometime in 2002. Frankly, with the down turn that we have experienced this year that is probably pushed off at least a year depending on how quickly things turn around. At this point, we do not have much visibility for the next couple of quarters let alone a year, but we think it is some where out there in the horizon probably in 2003.

Okay. A sort of strategic question here if you could mention parts of the communication testing measurement business those that were concentrated earlier on in the R&D and manufacturing side … and you have seen sort of DNU business opportunity occur in the portable area. Would you also comment on sort of the fourth area that sort of some people are towing at the end line or the embedded networking side for our network monitoring. How heavily levered are you in this market place? Are you positioning yourself? And in fact have the service providers have sort of _____ 01:13:05 last around a certain solutions set? EDWARD W. (NED) BARNHOLT: Well I think the whole area that did testing is still very, very new. There are some people out there today. We have got some solutions in that market, but frankly at a very small part of our total portfolio at this time. We are continuing to look at that area and at this point in time, I cannot really comment about any new product activities or anything new that we would do there until we are ready to make any public announcement. ROBERT R. (BOB) WALKER: But for the service providers I think you may be aware our SS7 solution today consists of tubes that are actually in the network that we provide, which is the one form obviously netting the testing process along with the software to make sense of that. We feel that exactly that is where the industry will involve and you think a combination of our testing capability as well as the activity in the OSS space, will it mean it is going to be attractive in ones forward. As Ned said, it is hard to tell exactly how quickly that is going to evolve.

And I am assuming the acquisition of OSI is going to be synergistic to that effort? ROBERT R. (BOB) WALKER: Absolutely. EDWARD W. (NED) BARNHOLT: OSI is really going to be in the center of all of our network management solution they provide … a very robust platform for us to build a lot of capabilities on that. ROBERT R. (BOB) WALKER: Compliments on our testing capability that we know so well from our reforms.

One last question. Regarding the network components in the semiconductor component business. If I rightly mention that right my focus has mostly been in the data networking side and not so much in the telecom side. However, there are plans to get aggressive in the telecom side of the market in terms of [sonic packet sizers] 01:15:03 and framers to go to up against the length of AMCC in the test and I think this was adjusted by one of the VP during the analyst conference. Is this trend still there, are you noticing any activity obviously this is sort of a slow area, but have you been able to display some of these competitors that you have to go up against? EDWARD W. (NED) BARNHOLT: Definitely there is an area that we are still looking at. As Bob mentioned this quarter we introduced a new chip that maps Ethernet protocol over sonnet and we are continuing to invest in some additional chips that builds on some of our confidences in our communications business. So, we are continuing to keep the majority of the R&D program that we talked to you about before on track. There has been some that we have had to push out or scale back some small ones that we have canceled, but so far we have been able to keep the majority of our R&D programs as we described to you before.

Very good thank you.

We will take our next question from John Jones with Salomon Smith Barney.

Hi, it is Cindy Shaw I have a couple of questions, first on wireless components. We have heard from some of the wireless components providers that they think they are seeing any uptake in demand. I wanted to get a sense for what you are seeing in that area and secondly you commented on supercom and you have gotten a nice bunch of advanced orders for your portable field tester for optical … I wanted to get a sense you said it was going well, could you give us any sense for what the orders are and if you are still on track to start shipping that next month. EDWARD W. (NED) BARNHOLT: Yes indeed as far as the wireless component business … we have not really seen a significant up turn yet, but if you look at the [words/worth] we are getting from our customers we expect that there would be some change in that area. We are roughly about the same level may be up a little bit from where we were in the second quarter, but I think looking out over the next couple of quarters we do expect that to be one of the businesses that starts to grow again. ROBERT R. (BOB) WALKER: Our opportunity here Cindy is really new types of components SFAR and other sorts of things. So, our [current/total] participation is very limited, but there is lot of step coming which is really I am going to take the forum of business in the next year as new devices are introduced in the market place. EDWARD W. (NED) BARNHOLT: One of the … we mentioned that we are keeping many of our capital investments on track and as a matter of fact a couple of investment we are making right now are through ramp capacity and SFAR and TM amplifiers. So, those investments to ramp capacity and start seeing a growth in that business for next year we think it is still on track. As far as the portable product, we introduced the supercom I do not have a specific number for orders, I know we announced $13 million of orders even before we introduced the product in supercom, but I do not have an updated number, but I know that the product is still doing well. We are still on track for shipping it next month and interest from customers or the service provider customers as well as other customers is very, very high.

