安捷倫 (A) 2003 Q1 法說會逐字稿

Please stand by the conference call is about to begin. Good day everyone, welcome toll Agilent first quarter 2003 earnings conference call. This call is being recorded. At this time I would like to turn the call over to the Investor Relations Director, Mr. Hilliard Terry. Please go ahead sir.

Thank you, David. Welcome to Agilent 2003 first quarter conference call for the period ended January 31, 2003. With me are Agilent's Chairman, President and CEO, Ned Barnholt. And Executive Vice President and CFO, Adrian Dillon. After my introductory comments Ned will provide his perspective on the company's performance this quarter and the current business environment. Then Adrian will provide detailed commentary on the financials and performance in each of our businesses. After Adrian's comments we will open the call 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 like to remind you that during this call, we may make forward-looking statements about the future financial performance of the company that involve risks and uncertainties. These risks and uncertainties could cause Agilent's results to differ materially from management’s current expectation, we encourage you to look at the company's most recent filings with the Securities & Exchange Commission to get a more complete picture of all the factors at work. In addition, the guidance we provide during the call today is only valid as of this day. The company assumes no obligation to update guidance provided on this call as we move through the quarter. With that, let's move forward with the call. Ned.

Edward C. White Hello everyone. When we spoke to you in mid-December and at our analyst meeting -- mid-November and our analyst meeting in December, we said that Q1 would be difficult. We cited the weak economic environment and seasonal softness in some businesses as factors that would affect us in Q1. The quarter turned out even tougher than we planned. Weak orders and continuing margin pressure were the biggest factors in a very disappointing outcome.

In my comments, I'll describe what happened and what we're doing to get back on track. There are a few themes to keep in mind as we review the results. First, we are taking new actions to reduce our costs in order to reach break-even with quarterly revenue of about $1.45b. We have said in the past that we have trigger points that would immediately set new plans into motion. With this quarter's results, we have reached those points. Second, we're making progress on improving our operations. The ongoing rollout of our ERP system is progressing well. In addition, this quarter we successfully launched our new customer support and service system. These efforts will improve our ability to address customer needs and will deliver some savings in the second half of this year, as we complete these projects and further savings in fiscal year 2004. And third, we are preserving the strengths of the company in protecting our investments for the future. Clearly, the tradeoffs between urgent short term demands and the long term have become even more challenging. I'm convinced we can continue to strike a healthy balance as we implement further actions.

Now I'll comment on our Q1 results. At $1.36b total orders were down 9% from Q4 and were 7% lower than Q1 a year ago. By geography orders in Asia rose 7% compared to a year ago. Europe was about flat. And the Americas declined by 22%. Customers are continuing to delay capital expenditures as they adjust to lower demand and the uncertain economic and geopolitical environment. These delays affected almost all parts of the company. In addition, several businesses were affected by specific delays in the timing of orders including our semiconductor test, OSS, and chemical analysis businesses. After a very strong Q4, the test and measurement business was sluggish due in part to seasonal softness in the U.S. aerospace and defense market. Demand for hard copy ASICs was also down substantially from the prior quarter and a year year-ago period.

There were some pockets of orders strength. In the automated test business we obtained a 31% sequential increase in orders for our system on chip testers. In semiconductor products, there was solid demand for base fiber optic components, as well as optical mice, embedded camera and wireless components such as our F bar filters and EP Hemp amplifiers. Within test and measurement, instruments for computer and storage market were seasonally strong and our wireless test market in Asia continued to achieve good growth.

Revenue for the quarter was $1.41b. This was add the mid point of our guidance and flat compared with a year ago but down 19% from the fourth quarter. Lower volumes were the key factor in this quarter's gross margin decline. We continued to see intense pricing pressure across all our businesses with average discounts increasing in many parts of the company. We had a reasonably good result in expenses in Q1. R&D spending tracked very closely to our plan and was down modestly compared with the prior quarter and a year ago. Sales and marketing and administrative cost tracked closely to our expectations which included startup costs for the new customer support systems. All of these factors netted out to a loss on an earnings before restructuring basis of $.23 a share. This quarter's results will make it clear that we need to do more to return Agilent to profitability.

