安捷倫 (A) 2005 Q3 法說會逐字稿

Good morning. I'm Hilliard Terry, Director of Investor Relations for Agilent Technologies. 'd like to welcome those of you who are here live for our Company meeting and we also have many people on the phone and also via the webcast so I'd like to welcome all of you.

Before we get started, I'd just like to make sure that I remind you that we may make some forward-looking statements and it's important that you take a look at our SEC filings and get an accurate representation of all the risks and uncertainties involved in those statements.

Also, during the course of our comments we may refer to some non-GAAP numbers. We have on our Web site the reconciliations to the GAAP numbers that we are referring to in terms of the non-GAAP numbers.

And lastly, in terms of the guidance that we provide today it is only valid as of today and we do not assume any responsibilities to update that during the quarter.

In terms of the agenda, obviously, we've announced Q3 financial results, and we have several other announcements that we'd like to go through in detail.

Bill Sullivan, President and CEO of Agilent will come up momentarily to give you some background and more details on today's announcements. Adrian Dillon, Executive Vice President Finance and Administration and Chief Financial Officer will go through the financials and the implications from a financial standpoint of the announcements today and also review our Q3 results. After that, we'll come back up and take questions both from those of you here in the room and then also from those of you on the conference call.

With that, let me turn it over to Bill.

Good morning, everyone.

Before I start talking about the announcements we made today, I just would like to make a few comments about our Q3 performance.

Our orders were $1.8 billion, again, one of the highest for over a year, 1% from last year. Again, Adrian will go through the details of our Q3 results, but our revenue of almost $1.7 billion was a little bit on the low end of our estimate, mostly driven by continued volatility in our wireless cell phone test business and a little softness in our pharmaceutical products.

But given that we had very, very good cost control, we actually came in at $0.28 per share on a pro forma basis and that was the high end of our estimates. We've also noted in our press release that the expectations for Q4 are exactly as we had predicted last quarter and that we expect earnings to come into the 33 to $0.38 on a pro forma basis in Q4 of '05.

Today starts a new chapter of Agilent. We have made decisions today for us to be able to focus on our core that we have been a leader for the last 65 years, and that is in the measurement market both on electronic measurement as well as in bioanalytical measurement.

We have enormously strong position in that market and if there's any two take aways I'd like you to remember this morning, that is all about focus and value to our customers and shareholders. We believe the decisions that we have made today will allow our organization to be 100% focused on the measurement market to be able to provide instrumentation tools and software for scientists, researchers around the world to be able to do their jobs in the electronic and analytical space.

Secondly, the announcement we make today are going to return real value to our shareholders starting immediately. In addition to that, our customers are going to see even a more focused company ensuring that we can meet their needs.

Just briefly what we've announced today is first of all the divestiture of our Semiconductor Products Group, to KKR Silver Lake Partners for $2.66 billion. Again, it's been quite a few speculations over the last few weeks. And again, we are pleased to confirm that we have made this decision.

Secondly, we are selling our share of our Lumileds joint venture with Philips to Philips. And again, that will be for about $950 million plus the $50 million debt repayment.

Thirdly, we are announcing our intention to spin out our SOC and flash Memory Test business. And again, just to be clear in our Automated Test Group segment, which last quarter was $192 million of revenue, this is about $117 million of that group.

Two other product lines in our Automated Rest Group, parametric test and VOIR testing, our manufacturing tests, will be kept inside of Agilent and will become part of the Electronic Measurement business. So what we are talking about spinning off in an IPO next year as practical in 2006 is our back end Semiconductor Test business.

With these proceeds, we have announced a $4 billion stock repurchase plan which will start immediately. In addition to that, we will call our $1.15 billion of convertible debt which becomes due in December of '06.

So that's the general overview of the announcement today in addition to the quarterly announcements.

The rationale for doing this, as I said previously, is really focusing the organization on the measurement business.

As you know, that we have been trading at a 25 to 35% discount as the sum of our parts and that we have really tried over the last few years to try to close that gap. And we believe that these decisions today are the best way for us to make sure that we can take the discount out of our share, return some value to our shareholders, and set an opportunity for our businesses that we are divesting or spinning off to be able to compete as pure plays.

We're firmly convinced that the Semiconductor Product Group as being a pure play company, a leader in optielectronics, in fact, number one in the world, great products in terms of the RF microwave space and of course a very strong position in integrated circuits and ASICS we'll be far better positioned to be able to compete as a private company in this marketplace.

Likewise, in the Semiconductor Test business, almost all of the competition in this space are pure plays. You know who the competitors are in this space and we believe that a company that is structured to focus at this segment, it's a $3 billion segment in the measurement market, will be far stronger and will be able to manage through the cyclical nature of the business.

As I mentioned, because of making these decisions, we believe that the disadvantage that we have in terms from a capital structure will be addressed and Adrian will go through a lot more of the details of exactly how we're going to close that gap. This divestiture we are absolutely convinced will in fact serve the best interests of our customer or our shareholders as well as our customers moving forward.

And finally, in terms of our Lumileds joint venture, that has been incredibly successful joint venture. The technology actually was originally developed under Hewlett-Packard, became part of Agilent during the spinoff in '99, and that joint venture has been exceedingly successful in developing solid state alternatives to the illumination market, to the lighting market.

This is very strategic to Philips. Fits very well into Philips Lighting Company, the largest lighting company in the world, and it's the right time now to be able to put that back together under Philips.

So as I mentioned, what we're going to do is return the cash that we have received from these divestitures immediately to our shareholders and again, Adrian will go through those details. We will still have sufficient liquidity afterwards, and again, Adrian will detail the cash position we will be in after we have completed this $4 billion stock repurchase as well as calling back the convertible debt, and we will have, I believe, a very optimized capital structure moving forward.

In addition to these changes, we have also made announcements of restructuring the Company to ensure that the infrastructure again, this is the IT services, the work place services, legal, finance, all of the functions that support a company, that we'll be reducing those costs by about $450 million.

This is $60 million higher than what is being charged today to SPG and the parts of ATG that we will spin off. So we believe with the simplification of the Company, simplification of our footprint around the world, we will be able to reduce our infrastructure cost by $60 million over what would normally just be transferred to the divestitures.

That will have an impact for the people who work in these infrastructure functions of about 1300 people. There will be three ways that the reduction will be done. A lot of the employees will move to the divestiture spinout.

Secondly, we'll have our normal attrition and the third, that there will be work force reductions to be able to hit our target of reducing our infrastructure by 1300 employees.

And of course, after that I think we'll have a very, very efficient structure as we complete this. And the expectation is to complete this transformation of our infrastructure by the middle of 2006. So we are very well prepared.

Adrian is leading the charge on this to be able to get these costs out of the system as fast as we can.

As a result of these changes, and many of you have heard me talk ever since I became CEO, that we are absolutely committed to get to a 14% operating profit and greater than 20% return on invested capital, and that we are going to do that in terms of fixing, restructuring, and really optimize our overall organization.

I'm very pleased today that we are absolutely positioned, and we will show you a forecast for what the year 2006 looks like, but we will meet our operating model as we have described. And so we're far better positioned to do that in a far less volatile market which I'm going to speak about in a moment.

