安捷倫 (A) 2002 Q4 法說會逐字稿

Please stand by. The conference is about to begin. Good day and welcome to the Agilent fourth quarter earnings conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Investor Relations Director, Mr. Hilliard Terry. Please go ahead, sir.

Thank you and welcome to Agilent's fourth quarter conference call. With me are Agilent's CEO Ned Barnholt and CFO, Adrian Dillon. After my introductory comments, Ned will provide his perspective on our performance this quarter, the status on restructuring transaction and a bit on the current business environment. Then Adrian will provide a detailed commentary on the financials and each of our businesses. After that we'll open it up for your questions. In case you haven't had a chance to review the release, you can find it on our website at www.investor.Agilent.com. I'd also like to mention that Agilent will host a full day analyst meeting in New York on Tuesday, December 10th. Please contact the investor relations department if you'd like to register if you have questions.

I'd like to remind you that in our prepared remarks in our answers to your questions, we will make forward-looking statements that involve risks and uncertainties. These risks and uncertainties could cause Agilent's results to differ materially from management's current expectations. We encourage you to look at the company's most recent filings with the Securities and Exchange Commission to get a more complete picture of all the factors at work. I should mention that the guidance we'll provide on today's call is only valid at the time we give it. The company assumes no obligations to update the guidance provided on this call as we move through the quarter.

With that I'll turn it over to Ned.

Thanks, Hilliard and thanks to all of you on the phone for joining us on the phone today. I'll review our fourth quarter, describe how we continue to impement our plans, offer perspectives on our markets and provide guidance. When I spoke to you a year ago, we reported a fourth quarter loss of $275 million. Six months ago in our second quarter, we lost $112 million. So breaking even this quarter shows how far we've come. But we remain cautious going forward and we still have a lot of work to do in a difficult economic environment. Net orders in the fourth quarter were $1.5 billion, up 3% from the prior quarter. Revenue was $1.7 billion, an increase of 25% sequentially.

In Q4 we made up all of the revenue shortfall associated with our Q3 ERP implementation and we were able to reduce our backlog. During the quarter, we continued to implement our plans aggressively, to balance our short-term efforts to return to profitability, with our long-term emphasis on R&D and improving our cost structures. We said we'd lower our analyzed cost structures by $1.2 billion, by Q4 2002. We did. We said we'd reduce our workforce by 8,000 people by the end of Q4 2002. We did. We said we'd lower our asset structure. We did. Inventory and capital expenditures were significantly lower than in Q4 2001. We said we'd go live with our major ERP system implementation. We did. In just five months since going live, we made huge strides, and the new system had no significant impact on our Q4 operating results. Now we're phasing in the ERP for the rest of our factories, and this work will continue for the rest of fiscal 2003. We also go live with our new CRM system in December. Our R&D investments continue to pay off. We're gaining share in key markets driven by the strength of our new product for the portfolio. We believe we outgrew our markets by about $125 million in Q4 compared to the same period last year.

Now let me say a few words about our markets. The communication test market was basically mixed. Wire line tests continued soft, as customers continue to reduce their capital expenditures. The limited opportunities for growth are from build-outs in areas like China. The market for wireless tests continued strong, driven largely by handset manufacturing in Asia. In the wireless infrastructure business, the manufacturing portion still experienced overcapacity. However, there is still some growth in R&D as network equipment manufacturers focus on reducing costs and adding new functionality. Service providers remain very cautious about capital expenditures.

But orders increase for our OSS solutions from Q3 to Q4. After three strong quarters in semiconductor tests, the market slowed significantly in Q4 however, our products are positioned very well, and Q4 was our best quarter ever for design wins. The market for general-purpose tests was season alley strong, driven by aerospace and defense customers. Demand for manufacturing test products increased from the automotive, medical, and computer-related end markets. Orders increased sequentially in our semiconductor products business across most product areas. Orders for printer asics were down seasonally in Q4 because of strong orders in prior quarters to support the production ramp of HP's new family of printers. The life science's business continued to grow, but spending by pharmaceutical customers remained conservative. Even as they continue to focus on new tools to improve their R&D processes and accelerate the development of new drugs. We had solid order growth in our chemical analysis business. Let me conclude by saying that throughout our businesses, pricing pressure remains intense, but has stabilized.

Now let me turn to our guidance. Because we reduced our backlog and made up all of our revenue shortfall associated with the Q3 ERP implementation, we expect revenue in Q1 to be between $1.5 and $1.6 billion. We expect operating EBG in the range of a loss of 5 to 15 cents, including a 7 cent impact of our ERP and CRM system implementations. The outlook for fiscal 2003 is highly dependent on the pace of recovery in our markets. The most recent industry forecast continued product success, increase of 5 to 10%. Consistent with the range of most analyst projections. While we're comfortable with the consensus earnings projections for 2003, there may be some slight upside, based on our success at reducing structural costs and in beginning to realize the benefits of our investments in IT systems.

I want to close by emphasizing how very proud I am of our people. They have continued their effort through six very difficult quarters. Because they are staying the course, I'm confident that we'll come out of this difficult time a stronger company. Thank you.