Now I'll turn to the actions we're announcing today. Over the last year and a half our plans have anticipated a modest upturn in orders. But orders have consistently stayed close to their average of about $1.47b per quarter for the last five quarters. So we can't continue to plan on the basis of order improvement. We are taking additional steps to reduce our cost structure to match this much-lower level of business. We are proceeding on schedule with the workforce reductions that we have under way. As you know, by the end of fiscal 2002, we had substantially completed our original reduction of about 8,000 people. We are also about two-thirds of the way through the program we announced last August to lower our headcount by another 2,500 people by the middle of this year. Today we are announcing actions to lower our cost by an additional $125m per quarter. To do this, we are planning to reduce our workforce by another 4,000 people. We are also continuing our operational initiatives that we discussed with you in December. We're continuing to consolidate our manufacturing, increasing our presence in lower-cost areas. Outsourcing functions and processes where it makes sense, and reducing the physical space we use. Regarding the current quarter, we believe that the uncertainty in the macroeconomic environment will continue. We also expect a modest rebound in our semiconductor test and semiconductor products businesses. Given these factors, we believe we can achieve revenue in Q2 of between $1.4b and $1.5b. The impact of our ongoing and additional restructuring programs should help us reduce our loss to between $.10 and $.20 per share in Q2 on an earnings before restructuring basis. So while we're disappointed this quarter's results we are moving on many fronts to restore Agilent to profitability. Our urgent focus is getting our cost in line with a much lower level of business. At the same time, we're working to preserve the strengths that are required for us to maintain and grow market share to address changing customer needs and to innovate. Our cash position remains strong. Receivables are in good shape and we're continuing to reduce our inventories. Our product portfolio is outstanding. After a difficult quarter, we are determined to move quickly to get back on track. Thanks for being on the call today, and now I'll turn it over to Adrian.

Thank you, Ned. Good morning everyone.

I want to briefly cover three subjects this morning. First, the financial results for the quarter, second our plans to bring down our break-even cost structure to a $1.45b run rate for the quarter this year and then talk briefly about second quarter guidance. We've been pretty clear on the past quarters that visibility has never been worse, unfortunately we did prove this in this quarter's results. As we indicated three weeks ago and Ned reiterated just now, it was disappointing. Orders were softer than we expected and that translated into weak revenues and an even weaker operating performance because of both volume and margin pressures.

One thing that did go well was the implementation of our SEBLE customer support system. As we all know, major implementations are never easy and none are flawless. However, this implementation went as well or better than expected. We also continued implementation of our company wide ERP system during the quarter and once again the ERP had no material impact on our operating results. In factor, our semiconductor products group now expects to complete its implementation in March ahead of schedule and overall we're still on track to complete the entire implementation by the fourth quarter of this year. And for this quarter, our unusual programmatic spending came in right at the roughly $.07 that we expected. One note as we're doing these financial comparisons, all the comparisons will be discussing are to the numbers as we stated in our press release of January 21st where we also broke out our automated test as a segment for the first time.

So getting to the numbers we reported net orders of $1.358b in the quarter down 9% sequentially and 7% year to year. Our cancellations were about $63m which was down from $80m last year and continuing the progression of very low and stable cancellations. We stated in our release that we felt business had been affected by economic and geopolitical uncertainties. We they think you can see that in the geographic profile of our orders. As Ned also mentioned, the Americas orders were down 22% year to year while Europe was about flat and Asia was actually up 7%. Revenues were $1.412b down 19% sequentially and about 1% year to year obviously revenues were below our original guidance of $1.5b to $1.6b and about at the middle of the range of our revised expectations. Our book-to-bill was about .96 up from the .86 from the fourth quarter a year ago. Our gross margin for the quarter was 38.6% down 3.4 points from the fourth quarter down about 1 point from a year ago. Frankly, that reduction in margins sequentially of 3.4 points as tough as it was could have been a lot worse if you just took a 70% decrimental on the volume, our gross volume could have been down as much as 7 percentage points. It was only down 3.5 points meaning we made up half of what did normal decrimental would be. We also made up for the fact that some of our highest gross margin businesses such as our automated test group business fell more than some of our lower gross margin businesses such as semiconductor. We were able to offset mix as well. Competitive pressures remained intense and we had unanticipated difficulties in semiconductor ramping up for the strong demand for our relatively new products, the F Bar filter and our EP Hemp Power Amp.

Our R&D spending for the quarter was $273m or19% of sales, down about 8% sequentially, or $25m, down about 10% from year to year. Our SG&A costs were about $474m, up about 2% sequentially because of the higher I.T. systems costs that we talked about. But down 5% year to year. For taxes, we had $195m pro forma pretax lost and that was reduced by the 44% tax benefit rate which is what we -- which is consistent with the rate that we indicated last quarter would be applied if we were in a loss position for the year, also the same as the effective rate last year, but it was higher than the 27% we said would be appropriate if we were going to be profitable this year.

So to go through the numbers, we had an earnings before restructuring net loss of $109m or $.23 per share. Going from that to a GAAP loss you'd have to subtract out about $12m of amortization of intangibles, about $42m of restructuring cost and then a tax benefit of $51m. Getting to a GAAP net loss of $112m. And in addition to that, by the way that was about $.24 per share. In addition to that we adopted FAS 142 and we impaired virtually all of the OSI goodwill from our acquisition in 2001, that charge on a net basis was $257m. And so on a total GAAP net loss we had a loss of $369m or $.78 per share.