So if you look at this overall measurement market, it's a $40 billion opportunity for us split in two ways. One called Electronic Measurement and the other one is the Bioanalytical Measurement.

As you can see from this slide we are in number one position in almost every category of these two markets. We really are the largest player by far inside of Electronic Measurement, three times larger than any of our closest competitor, again, number one in overall Test and Measurement, number one in wireless, wireline, and many segments of general instrumentation. So a very, very strong position moving forward.

Likewise in the bioanalytical marketplace, we're number one in gas and liquid chromatography and we have enormous opportunity in this space. This is a segment of the market while we're number one in segments of it, our market share in total is much smaller than where we are in the Electronic Measurement.

So moving forward, that we will continue to make a large effort to be able to expand our market share inside of the analytical area and continue to maintain and grow our market share on the Electronic Measurement. Though this is a representation of each of these markets, again the Electronic Measurement markets, $20 billion segment, bioanalytical market is also about $20 billion.

The overall market growth of both these segments in aggregate is about 8%. Our goal as a company moving forward is to grow at 10%, and this will be done both through organic growth as well as acquisition.

So that is the target that we have set for ourselves with the new Agilent moving forward.

We also believe that there's some real synergistic opportunities between these two segments. The most obvious, number one, is in the nanotechnology. This is a space that we have not played in the past.

We have made a recent investment that we have announced, continued work inside our laboratories in the nanotechnology space, and likewise in the homeland security, while we participate both on electronic part of the homeland security as well as the analytical, we believe that we're being the only company in the world with both these capabilities in house that we will be able to provide better tools for the various government agencies around the world to help improve and to help monitor homeland security.

So we do believe this very strong synergies between these two segments as well as having large opportunities respectively in each of these segments to grow over the next decade.

Of course, this new organization is going to continue to focus on our customer and, in fact, the simplification of the Company, I believe, will ensure our ability to be that valued partner for our customers. When people need to invent, need to innovate, they have to have the tools, they have to have the software, the technology to be able to enable there, and we really need to continue to be that valued partner that we have been for so many years.

We are going to continue to have our central research laboratory. Again, we're one of the few big companies that still has a central research absolutely committed to our ability to have a strong team that's really thinking about the future, thinking about the innovative tools, the innovative instruments, the solutions that our customers need moving forward.

And finally, I believe that this new company moving forward, being focused in this space will be able to return its investment that we make inside of research and developments that will continue to be a substantial investment as we move forward.

So in closing, what we're announcing today is again focus on our core business, the instrumentation market be the premiere measurement company in the world, we're realigning our costs. This will increase our earnings power which will maximize shareholder value.

And what I'd like to do now is turn it over to Adrian to go through all the details of what we believe will be a very substantial increase in value to our shareholders.

Coming up I just do want to say one additional comment. To be able to make all these transitions all come out today is not the easiest in the world. And I can't thank enough for Adrian and his team working with the businesses to be able to pull this all together. So again, Adrian.

Thank you, Bill. Good morning, everyone.

Let me give you a little bit more of the flavor for the strategic rationale behind today's announcements and the financial implications of what we're announcing today.

First, the overall rationale for the portfolio moves. As Bill's already suggested, Agilent, as a diversified technology company, has traded at a persistent 25 to 35% discount to any kind of synthetic weighted average of Agilent's peers and competitors. And it's not just today, it's been true really since the inception of the Company.

We're viewed, we're covered, we perform more like a sluggish semiconductor company than the world's premiere measurement company. It has been a case of the semiconductor tail wagging the measurement dog, and these moves today will make it very clear the inherent power of the underlying measurement franchise.

The vast, it's not that people don't want to invest in semiconductor, of course they do. But what investors want is to have a pure play. They don't want to bet on semiconductor to go wrong because of something that's happened somewhere else.

And indeed, the other companies that have, diversified companies that have semiconductor get penalized for having semiconductor. The vast majority are pure plays, and indeed in semiconductor capital equipment, all but Agilent are today pure plays.

It's very clear what the analysts want, it's a focused bet. And as a pure play, this measurement profile will enable us to really better align both cost-wise, focus-wise, strategic, customer, really align well, focusing on realizing the opportunities that we have as the largest, most profitable and best positioned company serving a $40 billion global measurement market.

So let's look at each of those pieces just a little bit so you can get a sense for the thinking that we went through.

If you were to put together a synthetic Agilent, using a composite of our Life Sciences and Chemical Analysis peers and competitors, Test and Measurement, Semiconductor Products, and ATG peers and competitors, what you'd see on average, looking at 2006, is a price to sales ratio of about 2.3, and an '06 priced earnings ratio of about 22.

Well this is a snapshot as of about mid year, so it's well after the rumors about the sale of SPG began and our stock began to rise. But despite that, on either a price to sales or a price to earnings ratio, we've continued to be at 30 to 35% discount to the peers and competitors.

And as I said earlier, this is not a one time or temporary phenomenon. If you look back to the inception of Agilent in the year 2000 and you look at how have we tracked on an enterprise value to sales over that time, the blue line is Agilent. That's the one on the bottom.

And the other companies are our best in class peers, Teradyne for ATG, Tektonrix for Test and Measurement, Texas Instruments for semiconductor, Waters for LCA, and as you can see, they have traded at anywhere from 2 to 4 times sales over that period of time.

The reality is we have been trading at a lowest common denominator basis. We don't get the opportunity, we don't get the credit on the upside, but we get penalized on the downside.

And indeed, again, when you look at how does the Company perform compared to its peers and competitors, we trade not like a Life Sciences and Chemical Analysis company, the correlation between our Life Sciences and Chemical Analysis peers and Agilent is 0.18 and in fact compared to Waters it's virtually zero.

Now this is the part of the Company that's been the strongest, the most rapidly growing, the steadiest. In the third quarter it represented 30% of the Company's total earnings and yet it had zero correlation with the industry.

Now for Test and Measurement it's a little bit better because we all went through that nuclear winter after the telecom boom. But again, compared to Tektronix, essentially no correlation with our leading peer.

And what do we correlate with? Teradyne and the ATG composites semiconductor capital equipment and semiconductors. That's, we have traded like because we have on average performed like, more like a semiconductor company than the pure play Test and Measurement.

Indeed, if you look at what do investors want, what they want is to invest in a pure play semiconductor company. If this graph shows or table shows the top 25m by revenue semiconductor manufacturers in the world. And of the top 25, only arguably three to five of them are not pure plays.

And those ones that are not pure plays clearly get penalized whether you're looking at price to sales or price to earnings compared to the pure play equivalents. And again, for Agilent compared to the 2.0, where the 1.5 ratio and on a PE, we're at a 16 compared to 23.

So we're, again, we're not even getting credit for the semiconductor multiple during these tough times.

And when you look at semiconductor capital equipment, Agilent has been the only one among the top 25 that was part of a diversified technology company. The other 24 and beyond are all pure play semiconductor equipment companies.

Again, it's very clear in the valuation and in the coverage that the owners, the investors, want the pure play bets for the semiconductor-related businesses. And the impact of being in those businesses has been to introduce a great deal of volatility and to slow the overall secular growth of the Company.