Now I'll turn the meeting over to Adrian.

Thank you, Ned. Good afternoon, everyone. I'm going to fill you in on the financial highlights for the quarter and secondarily the full year. I'll also talk a bit more about forecast guidance and some of the assumptions you should be using when thinking about fiscal 2003.

But let me start with a brief comment on the impact of the ERP. Last quarter we talked extensively about the operational impact of our major ERP implementation on our financial performance. As Ned indicated, we're now past that. Other than the rebound in revenues and earnings that we'll talk about, the ERP implementation had no material impact on our operating results in the fourth quarter. In addition, it's worth pointing out a true rarity among major ERP implementations. The second shoe of a financial disruption impacting reporting earnings did not affect Agilent. We did not lose control of inventories, receivables or costs in the midst of this massive transformation and so we had no ugly financial surprise just as we were regaining operational confidence and credibility. We are very pleased about that. Okay.

Let's start at the Agilent enterprise level. The guidance for the fourth quarter was revenue of $1.6 to $1.7 billion, and we hit $1.74 billion. For earnings per share, we had indicated a range of a loss of 10 cents to a break-even, and we achieved a break-even. And both the guidance and the actuals included about 5 cents for the ERP and CRM program implementation. Looking at new orders, we had net new orders of $1.5 billion, up about 3% sequentially as Ned said, and up 22% from a year ago. Now, truthfully we did have the impact of Everest, of our ERP implementation in the third quarter. Even if you add that back to the third quarter numbers, we were flat to down slightly in orders and still up 22% from a year ago. Cancellations remained around $90 million. Very stable throughout the year, and down from a quarter of a billion dollars last year at this time.

Turning to revenue, we had $1.74 billion, up 25% sequentially, up 8% from the prior year. Again, adjusting even for Everest, the $1.05 million that we thought we lost from losing a week's worth of production in the third quarter and the $71 million rebound that we did get in the fourth quarter, even adjusting for those impacts, our revenues were about $1.67 billion, pulp 11% sequentially, and up 4% from last year. Looking at our consolidated book-to-bill adjusted for the ERP, we were at about .90 in the fourth quarter versus about 1.03 in the third quarter. Looking below the numbers, as to sources of orders and revenue strength, with .2, the Asia Pacific, where orders were up 38% year to year and where revenues were up 23%. We're really taking full advantage of the strength in that area. Also as Ned said, new products in market share gains helped us quite a bit as well. Over the past year, we have outgrown the consolidated weighted average of our markets we believe by about $125 million.

Looking at gross margins, we had a good success in gross margins in the fourth quarter, at about $44.8%, up 4.4 points from the third quarter, when they were depressed again in part because of the Everest-related disruptions. But those margins were up fully 16 points from a year ago. R&D spending at about $275 million, was up 3% sequentially. There was a little bit of fiscal year-end buying and a little bit of catchup from the third quarter when we didn't spend as much as our trend rate, but we were down 10% from the prior year. And as a percentage of revenues, we're now at about 16% of revenues in R&D. SG&A costs fell during the quarter to $536 million, down 3% sequentially, and down 8% from the prior year. As a per cent of revenues, our SG&A was down to 31% versus 40% in the prior quarter. Note that SG&A spending fell 19% on the quarter and was off $45 million year to year. There we're seeing the benefits of the restructuring in lower expense. Similarly, though spending in R&D did rise, $7 million quarter to quarter, though it was off $32 million year to year.

Looking at the tax rate, we had a proceed form a tax benefit rate of 44% compared to the 33% we indicated previously and that catchup for the full year was worth about a penny and a half in the fourth quarter results. Our gap tax benefit rate was 34%, again also up one point compared to what we had indicated previously. For 2003, we expect the pro forma tax rate will be around 27% because of the relatively low level of earnings compared to the relatively fixed dollars amounts of low tax earnings, and thinking about our tax rate longer term, we now expect a sustainable tax rate of about 30%, down 3 points from what we reported a year ago at this time and 1 point below what we indicated six months ago. Again, the reason for that reduction in our sustainable rate is because of the shift to a higher proportion of Agilent manufacturing to low tax jurisdictions. Add all that up and we had an earnings for goodwill net loss of $2 million, or zero cents per share compared to $143 million loss, or 31 cents a share in the third quarter of the year, or as Ned said, $275 million, 60 cents a share loss a year ago. Bridging from the earnings before goodwill loss to gap net earnings, we had, for the last time, goodwill and intangibles amortization of $92 million. We had $256 million to restructuring costs and a tax benefit of $114 million, or a gap net earnings of a loss of $236 million, or 51 cents a share. Okay.