Turning to the BS, we think on the quarter we did a good job of balancing the BS and minimizing consumption. We said last quarter plus or minus the $50m related to the timing of restructuring costs we thought we could be cash flow neutral in the first quarter. Despite much weaker than expected earnings we think we just about achieved that milestone. If you take our GAAP loss of $112m and add back the cash we generated from networking capital and other on the BS, net cash used in operations was negative $76m. Now, you make a couple more adjustments as we mentioned last quarter, we put in $90m in a lump sum contribution to the U.S. pension plan, we also had an employee stock purchase plan of about $25m in advance payments. If you subtract those out, and then we also got a tax refund of $76m, subtract that unusual item out, as well, and then finally, subtract out the cash restructuring costs we had of $43m, what you'll find is we had an adjusted cash consumption from operations of about $18m. So we do think that we were within striking distance of cash-neutral on an operations basis. That's improved from the $111m cash consumption that we saw in the fourth quarter of last year.

Okay, continuing on the BS we had capital spending of around $61m, that's below the $69m in depreciation and on track to the $250m or less in Capex we will spend this year compared to $300m last year and $880m in 2001. In receivables our receivables were $930m. We generated $192m of cash from receivables this quarter, our day's sales outstanding were 59 days. It was only that high because of the extreme nonlinearity of the quarter. We had a very soft November, a very soft December and a reasonably good January, but obviously we haven't collected on the shipments and the revenue that we recognized in the January shipments. In inventories, we had $1.17b in the quarter; we generated $32m in cash from inventories. Days on hand of $121m, are improved dramatically from the 146 days that we had a year ago. All in, we ended the quarter with a cash balance of $1.75b, down about $90m from the fourth quarter.

Turning now to the segment information on test and measurement, as we have redefined the segment. We had net orders of about $594m, down about 12% sequentially and 8% year to year. Looking at the sub-segments, the communications test business was stronger than the general purpose test business. The comps test business was buoyed by some residual strength in the Asian wireless market, whereas, the general test market was off almost across the board was particularly weak in U.S. spending. Comps test was off about 9% sequentially and 5% year to year, the general purpose test was off 18% sequentially and 15% year to year.

Turning to revenues, we had $633m in the quarter down 15% from quarter to quarter down 7% year to year. Our pro forma lost loss was $132m compared to a loss of $107m in the fourth quarter or a loss of $171m a year ago. Now, the first quarter operating loss of $132m is obviously unsatisfactory but it noticed that it's $39m below last year's loss despite $51m lower revenues, reflecting the cumulative benefits of the restructuring to date. Sequentially, the operating loss did increase by $25m but considering the $114m lower revenues, is pretty good forms, a really modest 23% decrimental. Looking forward, roughly half of the $120m of additional restructuring that we'll do over the course of this year will be focused on this segment and combined with the actions already under way, we expect to bring this test and measurement segment to a break-even by the fourth quarter of this year.

Turning now to our new segment, automated test group. Our new segment really hit an air pocket in the first quarter after a very strong performance throughout 2002. Net orders of $115m were down 24% from the fourth quarter, and down 38% from a year ago. Revenues were -- of $136m were off 38% sequentially and off 1% from a year ago. Our book-to-bill of about .85 was right in line with the data reported by Semi just two days ago for the there-month moving average through January. Much of the -- sorry, our operating loss of $48m in the quarter compares to a profit of $9m in the fourth quarter and a loss of $44m a year ago. Much of the volatility in orders that we've seen has been due to the lumpiness of flash memory test business where you can count the major customers with one hand. Excluding flash segment orders were flat sequentially and we expect flash orders to bounce back this quarter based partially on orders that have already been place during this quarter. For SOC tests, while the business was up 45% for the year it was up 31% for the fourth quarter and we do expect it to be up this quarter. Part of our enthusiasm about that is that during the quarter we had 104 design wins and more than 250 of the design wins that we've discussed in the recent past will go into production over the next six months stimulating more demand. The slightly higher operating loss we saw in the segment in the quarter compared to last year was due entirely to product mix.

Turning to semiconductor products, we had net orders of about $381m up 5% sequentially, up 10% from a year ago. And if you take out the sharp decline we saw in hard copy ASICs our orders were up 11% sequentially and 19% year to year. The strength was about equal between networking and personal systems, both sequentially and on a year to year basis. Revenues were -- of $367m were down 22% from the fourth quarter and were up 12% from a year ago. Our book-to-bill of 1.04 compares favorably to the fourth quarter book-to-bill up 0.77. We reported an operating loss of $48m in the quarter compared to a $21m profit in the fourth quarter and a $61m loss a year ago. The first quarter operating performance of semiconductor was disappointing. We have seen recently a faster pace of ASP erosion in the past six months and we did have mix going against us as well as some unexpected ramping cost in order to meet the strong demand for our F Bar Filter and our EP Hemp Power Module. About 15% to 20% of the additional restructuring we announced today will be focused on this segment. Finally, turning to life sciences and chemical analysis, we had net orders of $268m, down 13% from the seasonally strong fourth quarter but also down 7% from a year ago. Within the segment, chemical analysis was weaker than life sciences, down 13% sequentially and down 9% from a year ago for chemical analysis versus about a 3% decline in life sciences.