For example, if you take a look at our four segments and just look at what's happened to worldwide shipments over the past decade, I should have given a quiz this morning to see what you would have thought was our most rapidly growing market, and I bet at least some of you would have said semiconductor or semiconductor capital equipment. That's in fact is not correct.

Over the past ten years, worldwide shipments of semiconductor test and assembly equipment have grown 0%, they've shown no growth over the past decade. But with an average standard deviation of 27 percentage points, that is 0% for 10 years, plus or minus 27 percentage points at any given year, that's a massive amount of volatility for only 11% of Agilent.

Semiconductors not much better, 3%, not 15 or 10 or even 5, but 3% average growth over the past ten years plus or minus 11 percentage points. So you can see why the semiconductor-related tail was wagging the Agilent performance.

When you look at what we now have and now we're going to focus on, it is a set of markets and opportunities that are substantially more rapidly growing and much more stable. Even with the nuclear winter that we had in the first half of the year 2000, we had worldwide shipments of computer and communication equipment growing for about 4.5% per year with an average standard deviation of 6 points, so 4 plus or minus 6.

And then our most rapidly growing and most successful business, Worldwide Life Sciences and Analytical Instrument growth over the past decade has averaged 8% per year with an average standard deviation of only 3%. That's the business that we have today. And we're $40 billion opportunity much more rapidly growing and much more stable.

Okay. Let's turn to the transactions.

First, as Bill said, selling the Semiconductor Products Group to KKR and Silver Lake Partners for $2.66 billion. Selling our stake and Lumileds to Philips for $950 million plus $50 million repayment of debt, those two transactions are expected to close around our fiscal year end.

We're going to spin off our SOC and flash memory test business as quickly as we can, and this generally takes 6 to 9 months, consider it about nine months but as soon as practical in 2006. And immediately, we will begin a $4 billion repurchase program over the next two years in order to give the proceeds of these divestitures back to the owners by way of a share repurchase program.

We will start as quickly as possible meeting in a couple of days. We'll begin it using open market purchases. We would anticipate in the first 12 months repurchasing $3 billion of shares.

Once we get the proceeds, we will consider a tender offer in order to accelerate repurchasing those shares or other means to accelerate the purchases. And at the same time, we will call sometime before 2006, we will call the convertible debt reducing potential fully diluted shares by an additional 36 million.

Bill mentioned that along with all of these actions is a reduction and a focusing of what we call our global infrastructure operations.

What's that? That's facilities, that's the sites, that's HR, that's IT services, that's finance, that's legal, that's the labs that Bill talked about and more generally governance, as well.

We're going to reduce our annual GIO cost by 35% to about $850 million. That means a reduction in head count of about 1300, and Bill described how they will go out a combination of moving with the divestitures through attrition as well as through work force management.

As a reduction of this shrinking, this focus on what is now a pure play measurement company, not a diversified technology company, we think we will be able to do better than the proportionate reduction in sales. And in fact, reduce by 1 percentage points of continuing revenue reflecting the ongoing benefits of this focus and the redesign. So this move alone will add 1 percentage point to our bottom line.

Eleven sites will be eliminated completely as a result of this and over 25 sites will be impacted by this restructuring. We expect this restructuring to be about 85% complete by the middle of next year and a 100% complete by the end of next year.

And as to the costs, we think the costs will basically be neutralized by the asset sales that we, gains on the asset sales that we will achieve as we reduce this global footprint.

We think the restructuring costs will be about $200 million, with 75 million for work force management, about $65 million from sites and facilities, and $60 million from reconfiguring and focusing our IT investments. And as I said, we would expect to offset that at least dollar for dollar from the proceeds of asset sales.

Okay. What is this company going to look like when this is completed?

What we're giving you here is a snapshot of if we could achieve all of these divestitures instantly at the end of this year, if we get all the costs out instantly at the [inaudible] this year, and if we ignore what we do with the proceeds of the divestitures, so this is focusing on the inherent earnings power of this company, what will it look like? What it will look like is a company that will have about $5 billion in revenues, down 27% from what we expect this year to end up at, but year-to-year, as I'll show you in a second on an apples to apples basis, it's actually up 7%, which is a pretty good proxy for our secular growth at this point.

We will have gross margins of 54% next year, R&D will be at our target of 12%, and SG&A will be at our target of 26.5%. So we would expect, based on how very early look at '06, and we'll talk a lot more about this after our fourth quarter earnings and at our annual investor's meeting in December, we would expect to have an operating margin of 15.7.

Other income will go down by about $40 million compared to this year. That's the impact of divesting Lumileds. But that gives us pre-tax profits of 875 and after-tax profits of about two-thirds of a billion dollars.

Now at 535 million shares outstanding, that's about a buck 30 a share. Notice also not only do we hit our operating model at 15.5%, but we hit and exceed our return on invested capital model at 25% versus the target of 20%.

Now, let me talk just a second and I apologize. This next slide is not in your packet, but that buck 30, as I said, that's based on 535 million shares.

What will we actually report? That depends on how quickly we can repurchase the shares and at what price.

What this graph shows you, if you look, start down at the bottom, we have $535 million of shares outstanding when we called to convert, that will subtract 36 million, so we'll end up with 499 million shares outstanding. You take that $665 million and then you repurchase about $4 billion of shares.

Now, obviously it depends what price we repurchase them at. But if we repurchase all the shares at, let's call it 25 bucks a share, then we will only have 339 million shares outstanding at the end of that $4 billion program, and our buck 30 will turn into 2 bucks per share. And if you do a little bit of arithmetic on a multiple, we're talking about somewhere between 37 and $45 per share.

And take another example. [Inaudible] at 31 bucks a share, we'll have 370 million shares outstanding, the buck 30 turns into a buck 80 for next year and we should be trading at somewhere between 34 and 41 bucks a share based on a 19 to 23 multiple.

Again, we don't know how quickly, we're going to repurchase the shares as quickly as possible. We don't know how quickly you're going to give us credit for this. But this is the implications of this fundamental restructuring and what our earnings per share will look like going forward.

Now let's talk about what will the Company be composed of and how has it been performing on a pro forma basis, if you will, looking forward or looking backwards.

We're going to have two segments, Electronic Measurement, that's the current test of measurement plus the parametric test and the board test businesses from ATG that we will fold into, the Test and Measurement Segment we will rename it Electronic Measurement.

And this is how it performed. In '03, about 2.7 billion, dropping 3%, up 18% the next year, about flat this year, and up 6% next year to $3.4 billion. Average growth over that period of time about 5.5%.

Notice the operating margins. We had the massive restructuring that we completed over the course of '02 and '03. But last year we were at a 9% operating margin, 11% this year, and 15% next year and a 25% return on invested capital.

And our Life Sciences and Chemical Analysis business, which we are going to rename Bioanalytical Measurement, this is the segment you have been seeing, but we haven't been paying enough attention to. This is a business that was $1.2 billion in '03, we think it will be $1.6 billion by next year, average growth rate 9% over that period of time for the top line.

Outstanding operating margins averaging as you can see, over the period including next year, 15%, and returns on invested capital that have averaged already mid 20s and will be well above 30% next year. That is the strength and the stability of the enterprise going forward.

