安捷倫 (A) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2006 Agilent Technologies Inc. earnings conference call. My name is Maria and I will be your audio coordinator for today. At this time, all participants are in listen-only mode, and we will be facilitating a question-and-answer session toward the end of today's conference. (OPERATOR INSTRUCTIONS).

At this time, I will now turn the presentation over to Mr. Hilliard Terry, Director of Investor Relations. Please proceed, sir.

Thank you, Maria, and welcome to Agilent's second-quarter conference call for FY 2006. With me are Agilent's President and CEO, Bill Sullivan, and Executive Vice President-Finance and Administration and Chief Financial Officer, Adrian Dillon.

After my introductory comments, Bill will give his perspective on the quarter and the business environment. Adrian will follow with his review of the financials and the performance of each of our businesses. After Adrian's comments, we will open the lines and take your questions.

In case you have not had a chance to review our press release, you can find it on our website at www.investor.agilent.com.

In accordance with SEC Regulation G, if during this conference call we us any non-GAAP financial measure, you will find on our website the required reconciliation to the most directly comparable GAAP financial measure.

In addition, I would like to remind you that 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 expectations. We encourage you to look at the Company's most recent filings with the SEC to get a more complete picture of all the factors at work.

The forward-looking statements, including guidance provided during today's call, are only valid as of this date. The Company assumes no obligation to update such statements as we move through the quarter.

And with that, let me now turn the call over to Bill.

Thanks, Hilliard, and hello, everyone. We are pleased to report on a quarter in which we continued to deliver on our strategic and operating commitments.

Our revenue and earnings per share was at the high end of our expectations, with total orders and net revenue at the highest level since 2001. Gross margin within the quarter was more than 2 points better than a year ago. Operating margins were strong, and the return on invested capital of 24% was above our target of 21%. We're very pleased with an EPS of $0.40 per share.

We did excellent job on asset management, in particular on the inventory days on hand, which at 96 were below 100 for the first time in Agilent's history. Free cash flow was strong, with $241 million generated in the quarter. There were some areas of softness in both of our main businesses, but overall, in Q2, we made good progress towards our long-term goals.

Turning to our results by business, the Electronic Measurement business had moderate order and revenue growth, with a solid improvement in profitability. There was good growth in wireless test and electronic manufacturing test.

On the wireless side, demand for low-cost phones in China and India, as well as investment in 3G manufacturing, helped drive our results. We also benefited from R&D investments and high bandwidth capability in data applications for mobile phones.

There was also a nice seasonal upturn in our Aerospace and Defense business, and our oscilloscopes continued to achieve excellent customer acceptance.

At the end of the quarter, we announced that our operations support systems group would become part of the Electronic Measurement group. We did this for two reasons. First, bringing these businesses together will strengthen our position in the wireless convergence and digital markets. In addition, we will be able to improve our operational efficiency and to deliver more comprehensive solutions to common customers.

In Bio-Analytical Measurement, overall growth in Q2 was modest. The key factor was the continued cautious spending by big U.S. pharmaceutical customers, as well as delays in government research spending. We are encouraged by customer response to our new products, such as the 1200 HP-LC series and our triple quad mass spectrometer. In fact, our Bio-Analytical business has recently introduced its largest new product portfolio in a decade.

As you know, during Q2, our subsidiary, Verigy, filed a registration statement for its planned IPO, which we expect to occur in Q3. Another focus area for this Company in the quarter was an ongoing work to resize our global infrastructure organization, or GIO. Our cost structure now is appropriate for a pure-play measurement company.

I'm very pleased with our progress. Our people in GIO are doing a great job in streamlining how we operate. We also have already reduced our GIO expenses to the run rate appropriate to support a smaller organization, after taking into account the spin-off of Verigy and the sale of our Semiconductor Products Group in Q1. We expect to reduce our support costs over time by amounts that will add about 1 point of operating margin.

In addition, we have repurchased about 105 million shares, completing 84% of our $4.5 billion share repurchase program. These actions make up what I call Phase I. Now we start Phase II. With the right operating model in place and with the Company focused on measurement, the main issue we are addressing is growth.