Turning to the balance sheet and cash, we think in the fourth quarter we continued to make good progress in managing our balance sheet and minimizing cash consumption. We had a gap loss from continuing operations of $235 million, net cash use in operations was $162 million, and that included about $51 million of cash restructuring costs. Capital spending was $88 million in the quarter, down 42% from last year at this time. We finished the year at about $300 million, and thinking about fiscal 2003, we think we'll drive the number down again to around $250 million. Depreciation in the quarter was $96 million and $350 million for the -- $357 million for the year. We think it will remain around $350 million this fiscal year, or $100 million above our level of Cap Ex. Receivables did go up this quarter because of the surge in volume. They went up by $245 million, but our Day Sales Outstanding remained at about 58 days, up only one day from the third quarter, and when you think about the fact that if there are any residual impacts of the ERP, this is where they would show up because those issues related to documentation at our customers, we think this is really an outstanding performance, and again, further evidence that we have good control over our accounts. Also demonstrated in inventories, where we reduced inventories quarter to quarter by $117 million, and our days on hand, 113 days on hand, down fully 31 days from the third quarter, and 26 days from a year ago. We entered our cash balance at $1.84 billion. Plus or minus $51 million related to the timing of restructuring expenses, we believe we could be slightly cash flow positive on an operating basis in the first quarter of this year and we should be increasingly cash flow positive thereafter.

Okay. Turning to segment data, in the test and measurement segment, we had net orders of $824 million, up about 3% sequentially, up about 22% year to year. Revenues were up 35% to $967 million on a sequential basis and up 3% year to year. In our pro forma operating loss was $111 million versus $279 million in the prior quarter. Notice -- and our operating loss last year at this time was $355 million. Notice that our operating loss in this quarter was one third of last year on essentially the same revenue because of the benefits of restructuring and the lack of any significant inventory charges. Notice that sequentially our loss improved by $168 million on a $252 million increase in revenues. In other words, we're delivering 67% of every additional dollar to the bottom line. Looking discretely at our semiconductor and electrical manufacturing test business, we had net orders of about $152 million, which was down 29% because of the weakening in semiconductor tests Ned spoke about but still even with that weakening up over 100% from a year ago. Revenue was up 13% to about $220 million and was 55% ahead of a year ago. This business, which will begin to report as a separate reporting segment beginning in the next quarter, earned an operating profit of $15 million. That compares to a break-even operating profit in the second quarter. Beneath a little bit of color on the orders, semiconductor test orders did fall about 36% sequentially, but overall we believe the business remains quite healthy. The fundamentals for semiconductor tests remain intact as a utilization on our 93 K SOC tester, for example, remains above 90% but we did see some softening in SOC at our semiconductor contract manufacturers who have become a bit more cautious in perfecting equipment. For our 93 K tester, as Ned mentioned, we had a record number of design wins this quarter. In fact, 85, compared to 63 in the prior quarter; and we also gained nine new accounts. Our flash business also fell sequentially, but remained pretty strong after a very big third quarter, and where orders remained very strong from the large IDMs and finally as Ned said, we have begun to see an upturn in our manufacturing test business.

Looking at the rest of test and measurement, net orders were $672 million, or up 14% sequentially. They were also up 12% year to year. Revenues were up a much stronger 43% because of the rebound from everest, and they were still off about 6% from the prior year. The operating loss in the remainder of test and measurement was about $126 million, compared to $279 million in the third quarter and $256 million loss a year ago. Again, notice that we delivered 68% higher profits or lower losses on the additional dollar, $226 million of volume. Year to year we had $130 million improvement in profits on lower volume. Clearly we're beginning to demonstrate in a major way the benefits of the restructuring efforts and, again, no significant inventory charges. Ned spoke about both COMs and general purpose tests and so I will skip that for now and go on to semiconductor products. Semiconductor product orders were $263 million in the quarter. They were off 5% sequentially. Though they were still up 40% year to year. Now, if you add back the $50 million impact from Everest in the third quarter, our orders were off about 16% on an adjusted basis but, again, up 40% year to year. Revenues at $471 million were up 21% sequentially and up 23% from last year. On an adjusted basis, our book-to-bill was about .79, down from the 1.08 of the third quarter. And in the quarter, we achieved a $32 million operating profit in the semiconductor products segment compared to a $24 million loss in the third quarter, and $115 million loss one year ago. We achieved a 6.8% operating margin, the first positive operating margin since the first quarter of fk '01 and again the incremental profits we delivered was 69% on that $81 million increase in volume.

Looking below the surface of some details on semiconductor orders, networking was up modestly about 7% sequentially and was up 13% year to year, whereas personal systems were down 10%, though they were still up 60% year to year. Within networking, we saw modest demand in the enterprise space and we think we gained some share in fiber channel opt ix based on the modest growth we saw compared to our competition where demand seemed to be flat or down. And that sequential order growth is being driven by good demand for our 2 gigabit chips and our first orders for enter praise networking asics. In personal systems we did see a seasonal decline in orders, though the optical mouse business continued to be quite strong. P Cs are pretty flat but mobile phones are showing improved momentum, and today we're shipping more than 1.5 million FBAR units per month and are continuing to see solid CD M A hand set customer demand. Continue to see orders ramp and finally we saw our first orders for imbedded cameras for mobile phones. Finishing up with life sciences and chemical analysis, overall we saw the seasonally strong fourth quarter, associated with year-end spending by government and large pharmas. Net orders were up 14% to $308 million. They were also up 8% year to year. Revenue at $298 million, was up 4% sequentially and up 4% year to year. Pro forma operating profit of $45 million was up 7% sequentially and 18% year to year. All those numbers for the quarterly performance, orders, revenues and operating profits were all-time highs. In fact, this business in the fourth quarter operated at a 30% return on invested capital compared to 28% in the third quarter and 24% one year ago. Again, Ned spoke to what we're seeing in these markets.