And indeed because of that strength and that ability, it's a business that we believe will be profitable and cash flow positive under virtually any economic circumstances.

We've talked about an average operating model. Over the cycle that we would average a 14% operating margin, that's unchanged. Gross margins are up a couple points from a prior model to 52%, R&D at 12, SG&A up a couple points at 26, unchanged operating margin of 14 and ROIC of 21.

But the difference is, this is a much more stable business and so even in a really severe decline, we'll continue to be profitable. We'll continue to have, at worst, a 5% operating margin, 8 to 10% return on investment capital. And during the boom times we will really print money.

The point is, we should be cash flow positive on an ongoing basis under virtually any economic circumstances.

Cash, what's the cash flow going to look like? Here again, this is a pro forma, if we could snap our fingers and have the divestitures gone and ignoring the proceeds of the divestitures for a moment, we believe cash from operations this year will be about $780 million and after $180 million of Cap Ex, $600 million of free cash flow generation in '05.

Next year, $920 million minus 110 for Cap Ex, and you can see that we're at $800 million plus free cash flow from operations.

We will end this year with $3 billion roughly on the balance sheet. And based on the operating performance that we're talking about today if we don't do anything with the money, we'll end up with $3.8 billion of cash on the balance sheet by the end of next year.

So what are we going to do with the money? We'll start the year of 2006, as I said, with about $3 billion ignoring divestiture proceeds. We'll get divestiture proceeds of another $3.7 billion.

We will restructure GIO. That will be offset by the asset sales.

We will repurchase $3.3 billion worth of shares beginning now through the end of next year, all the convert. So we'll consume $4.45 billion from those activities, but we'll also generate $800 million of cash from operations.

So where do we end up next year at the end of next year? Right where we began, with $3 million of cash on the balance sheet. That's how strong this Company is.

And so we have, as Bill said, all the liquidity we need to run the business, to do selective fold-in acquisitions, to build and extend the strength of this Company going forward.

So to summarize, Agilent is taking action to enhance its focus as the world's premiere measurement company and to create tangible value for its owners. The divestiture of the semiconductor-related businesses will generate $3.7 billion in cash which will be returned to the owners via share repurchases.

In addition we will call the convert which will reduce shares again by another 36 million shares. We will move forward to spin SOC and flash Memory Test as quickly as we can in '06, and the new Agilent will perform at or above its secular operating model in 2006.

Global infrastructure will be focused and restructured to match the size and the focus of the new company, ensuring that we operate efficiently and effectively. And as the largest most profitable and best positioned company serving a $40 billion measurement market, Agilent will achieve superior top and bottom line performance for its customers and its owners.

Okay. Let me finish by talking about third quarter earnings.

Our summary of the third quarter would be as follows: We believe we had good results, very good results, despite some continuing weakness or residual weakness in some of our markets.

Our orders were up for the first time in a year. Orders were up 1% year-to-year. They were up 4% sequentially during what's normally seasonally a weak quarter to $1.8 billion.

The volatility in orders has been driven by semiconductor-related businesses for the most part and as those come back, the whole business is coming back.

Revenues were slightly below expectations. We had given a revenue range of 1.7 to $1.8 billion for the third quarter, we were at 1688. Frankly, the reasons for that were partly some residual softness in the wireless test market.

We had said that we expected that adjustment to bottom out in the second or third quarter, it turns out it was the third. We do expect the business to be significantly better in the fourth quarter and we're seeing the early signs of that.

We also had a little bit of softness in pharma and delayed introduction of our GCMS. The good news is we that had lots of orders, the bad news is we were a month late in getting those orders out the door.

So we built backlogs overall by over a $100 million in the third quarter. We expect to deliver those backlogs in the fourth quarter.

And on top of that, as we committed, we had excellent expense management during the quarter driving our earnings per share to the top end of the guidance range. We had guided 23 to $0.28, we hit $0.28 per share.

How'd we do it? Operating expenses were $7 million below last year as we continued to get the benefits of all of the restructuring that we have done over the course of the past several years. Indeed, we were $44 million lower spending than in the second quarter.

Once again we had outstanding cash generation. We generated 800, excuse me, $85 million in free cash flow from operations, ending the quarter at $2.8 billion of cash on hand.

And indeed, it's not just operating well, we also had as illustrated by the GCMS introductions, we had new product introductions in both the electronic and bioanalytical instruments to build upon this strong franchise.

The next slide gives you numerically a little bit of a profile of how have we done in the four quarters of '04. In the three quarters of this year, again, $1.8 billion in orders, up 1% year-to-year, up 4% sequentially. Revenues down 10% from last year and identical to the prior quarter.

Gross margin, pretty good story here. Equal to last quarter and up 2.5 points from last year despite the fact that we were down 10% in revenues.

And as you can see looking at operating expenses, very good control over R&D, essentially at last year for R&D spending and down $8 million year-to-year in SG&A, down $44 million, as I said, quarter-to-quarter.

So operating margin, 8.6%, $146 million, up from 6.1% last quarter, down only a little bit from the 9, 7 last year at this time. $142 million of net earnings, $0.28 per share compared to $0.30 last year at this time.

Return on invested capital, 15%, continued really excellent performance on working capital, continuing to drive down inventories quarter after quarter after quarter despite the fact that we have some softness in the cyclical markets, DSOs outstanding performance.

Notice in something we talk an awful lot about, the breakeven cost structure. We have been committed that having gone through the pain of that massive restructuring to taking $2.3 billion out of our cost structure, that we would not let that build again. In the third quarter we ended at a $1.44 billion quarterly breakeven cost structure, down $100 million from last year.

And my favorite chart, of course, cash flow generation. You can see we were significantly cash flow negative to the tune of $900 million back in '02, we began to turn the ship around in the middle of '03, became cash flow positive.

In '04 we generated almost $600 million of free cash flow from operations. And this year, as you can see, we have generated, we are above last year's pace, $339 million free cash flow generated cumulatively over the course of the year, despite the fact that earnings have been lower than last year.

We cumulatively have been about $0.66 per share, excuse me, $0.68 per share in the first three quarters of this year versus $0.75 per share last year and yet our cash flow generation is nearly double.

Okay. Very quickly a little bit of a profile of how we did by segment.

The Bioanalytical Measurement segment, order momentum was mixed across the businesses but Chemical Analysis was up 8%, Life Sciences up 9%, the whole segment was up 9% in orders. We had a little bit of slowness in pharma, on the other hand generic pharmaceutical was strong.

The infrastructure spending in Asia was strong. Consumables also were very strong.

The GCMS platform roll was a month late getting out but is going very well. Orders are very strong there.

We had excellent performance in the quarter. The operating discipline continues. We had a 12.3% operating margin during the quarter, 27% return on invested capital versus 22% last year or last quarter as we continue to really optimize the strength of this business.

Now the truth is we've had sort of a mid year slowdown in the revenues in this business, only growing 2 to 3% in Q2 and Q3. We expect in the fourth quarter we will return to double-digit growth as we begin to really take advantage of the backlog that we have built in this business.

This, again, the strongest, steadiest, most profitable business that Agilent has and the one that is most fertile for opportunities for both organic and inorganic growth.