We believe the $40 billion measurement market has a lot of opportunities for growth and our strategy for pursuing these opportunities is pretty straightforward. We will continue to roll out compelling new products in all of our businesses. We will do more fine-tuning of the organization in order to achieve operating and financial synergies. We will continue to explore acquisitions that have the potential to contribute to growth and that are accretive within a reasonable time.

In sum, we have a lot of exciting opportunities for growing the top line and for continuing to improve how we operate and compete. We're pleased with the success we have achieved this quarter and are determined to build on that success.

In terms of the third quarter, we expect Agilent's revenue, including the businesses that make up Verigy, to be between 1.37 and $1.43 billion. We believe that the net income in Q3 will be between $0.37 and $0.42 per share. In the fourth quarter, normal seasonal patterns should lead to a revenue that is about 5% higher than in Q3 and should add about $0.10 per share to operating earnings.

Thanks for being on the call today. Now I will turn it over to Adrian.

Thank you, Bill. Good afternoon, everyone. Let me give you a few overall perspectives on the quarter for Agilent, review the performance of our business segments and conclude with some thoughts about second-half guidance.

Another reminder -- this review of Agilent's results will be incomplete because we are in registration for the initial public offering of Verigy, Agilent's Semiconductor Test Solutions business. And so we are prohibited from discussing anything about this business outside of the prospectus.

Starting out at the Agilent enterprise level, overall, Agilent had a robust second quarter. Orders of $1.59 billion were 21% ahead of last year. Revenues of $1.43 billion were up 12% from last year and at the top of our expectations. Adjusted net earnings per share at $0.40 were also at the high end of our guidance of $0.35 to $0.40 per share.

We believe the quality of our performance was also good, with gross margins up about 2.5 points to the highest levels in five years, operating expenses under good control, inventory days on hand below 100 for the first time, and return on invested capital at a new Company high of 24%.

Preparations for the spin-off of Verigy are on schedule, and as of midyear, we have successfully reduced Agilent's global infrastructure costs commensurate with our size and profile as a pure-play measurement company.

Despite the costs associated with these actions, we generated $241 million in operating free cash flow during the quarter -- that is, cash from operations minus capital spending. Overall, we believe we are demonstrating performance indicative of the world's premier measurement company.

Turning to the overall numbers, again, we had orders of $1.59 billion, up about 21% from last year. The dollar was stronger compared to one year ago, and that hurt our measurement orders by about 3 points, meaning that in local currency terms, our orders were up about 24% from last year.

Geographically, orders were up about 13% in the Americas; about 6% in Europe; and fully 36% in Asia-Pacific for a blended average of 21%.

Now, if we define the new Agilent as the sum of our Electronic Measurement and Bio-Analytical segments, orders were $1.28 billion, up 5% from last year, or again, in local currency terms, up 8% from last year at this time.

Total revenues at $1.43 billion were up 12%, and again, in local currency terms, up 15%. New Agilent total measurement orders were -- revenues were $1.24 billion, up 5% in dollars or 8% in local currencies. Agilent's total book-to-bill -- 1.11.

Turning to gross margins, either for total or for new Agilent, gross margins remained at the highest levels since early 2001. Gross margins in the quarter were 53%, up 2.4 points from last year at this time. New Agilent orders at 53.8% were up 1.4 points from last year at this time. Continuing to peel the onion, Electronic Measurement segment had 55.5% gross margins, up 2 points, while Bio-Analytical segment had gross margins of 50.3%, up 0.9 points from last year.

Total operating expenses were up only about 1% from last year and generally were at our targeted operating ratios. R&D, for example, was $178 million during the quarter or 12.4% of revenues, right in that band of 12 to 13% that we've talked about consistently, and in fact were down 1% or $2 million from last year's second quarter. New Agilent R&D at 153 million was also at the 12.3% of revenues.