So why don't we turn briefly to restructuring. At last quarter's earnings call, we discussed our success in reducing costs by an analyzed $1.2 billion, and our expectations that that would produce a quarterly cost break-even of about $1.65 billion as we exited fiscal 2002. We also indicated that based on the expected weakness in our markets, particularly in wire line communications, we needed to take additional actions to further reduce structural costs while ensuring that we protected those programs most critical to our future growth. In this fourth quarter, we booked $133 million of restructuring charges for severance and other cash expenses. We also took as set impairment charges of about $123 million to mark the value of those facilities to market. We expect that the savings from these actions will drive Agilent's break-even down by more than another $200 million on an analyzed basis, and it will achieve aquarterly break-even below $1.6 billion by the middle of 2003. Over the next nine to 18 months, we also expect to realize about $90 million in cash proceeds from the sale of excess real estate and facilities. Okay.

Finally turning to guidance briefly. Ned gave our guidance of $1.5 to $1.6 billion for the first quarter and earnings before goodwill of 5 to 15 cent loss. The first quarter EBG includes about a 7 cent cost of accelerating the completion of our ERP and CRM projects. After the first quarter we'll gradually go back to a more normal level of spending for ERP and for IT. Now, thoughts on 2003. Well, obviously no one knows. Visibility has never been worse, and our backlogs are at very low levels but if we assume at least a modest worldwide recovery continuing through next year, a few thoughts on the industries that we serve. First, semiconductor shipments remain flat for about five years now. We do expect some rebound, even if not the 20% that the SIA is expecting, driven by P Cs, cell phones and consumer electronics, as well as a modest revifl in worldwide IT demand. Semiconductor cap, same comments as semi-conducters, though again we're not as bullish as the 25%-plus forecast by semi-. Wire line teleCOMs, they will continue down but probably at a much slower pace than this year's 35% decline in wire line Cap Ex. Wireless teleCOMs also flat to down slightly, though our orders, that is, Agilent's orders to that market bottomed a year ago and have been up 10% since then. For general products, we were up based on defense and aerospace, and going forward, those businesses should trend with the general economy. And finally, in life sciences and chemical analysis, industry forecasts consistently called for around a 10% increase in spending next year. We would also point out that our new product successs have enabled Agilent to outgrow its markets by the $125 million by the fourth quarter, as Ned mentioned and again, we're benefiting from the strength in Asia Pacific. Thinking about earnings, it should be clear from our actions that we are not counting on a big rebound in our markets in order to restore Agilent to profitability. We will continue to realize the cumulative benefits of our restructuring efforts and we should see the break-even below $1.6 billion in the second half of this year.

Finally, unless the worldwide economy craters, we're confident that we will be increasingly cash flow positive as we work our way through the year. We'll have more to say on our markets and prospects in early December at our annual analyst meeting, but for now I'll turn it back to Hilliard.

Thanks, Adrian. At this time, operator, we are ready for questions.

Yes, sir, thank you, Mr. Terry. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the "Star" key followed by the digit "1" on your touch-tone telephone. If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star 1 on your touch-tone telephone to ask a question. We'll pause for just a moment to give everyone an opportunity to signal for questions. And we'll take our first question from Max Schultz of C S First Boston.

Thanks a lot. Two questions. One, I was wondering if you could comment on bookings trends, particularly in your ATE business and how you expect those to look over the next quarter; and second, on the cost structure for your general test and measurement business. How much more room do you think you have to take costs out of that business, and if you look at 2003 and assume for flatish revenues throughout the year, do you think it's realistic to expect that business to return to profitability or at least break even in that time frame?

Let me take the first one and then Adrian might come in on the second one. As far as the, you know, the ATE business, you know, we've seen, as we mentioned, a significant drop-off in the bookings in the fourth quarter. We do expect it to stay pretty light here over the next quarter or two. With some recovery as we go through the latter part of the year. Now, remember that that is bookings. We do believe that as a result of the design winds that we have in the market share that we should outgrow the markets and so again these are the industry trends. We think our trends can be a little bit ahead of the industry as a result of the 74 design wins this past quarter in Q4 and the 60 something design wins we had in Q3 are always going to drive additional business, we believe, starting even in the next one or two quarters.

And on the issue of being able to get more cost out of the general products and general tests, yes, we believe that we will be getting more costs out. That is well underway and is one of the main thrusts of the current restructuring that's underway. We fully expect that that business will be profitable in fiscal 2003.

We'll take our next question from Dean Dray of Goldman Sachs. Please go ahead.

Good afternoon. Two questions. The first with regard to the guidance for the first quarter and the 7 cents contingency for the ERP, have you changed that with regard to your recent success in the fourth quarter on the implementation? Is that 7 cents, has it always been 7, was it higher and, you know, how do we help handicap that; and then the second question is with regard to splitting out the semitest business, give us a sense of, you know, what the thinking there is and just what sort of expectation you have for growth for that segment. Thank you.