Revenues for the quarter of $276m were down 7% from the fourth quarter, we're about flat compared to a year ago. And we made operating profits of about $34m in the quarter, about the same as a year ago, down about $9m from the fourth quarter. Within the group we saw weakness in chemical analytical systems orders because of higher feed stock cost, basically the higher oil prices as reflected at the petrochemical and chemical companies. Spending by pharmaceuticals was also weak as budgets continued to be constrained but we didn't see any softening in the bioscience spending.

Turning to restructuring and guidance. As far as the second quarter to some extent with the possibility of imminent war in Iraq, providing guidance seems a little bit silly but we think we will see modestly higher orders in the second quarter as Ned suggested because of the rebound we expect to see in semiconductor test equipment and because of seasonally higher semiconductor orders. So our guidance for the second order would be revenues between $1.4b and $1.5b and a pro forma earnings share loss per quarter of between $.10 and $.20. And that includes the $.05 impact, continued impact of implementing our major I.T. systems during the quarter. Beyond the second quarter, we're not prepared to give specific guidance at this time.

Frankly, we don't want to get ourselves confused about the most important task at hand which is to return Agilent to profitability as soon as possible. We would like to think after going on three years that our markets outside of wire line telecom would begin to recover but we're not going to count on it. So what we want to do instead is give you a flight path for our cost structure. Today, we believe we're at about a $1.6b quarterly break-even. By the fourth quarter, we intend to be at a $1.45b break-even, $125m below where we indicated we'd be when we met in New York last December. We think the progress towards that $1.45b break-even will be roughly equal over the next three quarters. The additional restructuring will cost roughly $175m, and will be accrued mostly in the second quarter, and spent over the next six to nine months. Note that we still expect that break-even to improve at least another $50m at a quarterly rate during 2004, as we really begin to get the full benefits of the I.T. system implementations that we're completing this year. That should bring our quarterly break-even cost structure next year to below a $1.4b quarterly operating rate. With that, let me turn it back to Hilliard.

Thanks Adrian. David, at this time we're ready to take questions. I'd like to remind participants that we would like to limit your first question to just one question so we can get through the questions and then circle back.

Thank you. Today's question and answer session will be conducted electronically. Press star and 1 for questions today. We'll be taking today's first question from Edward C. White at Lehman Brothers.

Hi. In the semiconductor business which is one of the areas that you're looking for to come back, can you talk about what you can do to respond to the strong demand for F Bar and other products that are relatively strong? You talked about capacity constraints there and can you talk about why that's happening and what you can do to get around that?

Yes, Ed. We've been ramping as fast as we can. And as a result of the increased demand, we've had to keep one of our fabs here in the Bay Area open longer than we had planned. We originally had planned to move all of our fabs from the Bay Area to Fort Collins, and that process is under way and in fact that fab is ramping in Fort Collins. But given the demand we've had to keep our fab open in Newark for about six months longer than we expected. We still expect that fab to be closing over the next several months. But we were not able to get the benefits on cost wise of consolidating into a single fab as quickly as we like. But we are able to keep up with customer demand. We have not -- we have not missed our customer commitments. I think that's important to recognize. But it's cost us a little bit more to do that, just because we've had to leave this additional fab open.

Okay. Any sense as to how much that's been costing you, how much more it would have been, you know, relative to if you've been able to move more quickly to Fort Collins?

Very conservative estimate would be $6m to $8m per quarter for keeping that fab open let alone transportation yield and other issues.

Okay, great, thank you.

Deane M. Dray from Goldman Sachs and Company.

Could we get the next layer detail in the segments where the shortfall came in, sequentially or year over year, in terms of how much of the volume -- the margin hit came from volume versus pricing? And I assume when you say the margin hit, that's all pricing.

Well, I think there's a couple things. Dean, Adrian can give some specifics. Clearly, the overriding factor is volume. And that really impacted all of our -- all of our business, even LSCA that had been running pretty strong, had a downturn in orders due to, I think, some of the macroeconomic effects and the chemical analysis in pharmaceutical market. So we were hit across the board with volume impacts which was really by far the largest impact on our cost of sales. You know, within segments, we have seen a little bit of a -- a little bit of a mix difference. For example, in our semiconductor products, we've had some stronger sales for some of these new products that are ramping like F Bar Filters and P Hemp which aren't as profitability today as some of the more mature products like our fiber optic programs which haven't been growing as fast. So again, that's part of the mix-shift that's going on there. Within, you know within semiconductor test, we've also seen a little bit of a mix, a mix shift towards some of the lower-end platforms, as opposed to some of the high-end, as customers are buying more of the low-end machines than the high-end machines. But again, those I think are second order effects, compared to the overall volume issue. But let me turn it over to Adrian to add some comments.

Yeah, Dean, I obviously agree with that. I would say if you compared year to year, more than 100% of it is mix. And discounts have deteriorated from -- sorry, from- yeah, volume. Looking at it more generally, I would say that compared to the fourth quarter, the level of discounting has not gotten worse with one exception, semiconductor. Where it did get even more intense. But other than that, the level of discounting has been about as fierce as it has continued to be for the past six months. So it really is as I said volume is the overwhelming effect particularly sequentially, if you just took a 70% decrimental, we'd be off 6.6 points rather than 3.4. We were able to overcome over half of that by the restructuring and other actions. Mix is another point even sequentially.