SG&A for total Agilent at $385 million were up 2% or $9 million, and as a percentage of sales were at 26.9% -- again, right in the zone of our targeted operating model. For new Agilent, SG&A expenses were $347 million, up $6 million from last year.

Incidentally, we should also mention the impact of Agilent's variable pay program on our costs. This program pays nearly every Agilent employee a 10% annualized bonus when Agilent hits its 21% ROIC operating model. This program, which aligns employee and shareholder interests, can vary from 0% variable pay in difficult times to a 20% bonus when times are great.

In the second quarter of this year, Agilent hit a 24% return on invested capital, above our targeted operating model, and so we accrued about $38 million in variable pay during the quarter. That is up $21 million from last year's second quarter. Stated differently, Agilent's discretionary cost discipline was even $21 million better than suggested in our overall line item comparisons.

Total operating profit for the Company in the second quarter, $196 million, more than double last year's result -- operating margin of 13.7%, up 6.5 points from last year at this time. In general, we dropped $0.68 of every additional revenue dollar from the past year to the bottom line.

Okay, reconciling operating earnings to GAAP results -- we had about $41 million in other income during the quarter, of which 29 million was net interest income, compared to other income of 16 million one year ago. Our pro forma tax rate was unchanged at 25%, resulting in $178 million of pro forma net income, more than double last year's 84 million.

If you take the $178 million of pro forma net income, or $0.40 per share, we subtract out $25 million of noncash options expense, subtract $50 million of net realignment costs for getting STS ready for an IPO and realigning GIO costs, tax and miscellaneous costs -- income of $28 million, and then an adjustment to the SPG sale proceeds of $16 million gets you to the GAAP net income of $115 million or $0.26 per share, adding back that $16 million adjustment to semiconductor products, and we had income from continuing operations of $131 million or $0.30 per share.

Turning to the balance sheet, as I just mentioned, $131 million of income from continuing operations. We also generated $165 million in networking capital and other items. Therefore, net cash provided from continuing -- from operations -- $296 million. Subtract out $55 million of capital spending, and we had free cash flow from operations of $241 million, again, nearly three times what we did last year at this time.

Receivables consumed about $59 million because of the strength of the business, but at 53 days sales outstanding, was two days better than last year at this time. Inventories -- we released $56 million, despite the strength in the business. And as already mentioned, our inventory days on hand at 96 is at a new all-time low.

Other cash items during the quarter -- we sold property for $87 million associated with the restructuring and reconfiguration of Agilent. We also purchased the 49% of Yokogawa Analytical Industries that we did not already own for $98 million.

In addition, we had share repurchases of $487 million during the quarter and options issuances of $213 million. So at the bottom line, we ended up with $2.66 billion in cash and short-term investments at the end of the second quarter, down only $28 million from last year at this time and down only $80 million from the first quarter.

Through the end of last week, we have completed about $3.9 billion of our $4.47 billion share repurchase program. To date, we have purchased 109 million shares at a weighted average price of about $35.95. We ended the second quarter with 426 million shares outstanding.

Okay. Turning to segment information, Bio-Analytical segment had orders of $401 million or 4% above last year at this time. Life Sciences was up about 4% at $178 million. I should mentioned that the 4% increase both in total Bio-Analytical and in each of the subsegments was up about 4% in dollar terms and up about 7% in local currency terms. Strength was fairly uniform across most geographies and markets, despite the continued slowdown in spending by big pharma.

Several new product introductions, including the 1200 HP-LC series and the new triple quad mass spec are being well-received by our customers and are expected to provide growth in the coming quarters.

Also, our plans to grow in China and India are proceeding well, with year-over-year growth in India at 19% and in China at 29%. China growth was fueled by strong results in our core businesses, chemical, services and consumables, and pharma. Also, contract research organizations, or CROs, as they are known, are building their presence in China. India pharmaceutical companies continue to increase investment in basic research in response to the WTO patent laws that were introduced in India last year.