Sure, Dean, this is Adrian. The 7 cents that we indicated for accelerating the completion of our ERP and our CRM is about 2 cents higher than we had been indicating three and six months ago. I mean, frankly the -- our focus on a specific six months ago wasn't as precise as it is today, but we're also accelerating the completion of the ERP in one of our major businesses, semiconductor products, because of the success that we've had in implementing the system there, and as is always the case when you go through a major implementation like this, if you have struggles, the temptation is to push off, to back it off and wait until things settle down before you reestablish your plans. Once things do begin to settle down, you develop some successes and you also recognize that an interim state is an oxymoron, that it is very, very difficult to be running with new and old systems. Your impulse then becomes to accelerate it, to get past this and complete the systems as quickly as possible, and that's where we are psychologically. We're now back to wanting to complete this based on our successes, as quickly as possible and so we are going to have a little bit higher spending in the first quarter as a result. Then we will begin to wind back down to a more normal level of IT spending. On why split out --

Hey, Adrian.

Yeah.

before the splitting the second part of the question, what would be the inagreement Al risk? You said you are adding on additional manufacturing plants and that's on a more accelerated schedule. Is it just the fact that you are moving faster or that people have had to move up plans for the conversion? What's that incremental 2 cents?

Just that we're moving faster.

Okay. And why splitting out semi tests.

Splitting out semi tests, because we believe it is the market leader. It has distinctly different customers, production, technologies, and business cycles than the remainder of the test and measurement operation and again we do believe it's probably the biggest participant or close to it in the industry and we think that the owners will reward us with a higher valuation for the more specific information on this very successful business.

Will you restate how far back the semi test business.

We will go back two years quarterly and three years annually.

Terrific.

Dean, just to clarify, we are splitting out A T G. In other words, all of our automatic test group, not just semi conductor tests. We will give some breakdowns on that but again, our feeling is that this is really a good story. It stands very well on its own. I think the ATE industry is a pretty well known industry that, you know, lots of analysts track. So we thought it would give better visibility if we split it out exactly what's going on in that business. And we can be more specific at our New York meeting about the outlook in that business for 2003.

We'll take our next question from Robert Maire of bear Stearns. Please go ahead.

Yes. Going forward in terms of your projections for the semiconductor products group, do you have any expectations for, I guess, 2003 in terms of wireless, wireline, printer, and maybe you can give us an update on potential progress with other manufacturers such as Dell entering the printer market, you know, just where -- what you expect. Obviously you are not looking at the 20% DS A is looking for, but maybe you could break it out a little more.

Yeah. Robert, you are talking about the semiconductor products group, I take it, and there, we think there's several things driving our business. One, on the personal systems side we are getting traction now with the growth in our FBAR filter and P amp amplifier. We are actually getting some good design wins there. We will be more specific on where we can on those, but we are actually ramping capacity very nicely in both of those areas. We are beginning to see some orders. We announced a year ago the Cisco asic business. We are beginning to see some orders there. We are gaining some market share in things like the fiber channel, 2 gigabit fiber-optic transsevere business. As you also know, we acquired red switch, which we think gives us a very strong position in switch fabrics, including infiniband and others. So, you know, those are some of the things that are driving our semiconductor products group other than just the market dynamics itself. Our feeling, you can look all over the map for whose number you want to believe for 2003. I think SIA's at the high end with 20, 22%. Our feeling, it's the underlying market itself is probably going to be closer to 10. We think SIA is way too optimistic, but we think we have some upside on that as a result of some of these new product lines that I mentioned.

Now, as far as Dell entering the, you know,, the printer business, you have to remember that our agreement with HP is, you know, we cannot sell chips, asic chips that we develop for HP to other printer manufacturers. So our asic business will be, and continue to be, just an HP-only business. The same is true with some of our motion control products, although there are some that are very commercially available that we can sell tol other manufacturers, but again to other manufacturers. But again, we are prevented by our separation agreement from HP on exactly what we can sell and not sell to other printer people.

We'll take our next question from Richard Chu of S.G. Cowan securities. Please go ahead.

Yes, thank you. A couple of things. One, with respect to your Q1 guidance, can you give us a sense of whether there are perhaps any businesses that you think might hold up better sequentially than others? And then second, on the P&L, the extraordinary decline in SG&A, were there any unusual items in that, to what extent that the number reports reflect a volume increase in Q 4 things like commissions, et cetera,&exports, which the under lying infrastructure might be even lower? Can you talk about the sustainability of the number that we just saw? Thank you.

Richard, it's Adrian. Let me address the second one anyway. No, there were no unusual items in the fourth quarter SG&A expense. In fact, it's been a matter of some frustration internally that it wasn't coming down faster. Given all of the restructuring that has occurred. So we were quite comfortable at the number that showed up and we would expect that as we continue to implement the restructuring program that we announced, that we will see further gradual declines in that line item, especially once we finish the main part of the CRM and the ERP implementations after the first quarter.