The pricing impact was felt most on the semiconductor side, or semiconductor products?

Semiconductor products side.

Where does that stand on the COM text test side, optical, wireless, wire line, same sort of pricing conditions?

Yes. No real change from the fourth quarter.

I think the biggest factor there particularly in the optical test areas is the gray market. In several of our product lines, like our manufacturing test products as well as the optical test, there still is a fairly large gray market out there of used equipment for a number of older applications. Now, the good news is as time goes on, those don't fit a lot of the newer applications. So people are upgrading. But you know, until we get through that, you know, that gray market issue, we'll have continued pricing pressures, because we actually are selling and reselling our own used equipment, as it comes off lease, or from our demo pools in competition with some of these, you know, gray market sales.

And I think a quarter ago we said we were beginning to see some stability in that gray-market pricing. That continued this quarter. It did not get worse. It did not get appreciably better.

Okay, thank you.

We'll take our next question from Gerald S. Fleming at Fahnestock and Company.

I wonder Adrian if you could give us a little bit of feel for what the gross margin and cost structure looks in your model for this coming quarter.

We don't go there. We try and -- we don't give specific line-item guidance. I think you can assume with the modest bump-up in margins, excuse me in volume that we expect and with the continued rapid progress in our restructuring that you would see an improvement in both gross margins and support expenses.

And we'll go next to Max Schuetz at Credit Suisse First Boston.

Question on semiconductor products. If you could talk about which areas you were seeing the most pressure there and also if you have an idea when you were going to get to the Newark fab shut down.

You know, I think if you look, it's hard to, you know, it's hard to split it all apart, because you know, we've got so many different businesses. And compares to what period of time. But if you look at some of the more traditional light emitting diode products, some of the opto products that we've sold for years, there's a pretty active spot market that's pretty competitive, and again, we have taken a philosophy by the way, as companies are really trying to squeeze their suppliers and with the competitive market being as tough as it is, you know, we're walking away from what we call suicide bids. I mean, some people are bidding some ridiculous discounts just to win share and keep their light and heat going. We don't do that. We kind of draw a line. But at the same point, that just has continued to put more pressure on across the board. So I can't give you exact breakdown of the split, because it's pretty much across most of the businesses. But we have seen it in, you know, in some of the more traditional products first, where there's perhaps more competition and little less differentiation.

And how would you characterize the pricing premium you're getting on some of your newer RF products?

Well, I think we still expect to make very good margin, as I mentioned earlier, we're still in a ramp mode. So these businesses are not running at the profit levels that we want them to run. But you know, we still think that we can offer, because we have some technological advances in terms of size, and in terms of the performance, and in the F Bar Filter or in the Power Bar Amplifier in case of the efficiency that we operate, that we can -- we don't have to be as aggressive there, because there's some clear differentiation. But again, there is always competition, always pricing. It's just kind of relative. These are newer products that tend to have more differentiation than some of the more mature products.

I'd like to again emphasize that ironically, some of our margin issue in semiconductor products was because of the very success of F Bar and EP Hemp. Our efficiencies are not where they are going to be. We are continuing to ramp down the experience curve as we get more experience and more volume. But we're not there yet, and so ironically, the higher volumes of these newer products by the way they affect our mix are affecting our gross margin. And to answer your question on when do we shut down the Newark fab, I believe that the shut down is April.

Yes, April or May.

April or May.

We'll go next to Richard S. Chu at S.G. Cowen Securities.

Adrian, I'm really confused about the cost expense equation here. Your total cost expenses in Q4 totaled $1.70b. You're down about $100m from that in Q1. So I understand the point that you made with respect to gross margin leverage that the operational performance exceeded that. But I'm puzzled why total cost expenses are done only $100m sequentially given volume reduction, and the restructuring effects, that should still be playing out.

Richard, I'm not sure I understand the question.

You combine cost of goods and opex numbers for Q4. You show that as $1.70b. This quarter it's $1.68b. That number is down about $100m.

Right.

So my question is, with a $300m decline in revenues, why aren't costs and expenses down only $100m?

Well, if you took a normal 70% decrimental, they wouldn't even be down that much. Because our material prices, our material costs are only 30% of our total cost of goods sold. And so it's the pace of our restructuring that allows us to improve that from what otherwise would be a much more severe reduction in our gross margins and much less reduction in our ongoing costs. Again, I would also remind you that we had the absolute peak in our I.T. implementation costs this quarter adding an additional roughly $45m from the prior trend level of spending as we put in the CRM and continued our implementation of the ERP.

So you believe that your -- given the volume levels that your cost expense performance was on time?

Yes.