Orders for our Life Sciences products, which are about 44% of the Bio-Analytical segment, were up 4% year to year, with big pharma accounts essentially taking a quarter-to-quarter approach to spending. In the second quarter, spending was actually down in the Americas, was about flat in Europe, but was up double digits in Asia. We are not as dependent as most companies on big pharma, and we are focusing on harvesting opportunities at small to mid-sized firms to offset the reduced spending in some big pharma companies.

In our Integrated Biology business, our new high-density arrays are being well-received by early customers, although that environment continues to be highly competitive. The third-quarter introduction of our new Quadrupole Time-of-Flight mass spec will make us more competitive in the proteomics space, with shipments beginning early in the fourth quarter.

In Chemical Analysis, orders of $223 million were up 4% year to year, and again, 7% year to year in local currency terms. We are taking advantage of the chemical market in Asia, which continues to be driven by increased focus on export regulations, as well as, on a domestic focus, on food, air and water quality. Growing economies are big energy consumers, creating additional opportunities for us in the petrochemical and hydrocarbon industries. Additionally, higher oil prices continue to drive spending to upgrade refinery infrastructure.

Our installed base in forensics, chemical firms, petrochemical firms, academic institutions and government agencies all drive a new replacement business in Europe and in the Americas.

Second-quarter Bio-Analytical segment revenues of $372 million were 8% above last year in dollar terms and up 11% in local currency terms. The segment book-to-bill of 1.08 was the seventh consecutive quarter of above 1 book-to-bill. And that, combined with the new product rollout, should drive pretty robust revenue growth in the second half of this year.

Operating profit of $45 million was up 15% from last year, with both gross and operating margins improved by 1 point. As I mentioned earlier, during the quarter, we completed the purchase of the 49% of Yokogawa Analytical Systems that we did not already own for 98 million. Adding the $100 million to the segment's invested capital drove this segment's ROIC down by 2 points during the quarter to 21%.

Turning to Electronic Measurement, Electronic Measurement orders were up 5% year over year to $875 million and were up 7% in local currencies. These results reflect solid growth in electronic manufacturing test, moderate strength in wireless test, and weakness in wireline test. Communications test orders, which represent about 60% of the segment, grew 2% year over year. Wireless test, which is about 87% of communications test, grew 3% year over year, despite a highly competitive market.

Cellphone demand continues to be robust, especially for low-cost phones in China and India. Investments in 3G manufacturing capacity are also driving growth in handset testers. Handset R&D demand continues to be driven by investments in high bandwidth capability and data applications. Additionally, we're seeing an increase in demand for digital video broadcasting technologies in mobile devices and increased WiMAX spending in Europe. Wireline test is seeing continued softness from the router test business, leading to a 9% year-over-year decline for this business.

Last quarter, we mentioned a CapEx spending slowdown in a major customer. We anticipate the spending will resume in Agilent's third quarter, and this should enable solid sequential growth in Q3.

Network systems test has seen quarter strength, as NEMs and carriers continue to invest to develop and to deploy 3G services and technologies.

Turning to the Operations Support Solutions, or OSS business, as Bill mentioned and we previously announced, we have now merged the Company's OSS group with two other existing businesses and created the Network and Digital Solutions business unit, which will be led by David Churchill. This reorganization will significantly strengthen our leadership position in the wireless convergence and digital markets. The combination will enable this segment to realize important synergies in our delivery of solutions to customers -- to common customer segments, as well as in our operating results.

Turning to General Purpose Test, which represents about 40% of Electronic Measurement, this subsegment grew 11% year to year to $336 million in orders. This growth marks a recovery in Aerospace/Defense and significant gains in Design Software.

Aerospace/Defense improved as the federal government's budgets were released and funding has started to flow. We experienced considerable strength in Aerospace/Defense orders from Japan. We are also seeing significant growth opportunities in China and Korea for radar, military and satellite test.

Our real-time oscilloscope lineup is outpacing growth in the overall market as we have completely refreshed that product line. The outlook for logic analyzers is improving based on our new benchtop 16800 series. Still, we are seeing increased competition in this market in light of a new product introduction both by Agilent and by our competitors.