Electronic Measurement, Test and Measurement, very strong operating performance given the top line softness. Orders of $722 million were down 7% from last year, [coms] were down about 6%, general purpose was down about 8%, revenues at $705 million were off about 8% year-to-year, off about 6% quarter-to-quarter.

Demand was mixed, as I mentioned earlier, we did continue to see some softness from the cell phone handset test business. We think that has now bottomed, and we are seeing rising orders and we will see higher revenues in the fourth quarter from that business.

We saw excellent results in our OSS business. We've talked about that being a growing business, but one that's been a turn around. That business is now profitable and significantly profitable, as well as showing some excellent top line growth in the past couple of quarters.

We had a very good performance in scopes, in our aerospace and defense and service and support business. Operating margin, despite the fact that we had so much lower revenues was 10.5%, so we returned to double-digit operating margins and a 17% return on invested capital. And that's before we begin to get the turn around in this business.

Automated Test, very clear, that a market recovery is now underway. We've had orders up now for three consecutive quarters now.

Orders of $228 million were up 10% year-to-year, they were up by a third from the prior quarter. Revenues of $192 million were still down 21% from last year but they were up 6% sequentially.

Book to bill in this business now is 1.19. That's compared to 0.86 last year at this time or even last quarter 0.94, so very clear that there is some momentum building in the back end of the business.

Our 93k utilization, which last quarter was 85%, is back up to 90%, again more indicative of the recovery in the business.

We saw strong growth in SOC and in flash memory orders. This business which lost $13 million in the third quarter we expect to be profitable in the fourth quarter.

Finally, Semiconductor Products, very strong book to bill. Again, suggesting the improving market conditions.

We had a book to bill of 1.1 in the quarter, 1.12 last quarter, only 0.87 a year ago. So clearly some momentum building in the business.

The order growth this quarter was led by personal systems, up 37% with excellent demand for wireless handset test and navigation components. Networking orders were up more modestly but were up 2% year-to-year and we continue to work hard and with success at improving the operating performance in this business.

We had an 8.6% operating margin during the quarter, that compares to only 3% last quarter. Return on invested capital, including the benefits of Lumileds was 18% versus only 6% last quarter.

So let me finish up with guidance.

Market dynamics, there is evidence of a rebound in semiconductor-related businesses. We expect to take advantage of that through year end.

We are seeing a bottoming in the wireless test business. It is beginning to pick up.

And we expect to see a reacceleration to double-digit growth in our Life Sciences and Chemical Analysis business taking advantage of the backlog we've built over the past two quarters.

Therefore, our fourth quarter guidance is unchanged from what we said three months ago. Three months ago we said it would be 23 to $0.28. In the third quarter and fourth quarter would be up about a dime if we saw the normal seasonal increase.

We're saying we will see revenues of 1.79 to $1.89 billion, and on 535 million shares, we would expect to see 33 to $0.38 per share. I said it like that because we are going to do our repurchase program and begin that.

If we can repurchase over the course of the quarter roughly 19 million shares, then subtract out 7 or 8 million average for the quarter, that adds about a penny compared to assuming note repurchases during the quarter

So with that, I think we will take questions.

Thank you, Adrian. Bill, if you could come to the stage Also for those of you on the phone line, if the Operator could go ahead and give instructions for the question queue on the phone line.

Thank you, sir. [OPERATOR INSTRUCTIONS]

We have ample time for Q&A. We will take questions from the room and also the phone lines. So if we're ready, we'll go ahead and take questions from someone here in the room, Deane Dray from Goldman Sachs. Go ahead. Yes, we need a mike.

Thank you. Good morning and congratulations. First, a couple of execution-related questions, if I could. Just to clarify, any capital gain on the sale of the Semiconductor Products Group? I know there was a number of NOLs. Where does it stand in terms of after-tax proceeds?

We expect to have essentially a, less than a 10% tax rate on any gain from these divestitures, indeed for the reasons you identified, because of the NOLs. What you see in gross proceeds will also be net proceeds.

Okay. Good. And then, with regard to the Automated Test Group, the spin, is that contemplated to be a tax-free spin and will there be cash coming to Agilent in the structure that you're anticipating?

We have not firmed up our plans definitively but our current expectation would be we would do a two-step spinoff where we would sell 19% in an IPO, get generating cash proceeds, and then distribute the remaining part in a tax-free distribution.

And if memory serves correct, that's similar to the way Agilent was spun off from HP in the beginning, the end of '99? Correct. Okay. And just before I give up the mike here, I'd like to hear a bit about the impact of R&D. Agilent has always prided itself as a R&D driven company and in the separation of these businesses in both the SPG and the Automated Test Group, could you talk a bit about any potential loss synergies?

I mean for example you are potentially losing the loop that you get in manufacturing components with testing components. So if you just address what might there be in terms of any lost synergies.

And related to that, the 12% R&D operating model would have expected to see that change after these divestitures but it's still at 12%. Is that just kind of reflective of the kind of investment you need to make going forward? Thank you.

I'm going to answer the second part of the question first. The R&D investment, both on the Electronic Measurement and the Bioanalytical Measurements stays, of course, exactly the same. We will announce today a restructuring of Agilent laboratories really focusing on these two segments, as well as having a new group really focusing on new measurement opportunities in this $40 billion market.

To be able to win in this market, this is a high-tech, high-end market that one would expect continuous spending of the 12% in research and development.

In terms of synergy, sure there's some synergy. I mean there's been synergy for many, many decades and a lot of it was culturally as we had people to be able to share ideas back and forth. However, we believe in today's environment, where access to technology is so much easier than it was 30 or 35 years ago when Hewlett-Packard decided to become vertically integrated that we believe that will be minimal.

Likewise on Electronic Measurement they have their own [galeomarsonite] fab that they use for state-of-the-art devices to have the best measurement equipment in the world. So we believe that the synergy impact will be minimal and that clearly our shareholders long-term are going to be better off and I believe that both for SPG as well as the part of ATG that's being spun off they're going to be in a far stronger competitive position being a pure play in these industries.

It might be worth mentioning just a little bit the synergies that continue and that get reinforced by these moves too. Just two examples would be nanotechnology and homeland security. There are huge synergies between Electronic Measurement and Bioanalytical Measurement, and those are two really good examples of fertile opportunities somewhat between those two groups but again enable us to continue to take advantage of this huge technical advantage and heritage that we have to continue to grow the business in different directions.

Yes. Next question.

Hello?

You got it.

What's your estimate of the 19% cash generation out of the spinoff of the Automatic Test Equipment? Do you have any estimate?

No. Not at this point.

The second question. Is the total number of employees in those divisions that you're selling, what is the total number? Is it the 1300?

It's roughly 10,000.

10,000.

10,000 people.

Yeah. 10,000 is the total of the three. We have about 9,000, because the 8,000 will come out from SPG and from ATG, the parts that we're spinning off and then 1300 from GIO. So total is about 9400.

94. So that brings the total count after all this action --

To just over 18,000.

18,000. Thank you very much.

Let's take a question from the phone line.

Our first question comes from Edward White with Lehman Brothers.