Okay. Let me not belabor that. I'll follow up on that later. On the discussion on the F Bar and the SPG products, could you -- Ned, do you have an update on the F Bar situation, you had most recently talked about 2m a month as the level that you had ramped to. Are you substantially north of that now, and do you have any design, production design-ins that you can talk about on EP Hemp?

I think what we announced is we just passed 10 -- let's see, it was 10m overall that we have F Bar filters that we have shipped over the last roughly 18 months, 12 to 18 months. And I don't know if we've talked about a -- the monthly rate. We, you know, we're clearly ramping to keep up with demand. But you know, we've just passed the 10m -- 10m number. We can give you more resolution on that at some point in time. I don't happen to have those numbers here, though, Richard. In terms of -- your second question was around the, you know, related to, you know, where that's headed or what -- I wasn't sure I caught the second part of your question. Oh. Okay, what happened?

If you could hold for just one question please, sir, if you could re-`queue by pressing star 1.

What happened to Richard?

He's on line now.

Oh, yes. The follow-on was just do you have any production design wins on EP Hemp that you can disclose?

Yes, we do. We're continuing to work with our customers to be able to get approval to use those. Actually, we've had a number of design wins just in the last three or four months. And we will -- we will be disclosing specifically who those are as soon as we get that approval. But we can't -- we can't really discuss who they are at this point.

Terrific, thank you.

We'll take our next question from Alec Berman at --

Hold on a second. You were looking at the GAAP numbers not on at the pro forma numbers. Our total cost and expenses for the fourth quarter were $1.77b. Our total costs for the first quarter was $1.614b. That's down $156m quarter to quarter. Which we do think is excellence performance under the circumstances, and on our plan.

And are you ready to proceed sir?

Yes thank you.

We'll go next to Alec Burman at Pandrea Capital.

[Inaudible] Are these sign-ins you have CDMA or GSM or is there a mix in what the approximate ratio, and then also, can you give us any sense of what kind of monthly volumes of units you might generate in power amps going forward either for the year or for the quarter after that, give us a sense of what kind of volumes.

I can't give you those -- that level of detail. But you know, we do have a, you know, a good percentage of our volume with, you know, with CDMA. You know, that was kind of an initial focus. But we are certainly in the GSM area as well. So I think, you know, it's kind of a question of priority and where we focus first. And we have wins in both areas.

Can you give any -- without given a number of areas, can you give us some sense of you know, obviously the CDMA market, we know how big a market it is. Are we talking by the end of the year you'll have substantial share or very small share or just some feeling as to how hard this ramp is, how big is it going to be?

I just don't have any numbers handy. I don't think any of us have any level of detail of projections for every one of our products. I'm sorry, and I don't think we can go to specific levels of detail. We can give you general idea of share and design wins and where we're focused and maybe you could get back to Hilliard or somebody and get some more detail on that. But in terms of specific projections of how many units we're going to sell by the fourth quarter, we're just not going to go there.

We'll take our next question from Paul R. Knight at Thomas Weisel Partners.

Hi, Adrian or Ned. Following up on Richard, your absolute cost of goods was higher than the July quarter of last year. What's the makeup of that, why is it?

Well, I'll let Adrian answer. I think again, a big portion -- a big portion has been our volume. But I'm -- we're checking the numbers here, because it doesn't -- I'm not quite sure what you're looking at.

Let me try this and so we can get a frame of reference. Our total cost and expenses in the second quarter of last year, which was immediately before implementation of our ERP, was $1.676b. In the third quarter it was $1.652b. In the fourth quarter it was $1.77b and in the first quarter it's $1.614b. Clearly down appreciably from the levels of any time in the prior year.

Okay, thank you.

I think in terms of specifically cost of sales, if you're looking at the third quarter, are you looking at third quarter or second quarter last year? Remember, we had the Everest startup in the third quarter of last year. It's a little bit hard to -- I don't know if we can compare quarter to quarter. And then prior to that in the second quarter we actually had some early builds in anticipation of that. So some of those quarters get a little bit funny in terms of the comparisons.

But again, I would give you the second quarter of last year we had $879m cost of goods sold. It was $867m in the first quarter of this year down. But so was revenue from $1.457b down to $1.412b.

Okay, thanks Adrian, thanks Ned.

Our next question is from Dillon Cathers of Value Line.

Broad question, a lot of your competitors have remained in the black, National Instruments for one. Do you think the next round of restructuring will bring around a profit, you know, assuming the economy doesn't get any worse and we don't go to war?

Well, certainly, that's our plan. But you know, let me just make a general comment. If you look at the markets that we're in, you know, we're in very -- we've been in historically very different markets than National Instruments and some of our other competitors. You know, we peaked, our peak of revenue for the company was $2.8b in Q4 of ’00. You know, we've dropped to a run-rate of about $1.4b, $1.45b, and none of our competitors that you mention, like National or even Tektronix have dropped by that amount. If you want to look at competitors that have been impacted like us, look at Digital Lightwave, look at Acturner, look at Paradine, look at Credence, you probably can't see but some of the Japanese competitors or private competitors in the optical communications test market. You know, we had a big percentage of our business that has been -- that was very focused around optical and communications test. That fell off the wagon. And in -- that's what we are scrambling to get back to profitability with a significantly lower level of volume in those businesses. In some cases, down as much as 80%. Also, remember that we have a semiconductor test business. Very cyclical business. Last quarter, we were the only semiconductor test company making money. And so we will get back to profitability there. We're confident. So you can't compare us versus National. You have to look at our portfolio of businesses versus a portfolio of competitors including Teradyne, including Acturner and others who have been impacted at businesses like ours.

Next question, Chen-Ley Ong-Verkouille with Banc of America Securities.

On cancellation, could you give us a little bit more color into what was coming, the $63m coming from? Second question, is perhaps Adrian can help us on this one. Looking at the R&D spending, it's sort of been on the increase after the third quarter. Can you actually comment what's going to happen, is this going to be -- will we see any impact, I guess, from the recent announcement of the further cut? Thank you.

Let me try on both of those. First, as far as cancellations, the $63m of cancellations is actually a very good performance. That's about as low as it ever gets for a business of this size. And as is usually the case, it will be in the test and measurement and the automated test group is where that will be predominantly.

As far as R&D spending, R&D spending has been scaling down for the past year, not going up. Again, I think perhaps some of you have not gotten the -- all of the revised numbers that we issued a month ago on January 21st, but to read the numbers sequentially over the past five quarters, R&D spending was $305m in the first quarter, $303m in the second quarter, $289m in the third quarter, did go up to $298m in the fourth quarter but is now back down to $273m in the first quarter. And that's about 19% of sales. We have, in fact, brought down R&D spending over the past year by about $25m.

And just a comment on the cancellations. You know, what we see when we talk about cancellations is, you know, customers are changing their minds a lot. Priorities shift, programs get cancelled, and you know, on a -- on a $1.4b, $1.5b business, having some ongoing level of cancellations is not unusual. Again, you know, it would be nice if it was zero. But you know, we think we're down to roughly the ongoing run rate that we would expect. Maybe a little bit higher, but certainly because of all the uncertainty, but close to where we would expect to run, you know, on an ongoing basis, just because of all the different changes that goes on in customer priorities.

One other element that is distinctive about Agilent is that if we have a customer push out delivery beyond six months we consider that a cancellation. We only record bookings that are deliverable in the next six months. We don't take them on and we don't record them as a booking if it is beyond that and as I said if it gets pushed out it's considered a cancellation. If it gets rebooked for the next quarter, it's a new order.

We'll go next to Steven Koffler at Wachovia Securities.

Are you still targeting 50% gross margins as you work through the plan can you try give on these volume levels, when could you get there? Thank you.

We have said all along, Steve, that a 50% gross margin would be at an operating level of around the $8b level. Meaning normal economic conditions again, not these miserable conditions. Now, the truth is with these additional cuts that we're making, we are able to bring that kind of a gross margin or achieve that kind of a gross margin at a lower level of volume than previously by definition. But these are very difficult circumstances and we're not yet positioned even after the $1.45b to get a 50% gross margin, obviously if business stays at these levels.

We'll take our next question from Steven C. Pelayo at Morgan Stanley.

I believe you made a comment about semiconductor ATE, and particular strength [inaudible] expecting orders at more of the low end. Which would surprise me, it would seem that the utilization was at the high end. Could you provide guidance there?

That's generally true. If you look at the -- if you look at the capacity utilization today, it tends to be on the high end, in fact on average, if you look at the utilization of our testers, we think they're well over 90%. And those numbers apply in Taiwan and in most of the -- virtually all the customers that we track. But you know, again, these things -- these things come and go.

And I don't think we can get too excited about, you know, one quarter, because you know, we're going to see mix changes from quarter to quarter based on which customers are buying, what they buy, what they bought last quarter, what they're going to buy this quarter. So I don't get too excited about a quarter to quarter shift. If you go back and look at the whole year, as you probably have seen from, you know, the prime data, prime data report that was just recently issued, you know, we believe we gained about 6 to 7 points of market share last year. In semiconductor -- in SOC tests, even our memory test share went up by a lot, close to 10 points. So overall, you know, we think we're doing quite well. But in terms of the mix of business, it's going to shift around on a quarter to quarter basis. You're correct that probably the biggest utilization is in the, you know, some of the newer high-end devices that, you know, use the .13 Micron processes and others. But we just happened to get some orders from some applications that were from some lower-end devices as well.

We have a follow-up question from Dean Goldman Sachs.

Question each for Ned and Adrian. Ned, your question would be, can you comment on the changes in management responsibilities in the quarter, should that be viewed as a surprise that Byron Anderson had retired, announced retirement in the middle of the quarter and what should we think about Bill Sullivan, a Chief Operating Officer taking on operating role, some clarity there and then for Adrian on the action by the rating agencies, what were their issues, was it the cash burn and what's the expectation on Moody's? Thank you.

The retirement of Byron was long planned. He turned 60 this year. He made it known to me about five years ago that he had planned to retire when he was 60. So we have been working on a plan to transition that business to a new leader for, you know, some period of time. But given the challenges that that organization has, and the -- and I think the, you know, the issues that they have with getting back to profitability, I felt the best thing we could do in the near term was to have Bill Sullivan jump in and help out. Bill is certainly one of our best operations managers in the company. A lot of the things he was working on anyway, as COO, really were EPSG related issues. The implementation of our Everest system, the restructuring of our manufacturing, a lot of those became EPSG related issues. Asking him to do double duty seemed to make sense to accelerate the change and give Bill an opportunity, along with me, to continue to evaluate the, you know, the alternatives we have for long-term replacement for Byron. And certainly our intention that this is an interim move, but it could last as much as a year. Now, on top of this remember that we moved some of Bill's responsibilities to Adrian. Adrian has responsible responsibility for I.T. and workplace services, which turned out to be about 80% or more. He would say 110% of his workload. So we've moved, you know, these two activities to Adrian. Adrian has managed these activities before in his prior life. So you know, Bill is continuing to help me on some corporate issues, but probably devoting 80% of his time or more to EPSG related issues in the near term. While we get that business back to profitability. As Adrian said earlier, you know, this is the business that has been furthest away from plan, and profitability, and we're committed to get there by the end of this year.

Dean, on your question of the rating agency move, frankly, we've been pleased that the rating agencies hung in there with us as long as they had. It's a -- obviously a very difficult situation for the rating agencies. They're looking at a company that has been losing money consistently for seven consecutive quarters. And despite all the progress that we're making, and industries that are being served where our sales alone are down by 45% on a consolidated basis, their outlook for some of the markets that we serve is not rosy. And so it's really been an expression of faith and confidence in us getting back to profitability quickly that's kept the rating agencies hanging in there as long as they did. If you compared us to any sort of similar company and similar industries, we should have been down graded to speculative six and nine if not a year ago, six or nine months or even a year ago. Moody's with the latest warning did trip over, we understand that, obviously we don't like it. It is no consequence to us because we have no debt that is affected and no imminent financing needs. Moody's though they put us on watch for a potential down grade is still hanging with us because they believe our story. They believe that we are working hard and successfully despite the time at that we're in to get back to a break-even as soon as possible and certainly within this year. And they have confidence that based on the products and the technologies and the market positions that we have, that once we get to break-even, and with a little bit of fair sailing from our markets, that we will begin to claim money, begin to be sustainably cash flow positive and that's the basis for really hanging on there to the extent that they have.

Operator, this is Hilliard. We are going to take two more calls and then wrap up the call.

Okay, we'll go next to Rob Brocky at Tudor Investments.

Hi, guys. Just a couple of quick once, can you give us some kind of sense as to what your cash contribution to the pension is going to be kind of going forward. Secondly, one analyst put out a note this week suggesting you may have to take a significant valuation allowance against the net deferred tax assets so could you maybe comment on that. And then finally just on the $175m additional restructuring cost, should we assume that's mostly cash cost as well? Thanks.

Yes, let's take those in reverse order. The $175m order of magnitude cost you should consider to be cash. On deferred tax asset, as we always do on a quarterly basis, we did a thorough analysis of those assets. We feel that they are still good. And we have no discomfort about not taking an adjustment to that at this time. On the pension contribution, the total cash contribution for the year will be about $200m. We have already done about $120m of that this year.

And we'll take our final question today from Edward C. White at Lehman Brothers.

I was wondering if you could talk a little bit about what might have accounted for the weakness in the general purpose test on the government side. Was there anything specific behind their slowing down, and then secondly within the automatic test segment can you talk a little bit about how the board test segment did within that business?

Yes, I think two things about the, you know, the general purpose test. It was -- the aerospace defense business is seasonal. As you know the government fiscal year ends in October. So we do usually anticipate slow-down. So on a quarter to quarter basis, we would expect to see some reduction. It was probably more acute this year than normal, I think because of a lot of the uncertainty about a potential war in Iraq. You know, in the short term, a -- you know, the impact of a war means people spend more money on munitions and bullets than they do on test equipment. And so, you know, longer term, that, you know, they continue to need to invest in upgrading platforms and modernizing and additional communication equipment. But the short-temp impact is diverting funds from investment for the future into operations.

Regarding board test, yes, that business has continued to be weak. There's a lot of excess capacity out there in the contract manufacturers. There's a big gray market in that area which, you know, continues to be an overhang on our new business sales. And this is a business unlike semiconductor test, it doesn't have quite as much technology churn to it. So turns out board testers we made five to ten years ago may still work today for a lot of the boards that people are building. So that business has continued to be weak. We -- it's not too far off our plans, but it continued to be at very, very low levels of business.

Thank you. And this concludes today's question and answer session. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Thanks for joining us today. We look forward to speaking to you again when we join you in May for our Q2 results. Thanks a lot. Have a good day.

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