Yeah, I think the frustration here is that, to some extent a lot of the progress we've made over the last several quarters have been masked by our ERP problems in Q3 and by, you know, some weaker levels of business, but I think we're getting traction now on the savings that we set out to do, and we're pleased that we're making progress and believe we can continue to make more.

Before you go on, Adrian, can you quantify whether the reported number was, in fact, loaded by volume, volume-related SG&A? The variable component?

No, I don't believe so, if I understand your question, Richard.

In other words, Q4 revenues were very big. You pushed a lot of product out.

Actually, Richard, if you are talking about some of our SG&A costs that are flexible with volume, like our sales commissions and things.

Yeah.

That's were very small.

Okay.

You know, our sales commissions are only, you know, say on average 1 or 2%. That's on orders, yet we had -- if you go back and look at our orders, we were relatively flat with Q3 and Q2. So we did not have a huge bulge of SG&A expenses higher than we thought.

Okay. That clarifies it. Then the Q1 sequential outlook on various businesses?

Yeah, regarding your question on the various businesses, I think it's a little bit more as we've gone in the last couple of quarters. I think we will see still some growth in our semiconductor products business as we continue to ramp some FBAR filter and P amp amplifier. We expect to see some more Cisco asics, perhaps some more HP asifks. So I think we'll see a little bit of improvement. We expect to see the benefits from all those designs wins in our H T G business as we go into 2003. We have seen for about three or four quarters in a row some sequential growth in our wireless test businesses. And if you look at it seasonally, a number of our product lines, our businesses tend to be fairly strong seasonally, like the life sciences and chemical analysis business generally is strongest in our Q4 and Q1. Also our communication solution group tends to have a stronger Q4 and Q1, for whatever business is out there with service providers. We do tend to see it peak up towards the latter part of the year. So again, those are some of the areas we expect to see some strength as we go into 2003.

We'll take our next question from Greg Kinasny from Piper Jaffrey. Please go ahead.

Hi, thank you. I was wondering if you could give us a little bit more color in terms of the design wins on the ATE side. Are these primarily in a certain segment like graphics or communications or, you know, giving us a flavor for what end markets you are going to benefit from?

Well, I think there's several areas. We've, you know, been pretty strong in the wireless area. We've continued to be strong, as you know, in the kind of the contract manufacturing part of the business. So we've won some graphic chipset business, some cell phone, cell phone business, we've won some consumer business with things like, you know, digital TV, some of the, you know, data storage applications. Those are some of the areas that we've done reasonably well in over the last quarter.

We'll take our next question from Mark Fitzgerald of Bank of America. Please go ahead.

Thank you. Does the pricing environment at this point make you guys take pause in terms of your targets for margins going forward?

Mark, pricing always makes us anxious. I think, though, that if anything occurred in this last quarter, I think we heard for the first time in several quarters that pricing didn't get worse. That the intensity of competition remains absolutely fierce, but there wasn't a noticeable step up in the level of that intensity, and there were some of the folks who did say that pricing had begun to level off a bit, that there were fewer suicide deals. So if anything, we're feeling a little bit better than we have recently.

So you don't view it as kind of a structure change that's gone on in pricing and technology at this point?

Yeah, I think there is -- we are not expecting a, you know, return in the next year or two to a pricing environment like we had several years ago. I think those days are gone for some time to come. So we're expecting a pretty tight, very tough pricing environment going forward, but as Adrian said, we've seen it stabilize in the last quarter compared to the previous couple of quarters, and as a result all of our plans for our manufacturing restructuring, for our cost structure in general improvements, you know, take into account that we expect ongoing pressure on gross margins and therefore we have to take the appropriate actions on the cost side to maintain the margins that we want.

Is there any evidence in terms of new product introduction that technology companies like yourself can regain pricing with new products like they have historically done?

Yeah, that's the secret weapon is the new products and, you know, to the extent that our new products that we've introduced in this last year ramp and come out and, you know, really are differentiated versus the competition, that certainly gives us a little bit more flexibility, but again even in that environment, things are still pretty tough, competitors are being aggressive. So we don't expect the pricing flexibility that we had a few years ago, but we do think new products is the one area where we have more flexibility than others, and the combination of, you know, lots of new products with a lot of value added, along with the continual improvement in our cost structure is how we're going to deal with this environment of continued price pressure.

So bottom line, you are still on -- uncomfortable with targets of 15% operating margins?

Yes.

Yeah. We have not changed our --

our operating model.

-- our goal either on gross margin or operating margin.

And we'll take your next question from Adam Wolfman of Lehman Brothers.

A few quick questions. First, Adrian, I was hoping whether you could digest whether there was any impact on revenues or gross margin from previously written-off inventory and then secondly I was wondering if you could give us an impact on f A S1 42. I know the guidance you talked about in the context of still being earnings before goodwill, whether we'll see you move to an earnings per share calculation and put back in the amortization of intangible assets.

Okay. Question one, no, there was no reversal of previously written off inventories. Two, an update on F A S1 42, we will implement F A S 142 effective the first quarter of fiscal 2003. We will continue to report on an earnings before goodwill, as we call it, basis because of the level of restructuring expenses that are going to per vad our statements for the next two or three quarters. It is our fer vent intent to get out of this and be reporting a straight gap earnings as quickly as we can, but we think it would be more confusing to the owners than clarifying, were we to pull it altogether into a big bath today.

Okay. And one last quick question. As we've gone through the ERP implementation, at this point how, what are the key planimetrics that you are going to look for to gauge improvement and some of the firkt sis that you've gained through the ERP implementation and also as we look forward to this implementation as well.

Well the first thing only is just getting the cost of the program out. These are such massive programs, and obviously from what we've been indicating, they can really distort your financial statements. So getting the stability, then getting the program expenses down is number one. Number two is improvements in balance sheet items. We will have visibility to our inventories that we have never approached before, and so that should be a major impetus in getting our inventories down ultimately below 100 days. And then finally in the longer term, you get the genuine reengineering of the business. Once you have the kind of visibility, once you have the flexibility because you have an M R P that can give you answers within hours, not weeks, you begin to reengineer your fundamental manufacturing processes and so the cycle times go down, your as set velocity goes up, your margins go up, your flexibility goes up and that kind of more nimble, more agile manufacturing model is something that we expect to begin to see around fiscal 2004.

One additional comment is, is the savings, while we don't talk about them explicitly, they are baked into our goals that we give you about 15% operating margin and 50% or so gross margin. Those will be achieved partly because of the savings that we expect to get from the IT investments they are making, as well as other savings, but those are two major, major areas, both the ERP and CRM, that will allow us to achieve our goals.

And just to elaborate on what Ned was just talking about, we've talked several times about the 2000 odd systems that we've had historically, IT systems, many incompatible with each other, and very expensive to maintain. We will be shutting down the vast majority of those legacy systems in leveraging on the three genuine enterprise platforms that we have, shutting down all of the maintenance and support related to those old legacy systems. Those are real dollars that you'll see coming out of the SG&A over the next year to 18 months.

We'll take our next question from Jerry Fleming of Fon Stott and company. Please go ahead.

Yes, just one question for Adrian and that is, if you can't give me a quantitative answer, some qualitative thoughts. You are somewhere around the midpoint of your guidance next quarter down, 10% sequentially in revenues. What happens to your R&D and SG&A numbers?

Our S G and -- our R&D numbers will continue to come off gradually, and we would expect our SG&A numbers to be flat or come off sequentially as well.

And we'll take our next question from Barry Liebowitz of Morgan Stanley. Please go ahead.

Hi, guys, couple of questions. First, Adrian, can you talk a little bit about why the gross margins looked roughly flat, if you adjust back the ERP? I think last quarter you said gross margins would have been about 44, 44 1/2%. Given the large volume increase. Is there a trend towards lower margin products? Second question, Adrian, can you also just dissect a little bit for us the other income? It seems to have doubled in the quarter. What are some of the components of that, and do you expect it to be at this roughly $20 million run rate? And then third, a question for Ned. Can you talk a little bit about the environment? So it looks like if you kind of adjust some of the ERP issues, orders were down a bit sequentially. Are we continuing to slide? Was there any kind of end-of-year October improvement, and kind of what do you see in terms of linearity in your outlook? Thanks.

Okay, Barry, I'll take the first two. Gross margin, no, I think we made very good improvements, even abstracting from the impact of everest. We said that gross margins in the third quarter were 40.4, that if you added back $70 million from the lost volume at a 70% incremental, you got up to a 42% gross margin from the 40.4. Similarly if you take away the $50 million of gross margins, again at a 70% incremental, on the 70 million of everest-related volume, we're still at nearly a 44% gross margin. So we think that when you look through these annoying effects that we still have a fundamentally improved gross margin. Going forward. Too, on other income, there was alleges bit of a blip on other income in the fourth quarter. There was nothing specific that I can point to. It was a case of all the fleas lining up in the same direction for a change, but I would not use the $20 million as indicative of what we would see going forward. More like half of that number going forward would be more likely.

Yeah, Barry, regarding, you know, the linearity, there's no question that we saw our orders accelerate as we went through the quarter. Part of that is our normal pattern, August is usually weak because you know, Europe is shut down and we had some shut downs even in the U.S. here during the month of August. September is usually a recovery, kind of a normal month. Its a little bit lighter this year. I think people were still kind of getting a sense for where '03 was going, getting plans in place. And October was actually a pretty strong month for us. Part of that of course, is that that is the end of our year, so our sales force normally drives in, drives as many of those orders in as they can, but we did end up pretty strong in October. But I wouldn't read a lot into that. Again, I think there's a lot of seasonal effects going on here. If you step back and you look at the overall quarter, it was roughly flat with the last two quarters when you adjust for the Everest impact in Q2 and Q3. So, we're not declaring victory at all on the order front. I think that's still the number one issue is seeing a little bit of growth in orders. We do think its, some companies have the end of the fiscal year in December, we'll see a little bit of a push here in the last couple months. I think there's still a lot of uncertainity as we go into the early part of '03; how strong the Christmas season is going to be, what that does for the semiconductor industry, and the consumer markets, what that does for the semiconductor equipment industry. So, we're still being very very cautious on the macroeconomic front based on everything we see and read about the economy.

We'll take our next question from Tim Anderson of Solomon Smith Barney. Please go ahead.

Thank you. Just wanted to ask you a quick question regarding the life sciences and chemical analysis business. Was wondering since you've gone through each of the other two segments, if you give us a little bit more color specifically about life sciences and its outlook and then specifically about chemical and its outlook.

Sure, what don't I start on that. We had a very good performance in the business. It still remains about 40% life sciences about 60% chemical analysis. We saw if anything more strength in the chemical analysis business. Part of that is seasonal, part of that is homeland defense, part of that is infrastructure spending, particularly in Asia. But, we have done quite well there particularly after a relatively weak 2002. WE gained momentum just in the last couple of quarters and we would expect to have a relatively strong cyclical year in 2003. Pharmacuticals slowed their pace of spending quite substaintially during the year down to a 5% rate from the 15% previously. So we were very pleased to see the 8% year os Ned said, and I can give you details, we have quite a bit of new products in the life science area that has allowed us to gain some market share there.

We did see pretty good year of year and sequential improvement in our chemical analysis business. I think some of this is the normal pattern of spending but also some business for homeland security and other things. If you look at the pharmacutical market itself, business was okay, it wasn't real robust, kind of in the mid single digit growth range, but we did see some growth from our cedar ray chips, our bio analizers and some of our other products that address some of the new applications in life science. Now these are still relatively small on an absolute dollar basis, so the growth rate looks very good. But, we're encouraged by the continued acceptance of these kind of programs.

We'll take our next question from Paul Night of Thomas Weisel Parnters. Please go ahead.

Could you give a little color on what stage the ERP and CIM implementation are in, and where you are on the costs, et cetera?

Yeah, I will start. We are about -- we had obviously the major implementation that covered about 100% of our financials, 90% of our order entry and 55% of our manufacturing in the July time period, and we are continuing to move ahead on those. We will, as I said earlier, complete the implementation, the phase 2 implementation in our semiconductor products group by the end of February of this year and that's an acceleration from the original plans. We have -- we have a go-live for our CRM implementation in December of this year, and so that's the reason for the spike in first quarter expenditures. At that point we will begin to tail off. There will be a little bit of residual spending in the second quarter but then between the two of those we'll tail off to a more normal level of spending and we don't be talking about this additional 5 cents per quarter thereafter.

And one additional point. You know, at one point we had expected to have phase 2 and phase 3 of our ER M -- ERP systems be a second and third big bang. We have decided not to do that. We are rolling out our ERP systems site be site on a much smaller -- site by site on a much smaller scale. We think that will lower the risk. It gives us a chance to really learn cumulatively as we go. So we are rolling out, as Adrian said, our semiconductor product group will be done by March. We'll have some additional fairly significant functionality done in December and then we'll start rolling out some additional test and measurement sites one by one starting in the second quarter. We expect to be substantially done with our manufacturing sites by the end of the year.

Operator, we have time for one more question.

Yes, sir. Thank you. And that question will come frp Richard Eastman of Robert Baird. Please go ahead.

Just a couple of things. One is, can you just address the incremental $200 million in cross-reductions? We hit the $1.2 billion goal, where we are in the $200 million. And then secondly, do you disclose the year-end backlog and could we expect that the -- we'll run it more 6 a -- more of a book-to-bill ratio of 1.0 going forward?

Let me start with the second question. No, we do not report a year-end backlog, and, yes, you would expect going forward that we would be running closer to that one-to-one because our backlog has been brought down substantially. We do have in aggregate more turns business, and frankly we're doing more of a just-in-time manufacturing based on our customers' often last-minute demands anyway and so I think you will see that characterized Agilent going forward almost indefinitely.

One additional point on that is our year-end backlog this year is very similar to our year-end backlog a year ago. So again, I think we're -- for all the ups and downs over the year, we're pretty close to where we were a year ago.

And as to where we are in the restructuring programs, we are not complete with the prior two programs, what we call internally necessity in result but we are very close to being done with those programs. There is just a very little bit left to go. Which is why we said by the end of this past year, we were at the $1.65 billion quarterly cost break-even and had achieved the $1.2 billion of analyzed savings. The additional over $200 million dollars of cost reduction on an analyzed basis is just beginning. The first moves to write down assets and to move head count out and to restructure those businesses has just occurred within the last 30 to 60 days and will be continuing through the first half of our fiscal year.

With that, would a majority of the people, the remaining people will be notified no later than February but a large number of the notifications started in, shortly after our August announcement. So in early September and October and quite a large number of people actually left until October or November 1st that are not reflected in our year-end head count numbers.

So we are well under way but we will continue to implement that program for the next six months.

And that concludes the question-and-answer period today. At this time Mr. Terry, I will turn the conference back over to you for any additional or closing remarks.

Well, in closing we'd like to thank all of you for joining us and we look forward to seeing you at our analyst meeting on December 10th. Thank you very much.

That concludes today's conference. Thank you for your participation and you may disconnect at this time.