Hi. I was wondering if you would talk a little bit about the logistics, in other words, whether there'll be any disruption that you anticipate or whether you'll have a period of time where you still have infrastructure costs but that you haven't reduced but the revenues are gone. Anything like that, or how does that look at this stage?

We are trying very hard to time as best we can the reduction of our infrastructure with the divestitures. Since one will be a spinoff and the other is a carve out, those businesses do not today have infrastructure and so we will provide transition services of, especially for our SPG, for the next six months, for example, after divestiture.

So we have to have enough resources to be able to provide those transition services and at the same time, time and can do as much as we can to get those costs out where we can. So we do not, it won't be perfect, but we believe we will have pretty good alignment and will not have residual hangover of costs that we'll have to reflect.

From a facilities standpoint, is there any overlap of facilities or are those pretty distinct between the businesses that you're going to spin off or businesses that you're selling and the core businesses?

In regards to the Semiconductor Product Group, the major separation will be in our Ang, Malaysia facility where we have about a million square feet of space but the buildings are quite separable and in fact there's only one building that's shared on that site. So we believe first order it's going to be relatively straightforward to separate SBG and our Automated Test Group SOC and flash business.

Let's take one more question from the phone line.

Okay. Our next question is from John Harmon with Needham & Company.

Hello. Good morning.

Good morning.

Good, you can hear me. Bill, I was wondering if you could revisit your priorities for the use of cash. Previously you had said the number one priority is acquisitions. I realize buying back shares is a little more trade forward given all the changes you have to make.

Yes. As I've consistently said since last March, we have three options for the use of cash. First is investment in business through acquisitions, the second is a stock repurchase, retirement of debt, and the third one is dividends.

Clearly, today we are taking the proceeds from these divestitures and starting the process immediately to return this cash to our shareholders. As I had mentioned, we believe that this overall market that we're focusing on, the measurement market growth rate is about 8%. Our goal as a company is to grow 10%.

So you can assume as we move forward and as Adrian highlighted, we are still in a very, very strong cash position. We believe that our valuation of the Company with these changes will put us in a very strong position to make strategic acquisitions as we move forward in this space.

But the one caveat that we have is that we know that acquisitions are risky and 60 to 70% of them fail. So you can ensure, you can count on that this management team, if it does make an acquisition, will be very prudent to make sure that we protect the shareholders' interest.

We'll take the next question from Richard Chu here in the room.

Yes. Thank you. If I could focus on the test and measurement business for a moment. Can you give us a sense on in the fourth quarter, on extent to which you may see some risk or not in total government test and measurement by DoD?

I'm not aware of any abnormal risk that one would have in terms of government spending in the fourth quarter. You know, we have talked in the past that there has been some volatility of aerospace and the defense industry depending where the cash is actually utilized, but I'm not aware of anything unusual that one would expect in Q4.

The biggest volatility we have is, as both of us have spoken, is the volatility of manufacturing cellular tests and it's been a plus or minus 40 to $50 million a quarter. Q1 was soft, Q2 was pretty good, Q3 soft, Q4 looks like that's going to be pretty good. So again, it's mostly just the volatility of six major players that control 85% of that market.

Okay. And I wonder, Adrian, when you painted a normalized picture for fiscal 2006, you characterized operating margins as above your target model for the surviving company. What does that mean? Do you think that fiscal 2006 is, in your assessment of the playing conditions out there, is better than normal year or is it because structurally you plan a, internally, a deterioration in your returns in the following year? I'm trying to gauge why you think next year will be above normal rather than choosing to view that number as normal or below normal.

Fair enough, Richard. I would say that we want to run, we want to walk before we run. We really believe that the kind of performance that we are showing there in those six is sustainable. And so maybe we are being a little too conservative in talking about 15% operating or 14% operating margin and 20% return on invested capital.

What we're saying and to answer your question directly, I would expect that to be a fairly normal year. So, no, we are not projecting a deterioration in '07. We would expect even better performance in '07.

The bottom line was we wanted to make sure everybody understood we were keeping our commitments to superior performance of 20% plus returns on invested capital. And as we go along if we can recalibrate to even higher growth and higher performance, we'll do so because this is a more profitable and more stable business.

Take one more question from the room.

Okay. Two questions. One, can you comment as to whether or not you actually tried to sell your Semiconductor Test and Measurement business and in lieu of selling it, maybe if the price wasn't right you're spinning it? That's question one.

Question two is, you talked earlier about an optimal capital structure. Obviously you're buying back a lot of stock, that's great, but you'll still be left with $3 billion of cash which is not necessarily optimal. Does that presume that you can spend that cash over a multi-year time frame to make acquisitions such that we'll work our way into an optimal capital structure over time or is there some other commentary you'd like to offer with regards to that? So those two questions. Thank you.

I'll let Adrian talk about the capital structure. But in terms of the decision process we went through for our SOC flash business, we did look at all alternatives and we believe this alternative will have the greatest gain for our shareholders. So that's why the decision was made on a spinoff.

And as to uses of cash, I think it's a fair question that even at the end of '06 we may not need $3 billion of cash on the balance sheet. What that does is provide us with a lot of liquidity for making selective acquisitions if we identify them. If not, I think you can anticipate that we'll be back here a year from now talking about other ways to continue to return cash to the owners.

Take one more question from the room.

I have two questions. One of them is, could you tell us a little bit about the transition of pension obligations regarding that divestitures?

And the second question is, could you provide us with gross margins for the current segments and also where do you see them to be for the retained segments?

Let me try that. We would be transferring our fully funded pension plans based on our ABO, our Accumulated Benefit Obligation, or the cash to top it up if they were not fully funded.

Second, the gross margins we indicated in the presentation next year ought to be about 54%.

Sorry. We don't do that at least not regularly. Come December, we'll talk in more detail about the business and we'll formalize that guidance.

Let's take a question from the phone line at this point.

Our next question comes from Paul Coster with JP Morgan.

Yeah. If I may, I'd just like to go back to the points about synergies lost. Apparently none on the sort of R&D side, but I'm just wondering, are any of your customers potentially going to find this difficult to deal with? Have you talked to your customers? Can you just give us some color regarding the largest customers and their view on this?

Under confidential agreements, we have been in contact with our largest customers over the last few months. Both on letting them know what's going on given the rumors as well as the due diligence process that was done by KKR Silver Lake, and we believe that our customers, first of all, of course, won't be impacted moving forward and I believe that Agilent, of course, will continue those relationships and that SPG will continue to be the excellent customer satisfier that they have been for many, many decades so we see it as no issue.

Okay. And on the Life Sciences and Chemical Analysis side, you mentioned that pharma was a little short of expectations this quarter but you also anticipate reacceleration of the business. Can you just give us a little bit of color around the pharma segments and then what the reason for the reacceleration is fundamentally?

Well, as Adrian had mentioned, while we're quite confident in Q4 is that our orders in Q3 were strong, however, we were not able to meet our backlog commitments in the quarter so we have a fair amount of steam going into the fourth quarter.

As you all know, the pharmaceutical industry is going through a re-evaluation restructuring, and as a result of that, there's some concerns. We believe that we have a very strong product portfolio and that we will be able to maintain our position.