Can I ask couple of questions, I did not see your normal revenue segmentation release? Did you send it out and I just missed it. ROBERT R. (BOB) WALKER: Yeah, it was in the table. EDWARD W. (NED) BARNHOLT: I apologize that we did not get this out to you quite as soon as normal, but we really wanted to be able to talk to our employees today about our announcement.

Is international revenue and domestic revenue is in the table. EDWARD W. (NED) BARNHOLT/ ROBERT R. (BOB) WALKER: Yes.

Okay thanks very much.

We will take our next question from Jay Stevens with Buckingham Research.

Thank you. Bob and Ned could you put a little bit color on the magnitude of the capital spending the PPE number that you gave us 800 million for this year. I just feel like this is a little high considering with what you are seeing in the way of bookings and shipments and expected business amounts. There is something else out there that you are looking at that keeps the capital expenditure number that high? ROBERT R. (BOB) WALKER: Yeah Jay. I think first of all it is important to think about our capital spending generally it is not capacity-related, although some of that occurs from time to time, but this was really driven by two things one our new types of technologies whether it is _____ 01:20:17 filters or those types of things that requires a different sort of facility and different sort of equipment. And those programs again are nearly completed and the second part of it is that the whole transformation of our internal set of processes and systems and that also unfortunately requires new expenditures, and we began characterize this year as being abnormally high even if times were more gloomy because of the need to update those technologies, and certainly as we go into next year we would expect the return to much lower levels as those programs are launched behind us. EDWARD W. (NED) BARNHOLT: Two additional comments. First it is important to remember when you think about our capital budget for our new IT systems, if you remember we are also capitalizing the software. This is required now by SEC rules and that is a big chunk of the capital budget as well as the capitalized licenses in software. Second point is remember our fiscal year actually started last November, and we built some new facilities last fall even as recently December of last year we were still ramping the capacity. So, we have brought the number of facilities onboard and some new equipment onboard to ship some new product, you know, early in the year that is largely behind us today.

I forgot about that. Thank you.

Our final question today comes from David Ducenberry with Credit Suisse First Boston.

One more quickie … I am not sure I understand we will have an idea of your approach this year buybacks given all the cash and the balance sheet, and not also very clear on whether you will be aggressive on acquisitions, so I am thinking what else would you do with the capital at this point? ROBERT R. (BOB) WALKER: Right now, I guess, I would view cash as being a very nice thing to have on these sort of economic uncertain times. So, we are not going to make any sort of commitment to share buyback. I think this we talked about in the past. Our condition for that with both the substantial under valued stock price as well as enough cash to be able to sustain a program and again right now we think having cash gives us a lot more operational flexibility than if we did not. So, we are not going to launch anything in the near future in that way. We talked earlier about acquisitions. Certainly, we will be very selective, we will be very cautious and frankly pretty picky about acquisitions, but in these times there may be some opportunities that are attractive to us, but more than anything we want to make sure that we are able to sustain new product programs, the deployments, and the new [produced] levels and those sorts of things. We do not think we are going to do anything without cash balance in short term investments. EDWARD W. (NED) BARNHOLT: We are approaching this down turn as cash [is scarce] and we are very pleased to be sitting on a nice cash reserve. We think it is a good strong position for us. Some day we were certainly not ruling out share buyback at some point in our future, but I think at this point of time the prudent approach would be to use the cash wisely and may be selectively consider some MNA activities, but keep some cash reserves until we know how this is going to play up.

Thank you all. Gentlemen, there are no further questions at this time. I will turn things back to you for any closing or any additional comments. ROBERT R. (BOB) WALKER: Thanks a lot. We look forward to you guys joining us on Monday, November 19, 2001 when we plan to report our Q4 and year-end results. This concludes our conference call for today. Thanks.

Thank you for participating on today’s Agilent conference.