Finally, Electronic Manufacturing Test performed well again, with significant sequential and year-over-year growth. Revenues of $867 million in this segment were up 4% from last year. Segment gross margins improved 2 points to 55%, and operating margins improved 4 percentage points to 14%. Operating profits of $120 million were up 43% from last year, and on an incremental basis, this segment dropped $1.16 for every dollar of incremental revenue, both based on positive gross margins and excellent operating expense control. Return on invested capital, 23%, was up 8 points from last year.

Okay, finally turning to third- and fourth-quarter guidance, for the third quarter, which is seasonally weak for Agilent, we expect revenues of 1.37 billion to $1.43 billion, roughly flat with the second quarter, but up 10 to 15% from last year. Adjusted net income is expected to be in the range of $0.37 to $0.43 per share, again, about flat with the second quarter, but roughly double last year's comparable earnings.

Q4, on the other hand, is normally Agilent's strongest. If this year shows the normal seasonality, we would expect a Q3 to Q4 revenue increase of roughly 5%. Given our normal incrementals and the continued progress we are making in moving our global infrastructure costs from parity to clean slate, we would expect operating earnings per share to be roughly $0.10 above the third quarter and once again roughly double the earnings per share of last year's fourth quarter.

With that, let me turn it back to Hilliard.

Thanks, Adrian. Maria, at this point, we'll open the call up to questions.

(OPERATOR INSTRUCTIONS). Deane Dray, Goldman Sachs.

With regard to your guidance for the third quarter, what are you assuming for internal growth in book-to-bill? And can you comment on the pace of orders throughout the second quarter, please?

Sure, this is Adrian. As is often the case, our case of orders accelerated through the quarter. Normally, in the second quarter, we go from our second-weakest month of the year to our second-strongest month of the year. So it's always a roller coaster. And this year, it was even more true than normal. We really did see an acceleration in orders as the quarter progressed.

And how about within the guidance -- what are you assuming for internal growth for book-to-bill just in terms of what the top line looks like?

Well, I think we gave the guidance of 1.37 to 1.43 billion of revenues, which would be 10 to 15% above last year at this time, and again, essentially flat with the second quarter, but remembered, Deane, that the third quarter is always by far our weakest quarter during the year.

Good. And then what is the expectation on the realignment costs?

The realignment costs -- there will be one more quarter of costs during the third quarter, essentially, as, hopefully, we do complete the IPO. And then it will be largely gone, certainly by the end of this year, once we've completed all of the realignment of GIO. We will have dropped an additional 1 percentage point of operating margin to the bottom line. And then, as Bill has said, the challenge for this Company is to leverage that operating model to higher sustainable growth.

And just last question -- could you comment on what additional the Yokogawa investment provides the business today?

It is a business that generates the same sort of operating margin as the rest of LSCA. The difference, though, is that on that revenue, we used to have to subtract out 49% of the operating profits as minority interest. Now we will continue to consolidate 100% of that business.

So there's no other changes in having full of ownership in terms of what kinds of investments you could make or the pace of growth in owning the other 49%?

Clearly, there is. We do have more control over our distribution channel and our manufacturing in Japan now that we have 100% control of that very valuable business. And the team really is psyched about the opportunity to better leverage that real strength in our portfolio.

Good to hear. Thank you.

Darryl Pardi, Merrill Lynch.

Adrian, this is your fifth consecutive quarter seeing orders exceed revenues in General Purpose Test. This is driven by continued growth in Manufacturing Test business, or is there another dynamic there?

Thank you for observing that, Darryl. Yes, indeed, you are right, that -- first of all, a healthy business that is growing is going to have building backlog, almost by definition. And this business has been the fastest area of growth within Electronic Measurement for much of the last 18 months. The new really revamped oscilloscope product line has been a tremendous success. And as I mentioned earlier, the electric analyzer business is picking up as well. So I think we really do have some momentum, both in the customer and in the product areas.

And does the backlog that you have built over the past 15 months begin to convert to revenue at a quicker pace as we get through the second half of the year?

That's always a debatable item when you are setting up budgets as to how quickly is that backlog going to convert to revenue. I would assume a relatively constant conversion rate for the moment. And hopefully, we'll be able to improve upon that.

Is Chris van Ingen on the line?

No, he's not.

Sorry, I just had one more question for you guys, then. As we are now halfway through this fiscal year, you are a good way through completing your share repurchase authorization. You have a lot of cash, you're generating a lot of cash. Could you give us an update on your thoughts on use of cash beyond this time share repurchase authorization?

Our position has not changed from previous calls. The first choice, of course, is continue to invest in the business. The second option is to ask the Board for a reauthorization for additional stock repurchases. And the third choice would be to pay a dividend. And as we complete this repurchasing by the end of this year, barring normal market conditions, we will review that with the Board.

John Harmon, Needham & Co.

I'm going to ask the question that Darryl probably was going to ask. In the Bio-Analytical space, one of your competitors recently announced an enormous acquisition. I'm wondering from the point of view of Bio-Analytical, what does this mean for that group and does one competitor becoming -- bulking up change anything in terms of its goals or its mission or increase the impetus for it to become larger?

Yes, again, as you would expect, we don't make comments on acquisitions of any of our competitors. We're very excited with the new product offering that we have launched, both in the mass spec side, as well as our whole conversion to the 1200 LC series. So we're going to continue to stay the course, and the market acceptance of our products has been very good.

(OPERATOR INSTRUCTIONS). Ajit Pai, Thomas Weisel Partners.

Congratulations on very solid execution and some great margins. Two quick questions. The first one would be about your wireless business -- not the wireless, but the wireline side of things. We are seeing end market spending improve out there. A lot of the comm equipment guys are seeing some pretty solid results.

Why are you seeing this year-over-year decline? Is it only one customer? And can you give us some idea of mix of how much is to the comm equipment vendors and how much is to the carriers right now out of that business?

I think as Adrian has stated, a lot of this business is concentrated in very few customers. And we were impacted by that.

Ajit, I would also add that in our OSS business that we have seen some relative weakness on the wireline side as well that we didn't fully anticipate. This business is very, very lumpy. The whole industry is going through massive consolidation at this time. And the first thing that happens whenever you get major acquisitions is that all spending freezes. And we have seen that in a few of our long live customers suddenly saying, halt everything until we get this sorted out. So that is clearly part of what is behind the wireline year-to-year decline.

So it is [broad-based] the NEMs, the network equipment manufacturers, as well as the carriers, you're seeing a bit of a pause -- there's some volatility there. But you believe that at least one of those two is coming back. Could you give us some idea of mix between those two, how much is carriers and how much NEMs as part of that wireline business?

I would say that the network equipment manufacturers is dominating at.

Yes, the biggest shortfall, again, has been in our router test.

And then the next question would be in terms of the number of business units, I think you have walked us through, about two years ago, about how many business units you had and how many of them were above -- with an ROIC above 20% and how many below.

After all the streamlining and the changes that you have had and once STS is spun out, how many business units will you have remaining, in the way you used to classify them earlier? And right now, how many of those are above your ROIC metric of 20%?

We will have two business units going forward, as we do today -- Electronic Measurement Group, as well as let's say our Life Sciences and Chemical Analysis. Both groups are above 20% return on invested capital. And that's why the comments that Adrian and myself have both made -- the real focus moving forward is to be able to leverage our operating model with greater than market growth rate and then allow that additional profit to flow to the bottom line.

But all these sort of sub-units you had when you were talking about much greater number of units separately about two years ago -- have you collapsed all of those together? Or do you still maintain P&L at those levels even today?

Well, we have two fundamental business groups that we report, and underneath those, in Electronic Measurement, we will have three business units, again, focusing on the communication and digital wireless and general instrumentation. Likewise, in the Life Science side, we have two business units, one focusing on chemical analysis, the other one focusing on pharmaceutical and life sciences.

Edward White, Lehman Brothers.

Focusing a little bit more on the growth in China and India, you mentioned some numbers on the Bio-Analytical Measurement side. And I was wondering how sustainable do you see that business? In other words, do you see that growth momentum continuing through this year, and what sorts of things can you do to keep the momentum strong there? In other words, are there other product lines you can offer in those geographic regions that can sustain the momentum there?

We are very optimistic with the market opportunities in both China and India and our continued investment forward is very straightforward. We're going to continue to expand our sales presence in both China and India. We are also expanding our research and development presence to ensure that we have the appropriate customized products to be able to meet those needs.

In addition to that, we also of course have manufacturing capability in China. With the advent of electronic manufacturing in India, I believe there's even more opportunity than what we have seen to date inside of India. So we are very excited with opportunities in both countries and are making the appropriate investments to ensure that we can capitalize on those opportunities.

Second question is I recognize the real opportunity for you going ahead is to leverage the success you've had on the operating line with higher revenues. But there are a couple of areas where there may be some -- there seem to be some potential to improve operating costs and make some improvement. And those are with the OSS business and gene array chips. Can you talk about the progress on those and your competence level in terms of your ability to get those closer to the corporate operating model?

In terms of our OSS business, actually, we have made excellent progress in the first half the year to get to gross margins that are equivalent to our Electronic Measurement sector. The biggest opportunity we have is in the Life Science area. We have had a very successful launch of our new mass spec platform. So the cost of that development and introduction will slow down over the rest of the half of the year.

Likewise, we have seen good growth in our microarray business. That market is very, very competitive. But some of the new capability that we've offered customers, we think that with some additional top-line growth and improvement in efficiencies that we can get the array business back to profitability.

Richard Eastman, Robert W. Baird.

Just two questions. One is on the BAM business. Does that business continue? Was there any issues in terms of shipping product? Or was it how the orders came? I am curious as to essentially your second straight quarter here where we built backlog -- is the strategy there to work that backlog down in the second half or should we look for better shipments?

Absolutely. The order strength has been very good. We have, as I had mentioned, had the largest launch from this business group in over a decade. And any major product launch across the board, complete conversion of our whole LC platform, as well as entering in a whole new mass spec platform, is always challenging. But we are very excited with the momentum we have, and again, the team is 100% focused on shipping our backlog.

And is there any chance -- geographically, Adrian, if we look at the Electronic Measurement in the BAM business combined, so kind of the core business, could you possibly break down that geographic order growth just in the core business?

I cannot do it off the top of my head with the individual segments. I can tell you that, as I said before, the orders for the Americas was up 13% year to year. Europe was up 6% and Asia-Pacific, 36%. I don't think that the order trends were dramatically different by business.

I guess when I look at that 21%, though, that includes the STS orders, obviously, right?

Fair enough. Yes.

And that is what is going to have bulked up the Asian growth?

We have seen across-the-board strength in Asia, but certainly that business is even more disproportionate Asia.

(OPERATOR INSTRUCTIONS). Ajit Pai, Thomas Weisel Partners.

Just looking at your geographic mix, not in terms of revenues, but in terms of costs -- now that you have SPG leaving and potentially have ADG leaving, what percentage of your cost is in [dollar] countries and in the U.S., and then what percentage is in China, and what percentage in the rest of the world? This is both COGS, as well as expenses?

Ajit, I would say that dollar -- literally, dollar is roughly 40%, but then you get essentially the Malaysian and other related areas that are locked to the U.S. dollar. China is roughly 25% today and obviously growing. The whole Asian area is about 60% today.

So that would mean that a falling dollar would actually benefit your margins?

Yes.

At this time, there are no more questions. I will now turn the call back over to Mr. Hilliard Terry.

Thank you, Maria. To everyone on the line, I'd like to thank you on behalf of the management team for joining us today. And we look forward to chatting with you again in August, when we report our Q3 results. Thanks for joining us.

Thank you for your participation in today's conference, ladies and gentlemen. All parties may now disconnect. Enjoy your day.