As Adrian also mentioned, the generic marketplace continues to heat up and we're very well positioned there and we continue to do exceedingly well in Asian markets. But there again, it's no secret that there are some concerns about the overall pharmaceutical market. But we have a very strong product lineup and a lot of momentum going into Q4.

And last question. In the Life Sciences and Chemical Analysis segment, can you just sort of give us a sense of how you perceive the competitive landscape there?

I think the competition is very, very good. We use Waters as one of the top companies in this segment and, of course, you have Thermal and Perkin Elmer as an example. So again, our market position in this space, you know, is not as great as it is in the Electronic Measurement space.

We're clearly number one in gas and liquid chromatography and we believe that we'll be able to continue to leverage that position to grow with the marketplace. So again, we're very pleased with our position but again, we have very some very competent competitors.

I have one last question, I'm sorry. The secular growth trends that you've outlined, I think it was about an 8% growth rate and you anticipate outpacing that market growth through some acquisitions. Can you talk a little bit about your market share expectations because obviously, we'd like to see you picking off others now that you're more focused? Can you, that doesn't seem to be factored into the guidance, the longer term expectations.

I would agree with that. Again, what we are talking about is a secular model that organically ought to be growing, as Bill said, somewhere in the 8% range, but our commitment to the top line is above 10%. Of those 2 percentage points per year of additional growth you should assume would be from the kind of fold-in edge out occasionally larger acquisitions that allow us to take full advantage, particularly on the Life Sciences and Chemical Analysis side where the business is not as concentrated and where the opportunities really are quite fertile.

And, again, it's' simple math. Next year it will be roughly $5 billion of revenue in a $40 billion market segment. Our position on the Electronic Measurement side is twice what it is on the analytical side and why we have consistently said that our focus for acquisitions will be on the analytical side of the market.

Let's take another question from the phone line.

Our next question comes from Mark Fitzgerald with Banc of America.

Great. Thank you. In our outlook for 2006 and in your model target here, can you tell us what your, I assume you've got some top line growth here and also when we're looking at the model here, what's the impact of using up NOLs here so are you going back to paying taxes or full tax rate, and how is the spinoff also impact option expensing? The kind of three line note is they're revenues, tax rate and option expense.

Okay. Let me try. We're talking about the business being up on an apples to apples basis. You can see by looking at the Agilent operating performance by segment. In total, it's going to be up 7% next year, again, apples to apples from 4.663 billion to $5 billion. What was the second question?

Then is there, are there capital gains here that are going to chew up your NOLs or--

Yes, but we will still be, essentially have a cash tax rate in the 10 to 15% rate for 2006. You'll see that we indicate on a pro forma basis a 24% rate because we think that's more indicative of what we think the rate will be in the long-term once we've used up those NOLs, but we will still have significant NOLs to consume for the next several years.

Okay. And then the final line item here, option expense. How's that impacted by the spinoff? Do options disappear because of the spinoffs?

You can assume that our option expense would drop by about a third as a result of these two actions.

So going forward, somewhere around 7, $0.08.

Depending on your assumptions, yes.

Okay. Thank you.

Take the next question from someone in the room.

Question is, is there any purchase agreement in place with SPG after the sale of the operations, similar to what happened with Freescale or Motorola committed for three years to buy from the Company. Is there anything of that sort?

And the second question relates to the Automatic Test area. You had a strong improvement. I know that you're going to be spinning out the company but which areas did you see the improvement and could you give us some more color on this improvement? Thank you.

As far as the improvement, it was really concentrated in SOC and flash. The pieces that we are going to be spinning off were the areas of the most strength within ATG.

The parametric test business was still fairly soft. The manufacturing test business was up slightly, it's beginning to recover. But the source of strength really was in the SOC test and Memory Test. Yeah. Close enough.

In terms of products transfer from SPG back to Agilent moving forward, again, the transfer of wafers into Agilent has been very, very small, and this is my estimate, and again, we can get to the exact number but it's around the $50 million a year range out of the 1.8 to 2 billion.

Again, SPG's largest customer continues to be Hewlett-Packard and so most of the chips that come from SPG actually go into the Automated Test group SOC business, so there really isn't very much transfer between the two. So nothing near the impact we had when we separated from HP or the Freescale, as you had mentioned.

Okay. Thank you.

Let's take one more question from the room. Yes.

Yeah. Hi. Just looking at the improvement, excuse me, inventory days on hand over the course of the last four years is pretty impressive. What will the change in the structure of the business impact the inventory days on hand? Going forward I presume in '06 there's still some leftover possibly from the semi business and the spinoff. But if you could give us an idea going forward.

Yeah, in fact on the cash forecast page you will see that the forecast for inventories, that despite the fact that these businesses have slightly higher secular inventories because they are more vertically integrated, we would anticipate our inventory days on hand dropping from 90 days this year to 87 days next year.

Do we expect further improvements from the 87?

Yes.

So would it be fair to assume then that the change in cash or free cash flow thereafter '07 going forward would be higher, possibly higher than $800 million you've outlined here for '06?

Nothing lasts forever but yes, if we assume that the markets will continue to grow in '07, that we will continue to have higher cash generation.

Thank you.

Let's go back to the phone line for a question.

Our next question comes from Brett Hodess with Merrill Lynch.

Two questions, thank you. First, Adrian, when you talked about what '06 would look like, you said, I think you said in your prepared remarks that the margin and expense profiles were assuming everything was complete right at the start of the year. Do you, until you get rid of the semi test business, do you expect to put that as sort of a non-continuing business or will you include that in the reported results until once it's spun out?

The way they, these expenses work is that order of magnitude, 85% of what we call GIO is in fact consumption driven. There's only 15% that is general governance. And so as long as we have those businesses, we will continue to, those businesses will continue to get charged for what they consume, that 85%. So that's why I say there shouldn't be a lot of hangover. The trick is the day after we separate those businesses to ensure that those costs go as well.

Okay. So we should model in for six to nine months those costs and then assume that they go away for something like the semi test business?

Yes.

And the second question I had was when you look at the margin profile that you gave of 54% for the remaining businesses after the divestitures are done and what not, that gross margin profile is a couple hundred basis points above the previous gross margin profile, but if you look at the operating margin differential between the remaining businesses, it seems like that that could be easily exceeded. Is that essential there, do you think?

I think that the difference in our overall model is that gross margins are up a couple points but also so is support expense. You have to remember that the semiconductor business has an inherently lower gross margin but a much lower SG&A, 13% compared to 26% for the measurement businesses.

So it really is a little bit of a shifting within the line items, a higher secular gross margin because you have to pay for that additional support of 2 points. So if you compared the old model to the new one, you'll find 2 points higher gross margins, two points higher SG&A and an unchanged operating margin.

Got it. Thank you.

Next, one more question from the phone line.

Thank you. Our next question is from Rick Rickard with Sanopoint.

Yes. Hi, guys. I was unclear as to when you thought you would call in the convertible and would you alter that time frame at all? I guess the stock is up a good bit if that stock accelerates through the conversion price.

We will try to call the convert as quickly as we can and hope that we can cash it before it gets and if not, there are worse problems to have than worrying about a much higher stock price. To the extent it doesn't convert immediately into stock it becomes cheap financing but we will get that out or increase the size of the repurchase program by that, an equivalent amount.

But your plan currently is before the end of this year? Is that what I heard you say?

Yes.

Okay. Thank you.

Let's move back to the room, Deane. Wait for the mike.

We've got time? Okay. Thanks. If we can go back to the acquisition expectations, right now you said you would like to focus on the analytical Life Sciences phase and there are literally a thousand companies or so. Would you be looking more towards acquisition of intellectual property patents and so forth versus adding additional capacity?

Our focus will be for additional capacity. It will be revenue generating acquisitions.

Okay. And then if we, just going back to the uses of cash, would one of them potentially be the paying of a dividend and what might the timing be for that?

As I said again, I'll let Adrian talk about some of the timing. That is our third option once we get through the whole transformation of the Company, consistent financial returns that under worst case scenario we can still generate cash and dividend is a very viable option.

As I said, next year at this time, if we haven't, if we're still generating the kind of free cash flow that we have, we will revisit that issue. We are committed to sustainably generating cash returns for the owners

And then on the cash flow equation, how will capital spending change on a pro forma basis?

In fact, we indicated that that's one of the reasons we gave you the cash flow forecast for '06. We would expect that capital expenditures would drop from roughly 180 million this year to order of magnitude 100 million next year. These are not particularly capital intensive businesses.

Thank you.

Let's go to Richard Chu next.

Oh, yes. A couple things. First of all, back to the buy back, Adrian, you mentioned that you may revert to tenders at some point if you don't achieve the open market. I wasn't clear on when you would consider a tender. You made a timing reference on that.

Yes. We will try, we will begin open market repurchases immediately and until such a time as we get the proceeds from SPG sale and from Lumiled sale, at that time, we will consider a tender. We may consider it in other ways to accelerate the repurchases, but that would be the time that we would begin to consider something like a tender.

Do you literally mean, when you say accelerate, will consider an accelerated buy back plan as well?

You can't do both but we will consider all our alternatives including potentially a tender.

Okay. And then second, Bill, I wonder if you could spend just a little bit more time on the test and measurement. You said the handset test portion was weak, you expect it to be better. Can you comment on the wireless R&D and infrastructure markets? That's first.

And then second, on the wireline side on how you did on network testing, router test. And you touched on [inaudible] already but those are the --

Right. As you know, a large part of our market share on wireless cell phone tests is in manufacturing tests and that's why it's volatile.

We continue to make efforts to expand our market share on the R&D side of the house. We are making good progress, but we are still dominated by manufacturing tests.

Infrastructure test business it continues to be okay. A lot of that, of course, is going to be driven by continued rollout of 3G.

On our wireline side, we actually had a pretty good quarter. We have remapped our whole line focusing on the triple play with our N2X platform, our growth in the quarter was very, very good and we're very, very pleased in the progress we have made.

As you know, that business went from 200 million a year to 1.2 billion back to 200 million. And so we have been refocusing our efforts to provide protocol solutions for our customers on one standardized platform and we're really starting to get some strong tension or traction moving forward. So again, we're quite pleased. Still small compared to wireless but right direction.

And general [inaudible] test, you made positive comments but it appears revenue that was weakened a little bit how did you feel about your performance there?

There was clearly some weakness in our general instrumentation, particularly at some of the base units. You know, we are happy with the [siliscopes] and that continues to go well but some of our pulse generators, power meters, those types of products were a little bit soft in the quarter.

Thank you.

Let's take a question from the phone line.

Our next question comes from Shelton Orang with CSFB.

Hi. My question's been answered. Thank you.

Next question from the phone line.

Our next question is from Scott Kinion with UBS O'Connor.

Hi. Actually, this is Dan Burkrey for Scott Kinion. I have three questions to follow-up to what Adrian said. The first question is in terms of the stock buy back versus the convert calling, is that an issue of that you have, you can buy back stock in sort of smaller chunks of hundreds of millions as opposed to a billion or what's the logic there is the first question?

There is, it's not competitive we intend to do both as quickly as we can do it.

So your statement on the press release and earlier today that you were going to call the convert sometime before the year end, was that referring to calendar year or fiscal year?

I think what the press release actually said was before the call date of December 2006. But again, we don't want to be two clever here or too speculative about what's going to happen to the share price, assuming that we can call it in, we will call it in.

For cash, you mean.

Correct.

Okay. And then the second question is a follow-up to your question earlier, and I'm sorry if it's a bit repetitive. But your statement that it would be inexpensive financing, are you trying to leave us with the impression that if you could not call the bond in for cash, you wouldn't be planning to call it before the December '06 put date?

No, I'm not trying to be clever. I'm trying to keep our flexibility for seeing where the stock goes and what our other financing options are. But, again, our intent is to get the convert out before the call date of 2006 regardless.

Let's take one more --

Regardless of cash or stock?

Correct.

Okay. Thank you very much for your help. Good luck.

Next question from the phone line.

Thank you. Our next question is from John Harmon with Needham & Company.

Hello again. I was wondering on your ATG spinout why you drew the line to spin off SOC test and flash test but kept parametric and the board test. Was it a desire to create a pure play or was it based on some kind of profitability [inaudible]?

First of all, the first decision was based on a pure play. If you look at back end tests in the semiconductor industry, almost every one of this new company's competitors are pure play, back end testing.

Manufacturing board testing, parametric tests easily fit back into EPSG or our Electronic Measurement Group and as you recall, all of this was one group only until a couple years ago, so it's just a very logical place to separate and to focus on that segment of the market, which is incredibly competitive.

I've talked in the past about it, a $3 billion segment in the market with about six competitors and it's very volatile and highly competitive and a pure play company focus and structure to compete in this environment is the best way to go.

Also, we're in a very strong position in this segment of the market. We've introduced our Pin Scale technology, we're really the leaders in technology in this segment and I'm very confident that this new company that gets created next year will be much more competitive and a very, very competitive slice of the market.

Next question from the phone line.

Our next question is from Edward White with Lehman Brothers.

Hi. You talked about the progress and success you had on the operating expense level during the quarter. Can you talk a little bit more about some of the things you did to achieve the improvements in operating expenses?

Well, traditionally during the summer months, of course, especially in the U.S. in play population, we have a large amount of vacation time which always helps on some of our expense structures. But as I have said in the past, we are absolutely focused to make sure that every business inside of Agilent is healthy, strong, and is structured properly.

So we have been working division by division to ensure that each of these businesses have the right operating model. And by the end of Q4, we will have completed that task.

And so not only for the companies that are part of the divestiture but the businesses that are staying, we are going to have competitive divisions. Agilent Technologies is a decentralized company.

The measurement market is very fractured. And so the best organization is to have general managers, teams of people focusing on segments of the market, each one of those general managers must be able to hit our operating model.

And I'm happy to report by Q4 every one of them in the new company will, with the one exception is our investment in Life Sciences and integrated biology and they'll be there next year.

Great. Thank you.

Any other questions in the room? On the phone line?

Not at this time, sir.

If not, thank you for joining us. Thank you to those of you on the line and on the Web, we appreciate you joining us today. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect.