安捷倫 (A) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Agilent Incorporated conference call.

My name is Akia, and I'll be your operator for today. At this time all participants are in a listen-only mode. We will be conducting a question and answer session toward the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

I would now like to turn the presentation over to your host for today's call, Mr. Rodney Gonsalves. Please proceed.

Thank you and welcome to Agilent's fourth quarter conference call for FY 2007.

With me are Agilent's President and CEO Bill Sullivan and Executive Vice President of Finance Administration and CFO, Adrian Dillon. After my introductory comment 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 the businesses. After Adrian's comments we will open the lines and take your questions.

In case you haven't had a chance to review our press release you can find it on our website at www.investor.agilent.com. We are also providing further information to supplement today's discussion. After you log into our webcast module from our website you can click on the link for supplemental information. You will find additional information such as our end market revenue breakouts and historical financial information for Agilent's continuing operations.

In accordance with SEC Regulation G if during this conference call we use any non-GAAP financial measure, you will find on our website the required reconciliation to the most directly comparable GAAP financial measures. In addition, I'd like to remind you that we will make forward-looking statements about our future financial performance of the Company that involves 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 Agilent'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 and the Company assumes no obligation to update such statements as we move through the current quarter.

Before I turn the call over to Bill, I'd like to remind you that we will host our Analyst Day on Tuesday, December 11th, here in Santa Clara, California. The meeting will focus on our forward view of Agilent overall. In addition we will provide a deeper dive into our electronic measurement businesses and our major growth initiatives. Most of our executive management team will be available as well as our leaders from each of our electronic measurement businesses. Lastly I'd like to note that Adrian will be presenting at our upcoming Credit Suisse technology conference on November 28th.

Now I'll turn the call over to Bill for his comments.

Thanks, Rodney, and hello, everyone.

Our fourth quarter results repeated many of the trends and strength that we have seen in recent quarters as we continue to leverage the strength of our operating model through higher sustainable profitable growth. Q4 orders were up 6% over the last year while revenue increased by 9%. Operating margins reached 18% and ROIC was 30%. We generated $398 million in cash flow from operations for the quarter and had adjusted earnings per share of $0.53. Bio-analytical markets were strong across the board and across all geographies. Electronic measurement markets were essentially flat with growth largely in areas we're investing with specific growth initiatives.

Let me now turn to Q4 and provide some detail by business. Our Bio-analytical Measurement business delivered excellent quarterly results with strength in both chemical analysis and life science. Revenue growth was 24% year-over-year including acquisitions. This topped all major competitors and represents a new high for Agilent. We also had solid performance across all geographies, particularly China, India and Europe.

Life science revenues were up 30% including acquisitions. Pharmaceutical, academics and government markets all showed strong demand this quarter. We're seeing sustained momentum in our LC and LCMS systems, columns, microarrays and related services. Chemical analysis also had a strong quarter. Revenues were up 20% over last year as we saw sustained strength in the Petrochemical, environmental and food safety markets.

Results were driven by strong market acceptance of our new GC and GCMS products. Strong demands in petrol and chemical segments are driving plant expansion in Asia and replacement business in the U.S. and Europe. The environmental segment is strong around the world and Agilent is well positioned to capture both new and replacement business with our new GC, MS and LCMS technologies. Going forward our strategic intent remains the same, to leverage current technologies in existing platforms to create customer oriented workflow solutions. We will continue to focus our R&D, customer collaboration and M&A efforts in refreshing and expanding our portfolio, addressing customer work flow requirements and providing full application solutions to our customer needs.

Turning to the other side of the house, our electronic measurement business was essentially flat with 1% revenue growth over last year. Solid growth in the aerospace and defense and wireless R&D segments was offset by declines in computer and semiconductor. Geographically Americas and Europes grew respectively, Asia and Japan declined year-over-year although less than in previous quarters. General purpose test revenue is flat year-over-year. Demand from computers and semiconductors was weak but end marks appear to be bottoming out in position for recovery.

Electronic manufacturing customers continue to focus in reducing their overall costs of tests which puts downward pressure on spending. On the positive side, aerospace and defense saw double-digit growth in all regions with the exception of China where investment remains constrained. Going forward we continue to remain cautious in the aerospace and defense market outlook in line with the cautious outlook for the U.S. Government and primes capital spending.

The communications test business was up 1% from a year ago. Although handset manufacturing was down slightly year-over-year, it seems that we are making our way through the trough. This quarter's modest year-over-year decline marks an improvement of over 7% year-over-year decline we noted last quarter and a significant improvement over Q2 where we were down 25% from the previous year. Wireless monitoring continues to experience capital and operating investment pressure. Wireless R&D market demand remains steady for base station and non-cellular market segments.

We are seeing continued strong acceptance of our WiMAX solution. In addition we continue to announce strategic partnerships that enhance our solutions in next generation mobile communication. Overall electronic measurement growth came largely in areas where we have invested in specific growth initiative such as aerospace and defense and wireless R&D.

Our strategy going forward will continue to focus on offering complete test application solutions for rapidly growing segments, close customer collaboration and technical innovation. Overall our 2007 fiscal year achieved several milestones for Agilent. We completed a $2 billion stock repurchase and we are authorizing a second $2 billion buyback as we enter into fiscal year '08. We made a number of key acquisitions including Stratagene, Acqiris and Networkfab and we also recently announced our acquisition of Velocity 11. These acquisitions complement our portfolios and strengthen our position in key growth markets including life science and aerospace and defense.

We have just introduced the new LCMS platform that demonstrates the synergies of our measurement leadership. This new product incorporates our high performance analog digital converters originally developed for electronic measurement and now used in life science. The new platform has been very positively received by our customers and will drive continued revenue growth in our Bio-analytical Measurement market.

For the full year FY '07 orders were $5.4 billion, up 7% from the previous year. Revenue was also $5.4 billion, up 9% over the previous year. Adjusted income from continuing operations was $738 million, an increase of 13% over the previous year. We generated $969 million in cash flow from operations for the year and an adjusted earnings per share of $1.82.

As we enter fiscal 2008, we remain cautious about the overall economic conditions, particularly in electronic measurement markets. Regardless, we are well positioned to take advantage of continued demand in high growth areas including wireless R&D, aerospace and defense, Petrochemical, food, environmental and life science. We continue to shift resources to the best opportunities and continue to make targeted acquisitions while maintaining our operating model.

In addition, during the first quarter of FY '08, we will complete a restructuring program that will provide ongoing savings of $30 million in expenses per year. Going forward we should not see any further proforma restructuring charges. We have also substantially reduced our non-cash share-based compensation for FY '08. Adrian will provide more details during his portion of the call.

For the first quarter of FY '08 we expect to see continued ongoing trends and strengths. Revenues are expected to be in the range of $1.35 billion to $1.4 billion, up 5% to 9% from last year. We anticipate adjusted net income to be in the range of $0.38 to $0.43 per share, 15% to 30% above last year's comparable earnings.

Thanks for being on the call. Now I'll turn it over to Adrian.

Thank you, Bill. Good afternoon, everyone.

As usual I'm going to offer a few overall perspectives on the quarter for Agilent, review the performance of our two business segments and conclude with some thoughts about first quarter and full year 2008 guidance. Starting at the Agilent enterprise level, overall we believe Agilent had a good fourth quarter performance especially considering the continued divergent trends in our markets. Bio-analytical markets continued to show solid momentum across the board and we took good advantage of it with orders up 16% and revenues up 24% from last year.

Stratagene was responsible for about five points of that orders and revenue growth and Stratagene integration activities are also going well. In addition, we just announced the acquisition of Velocity 11 adding lab automation to our expanding workflow solutions. Electronic measurement markets, on the other hand were virtually flat overall. The good news is that the growth we did see was concentrated in those areas where we have invested in specific growth initiatives like aerospace, defense and wireless R&D.

Our overall performance in electronic measurement, while solid suffered from the acquisitions and head count that we added earlier in the year and by currency movements that hit operating margins by about $12 million in the quarter compared to last year. Overall fourth quarter revenues of $1.45 billion were up 9% from one year ago, or up about 7% in local currency terms. Operating earnings of $0.53 per share were near the top of our $0.50 to $0.54 guidance range.

Cash generation was once again a highlight for the quarter. Both receivables and inventory set historic new lows and return on invested capital hit a new high of 30%. Cash generated from operating activities during the quarter was $398 million. During the period we repurchased $631 million of stock completing our prior $2 billion program and as Bill mentioned today our board authorized a new $2 billion program.

In short, despite a mixed quarter from a market perspective, we met our performance commitments and demonstrated again the excellent cash generating capabilities of this company. That performance is also reflected in our full year results. Full year fiscal 2007 revenues grew 9% to $5.4 billion, adjusted net income rose 22% to $1.82 per share and ROIC reached a new high of 27%. Cash generated from operations during the year reached $969 million and free cash flow after subtracting capital spending of $154 million reached $815 million.

Okay, turning to the overall numbers, orders of $1.48 billion, up 6% or 4% excluding Stratagene. Geographically the Americas were up about 7%, Europe was up 13% and Asia was up 1%. Fourth quarter revenues of $1.45 billion were 9% above last year or up 7% excluding Stratagene. Geographically the Americas were up 9%, Europe was up 18% and Asia-Pacific was up 3%.

As I mentioned, the weakening dollar boosted revenue growth by about two points. As occurred in the third quarter, however, currency also hurt our operating profits by the equivalent of about $0.02 per share. This is caused by a mismatch of yen and dollar denominated revenues versus Euro and Malaysian based costs that are only partially offset by hedging gains.

Gross margins at 56.1% were about at last year's levels with little change in either electronic measurement or bio-analytical. Operating expenses during the quarter were up about 8% as reported with currency responsible for about three points of that growth and the addition of Stratagene worth another two points of that growth. Actual discretionary operating expenses were very tightly controlled, up only $12 million from last year or 2%.

As reported, R&D spending was $168 million in the quarter or 11.6% of revenues up 0.3 of a point from last year. SG&A at $389 million was 26.9% of revenues, down 0.6 from last year. The Company's operating margin at 17.5% was up 0.1 of a point from last year and the best in the Company's history.

Other expense in the quarter was soft at $11 million down from $20 million last year. That was due to both lower interest income and a balance sheet hedging loss that lowered our net income. Pre-tax income was $264 million. We had a 22% tax rate during the quarter coming up to next income of $206 million or $0.53 per share that's 17% above last year's $0.45 per share on the same basis.

Okay, going from operating earnings to cash, table five of our financial--of our press release financial tables provides a detailed reconciliation from non-GAAP to GAAP income, but summarizing, we had proforma net income of $206 million, we had restructuring of about $12 million, share-based compensation of $36 million, non-cash amortization of intangibles of $15 million, and a tax benefit of $37 million adding up to GAAP income of $180 million in the quarter or $0.46 per share. That's 48% above last year's $0.31 per share.

A few comments on GAAP-related issues. First share-based compensation at $36 million was higher than expected and resulted from a year-end true up of our 2005 to 2007 long term performance plan. For the last time we had to do a true up to mark this plan to market. We achieved a 200% payout rather than the 100% we had been accruing resulting in a $15 million true up this quarter.

In future this won't happen again because we changed the plan so that our payout depends exclusively on the relative performance of Agilent stock and so it will be treated and valued like the rest of stock-based compensation, that is, establishing a valuation at the time of award and then amortizing it over the plan life. For fiscal 2008 we expect total share-based compensation to be about $85 million compared to 2007's $139 million.

Second, by year-end we have successfully utilized all of our U.S. federal deferred tax assets that we were forced to write off in 2003. As such our 2008 GAAP tax rate should be very close to our proforma rate when which we expect to be about 22%. Third, as Bill mentioned, Agilent has about completed its multi-year restructuring activities.

There will be about $20 million of recognized expense in 2008 based on actions taken in 2007, but other than that the only difference between GAAP and proforma going forward will be share-based compensation expense and intangibles amortization. In other words, non-cash charges. We think this is a big deal for Agilent, another sign of the seasoning and the strength of this operating company.

Turning to cash, I've already mentioned the good working capital performance with inventory days on hand at 92, six days better than last year, and receivables day sales outstanding at 46, one day better than last year. So total cash from operations $398 million in the quarter. CapEx was $39 million giving you free cash flow of $359 million in the quarter.

Depreciation and amortization was about $48 million and during the quarter we made about $33 million of acquisitions. We also repurchased $631 million of stock during the quarter and had $31 million of proceeds from share issuances. As most of you certainly know we also issued a 10 year note during the quarter realizing proceeds of $598 million. So we closed the quarter and the year with $1.826 billion in cash and short term investments. Finally as far as the new $2 billion repurchase program you should assume for modeling purposes that we will buy back the shares ratably over the next eight quarters.

Turning now to segment information, Bio-analytical Measurement had another great performance with fourth quarter orders up 16% from one year ago and up 11% excluding the impact of the acquisition of Stratagene. This marks the sixth consecutive quarter of double-digit orders growth for Bio-analytical. Revenues of $558 million were up 24% from last year and up 19% excluding Stratagene.

Growth was robust across both life sciences and chemical analysis and in all geographies with Americas up 23%, Europe also up 23% and Asia up 27% from last year. Life sciences revenues of $236 million were up 30% from last year and 17% higher excluding Stratagene. We saw sustained momentum in our LC and LCMS product platforms and in our microarray applications.

Revenue in the pharma and biotech market was up 16% year-over-year with sustained strength in our 1200 series LCs and LCMS. Mass spec demand including the triple-quod and Q-TOF is particularly strong in pharma R&D. The fourth quarter introduction of our new 6220TF and 6520 Q-TOF brings industry leading mass accuracy and dynamic range to our mass spec platform and sales have ramped very well since these products remember introduced at ASMS.

Despite markets that are growing more modestly our revenues in the academic and government market grew by 25% organically and more than doubled including the impact of the Stratagene acquisition. In the U.S. NIH grants remain flat while the cytogenics market is strong. Europe is focusing on enabling new technologies, for example, high end mass spec and with a renewed interest in genetic sequencing. In Asia we see Japan investing in genomics, China in drug and food testing and India in generic drug and biopharma research.

In microarrays we're seeing strong demand for Array-based comparative genomic hybridization or ACGH, high density arrays, multi-format arrays and for MIRNA. As in Q3 chemical analysis is even stronger than life sciences. 4th quarter revenues of $322 million p up 20% organically from last year driven by continued strength in the Petrochemical, food safety, environmental end markets. Strong market acceptance of our new 7890 gas cromatagraph and continued strength in our LCMS portfolio helped drive growth in the chemical analysis markets.

Revenue in Petrochemical, for example, was up over 25% driven by continued plant expansion in China, India and the Middle East. Sales of our new GC and GCMS products again helped drive growth in this market. Revenue into the environmental end market was up more than 30% from last year. The strength here is driven by lab expansion in Asia where stricter regulations are fueling growth in drinking water and solid waste testing as well as air monitoring.

In food safety which grew 18% we saw governments in China, Malaysia and India continue to invest in testing capacity for pesticides, veterinary drugs, product adulterations, as well as microtoxin testing. Segment operating profit of $120 million in the quarter was $29 million above last year on $108 million increase in revenues. Excluding Stratagene we dropped $0.34 of every incremental revenue dollar to the bottom line. The overall operating margin improved one point to 21%, a record high while segment return on invested capital fell three points to 33% because of the addition of Stratagene's $0.25 billion of invested capital.

Okay, turning now to electronic measurement, we continue to deal here with very mixed markets during the fourth quarter. Strength in aerospace defense and wireless R&D a decline in computers and semiconductor and a bottoming in both the electronics and handset manufacturing end markets. The net result was a very flat profile with orders and revenues both up 1% from last year.

Geographically the Americas were up 2%, Europe was up 12% while Asia was down about 4% from last year. General purpose revenue was essentially flat year-over-year at $518 million. Fourth quarter aerospace defense revenue was up 15% year-over-year in what is typically our strongest quarter for this business. Homeland Security continues to invest in signal analysis equipment with wider spectrums and faster sweeping. ISR or intelligence, surveillance and reconnaissance also continues to grow reflecting ongoing investments in military satellites and aircraft.

Demand in the computing and semiconductor segment has been weak, although there is some evidence the end markets may be bottoming. For Agilent the year to year compares are distorted by the very strong demand one year ago that resulted from our fourth quarter '06 release of the refreshed oscilloscope line. From a regional perspective we did see strength in Europe especially for high end scopes, however, we also saw slowing demand in the Americas and Asia-Pacific.

Communications test was also essentially flat in the fourth quarter at $370 million. In wireless handset manufacturing we're seeing increased signs of stability. As Bill mentioned in the fourth quarter, we had revenues down 2% year-over-year compared to declines of 26% in the first half and a 7% year to year drop in Q3, and while conventional business remains tough we are also seeing a shift in sales of WiMAX solutions to the manufacturing sector. Demand is up for our WiMAX test application on MXA for manufacturing and we recently introduced the N8300A wireless networking test set.

Wireless R&D was up 7% year-over-year. Demand for HSDPA, wide band CDMA and UMTS applications led all other technologies while WiMAX R&D test equipment demand remained strong especially in Asia. Wire line was also up 7% year to year and continues to be driven by the convergence of all IP based networks for voice, video, data and mobile services. Photonic test and measurement was also strong across the board.

Fourth quarter operating profits in electronic measurement of $133 million were down $4 million from last year on a $10 million increase in revenues. Gross margins were flat and operating margins fell by less than a point. Margins were hurt by a $12 million increase in currency related costs as well as by acquisition related spending, however, aggressive asset management enabled segment ROIC to remain stable at 27% despite lower segment income.

Finally, discussing fiscal year '08 guidance, as Bill mentioned earlier we are comfortable with the current range of analyst estimates for fiscal year 2008 revenues and adjusted net income per share. We'll provide more color on 2008 prospects at our analysts meeting on December 11th.

For the first quarter we're also comfortable with analyst estimates with one important nuance. As many of you know, Agilent has been moving compensation towards a greater focus on variable compensation tied to performance. This year we are moving the annual compensation award cycle to the first quarter from the second quarter last year in order to more quickly reward performance in 2007. We are also shifting pay from fixed merit increases to individual performance bonuses paid annually in the first quarter.

The net result is that compared to our normal seasonality we will shift about $32 million of compensation expense into the first quarter and out of the rest of the year. For modeling purposes you should assume about $0.06 of additional costs recognized in Q1 offset by a $0.04 reduction in Q2 expense and by $0.01 reductions in both the third and the fourth quarter. Reflecting this changed pattern of compensation expense we expect first quarter adjusted net income in the range of $0.38 to $0.43 per share, 15% to 30% above last year's comparable earnings. First quarter revenues are expected to be in the range of $1.35 billion to $1.4 billion, up 5% to 9% from last year.

With that, let me turn this back to Rodney.

Thanks, Adrian.

Akia, I'd like you to go ahead and give instructions for the Q&A.

Sure, thank you sir. (OPERATOR INSTRUCTIONS)

Your first question comes from the line of John Harmon of Needham & Company. Please proceed.

Hi. Good afternoon. I was wondering if you had talked about in electronic measurement how fast you think your markets grew in your fiscal year, the flip side of that would be whether you had gained the two points of share that you had targeted?

The overall market we believe grew in the 5% to 6% and we did not outpace the market due to our huge footprint in manufacturing which has clearly slowed down in Asia.

Great, thank you and just a second question. You talked about the slowness in Asia. Is that still primarily deriving from Japan or was there additional slowness in other countries?

It's very similar to last year and again, the decrease at least is moderating but with the merging together of contract manufacturing, the overall slowness that we had mentioned in Japan and Asia, the manufacturing sector is clearly flat and again because we have such a huge footprint in electronic manufacturing, it impacts us disproportionately than many of our competitors.

Thank you.

And just to be clear on Japan, it was down 4% year to year, but obviously was up substantially from Q3 to Q4. So but when in Q3 it dropped to 25%, so clearly we are seeing a return to more normal conditions.

Great. Thank you.

Your next question comes from the line of Jon Wood of Banc of America. Please proceed.

Okay. Thanks a lot. Any view on pharma and biotech budgets for calendar 2008 yet? If so, what extent, if any, are recent restructuring announcements in that market having on the discovery QA and QC budgets?

I'm not sure that we have a particularly definitive view on what the overall outlook is specifically particularly to U.S. pharma. It is our expectation, though, that the investment around the world in pharma biologics will continue and as we noted in the last session we had in our Bio-analytical group, the investment in academia in the universities around the world is huge and we believe the investment from a capital standpoint of instrumentation tools in universities and central research facilities is equal to the pharmaceutical biotech market.

Okay, great, and then to what extent would you view the Bio-analytical growth as indicative of market share gains versus just strength in the end markets? I mean do you have a view on what the Bio-analytical side grew in your fiscal '07 from a market perspective?

Well, I will have Adrian give you the exact details, but I will give you probably what's a very highly biased view point that I think the data is very clear that the introduction of our mass spec, our introduction of our new LCs, our new GCs has been very favorably received by our customers in the marketplace.

We believe that the overall markets on both sides is up about 10% and we believe that we gained very substantial share over the course of the year because of the acceptance and success of our new LC, our new LCMS and now GC platforms as well. We gained share across the board.

Okay. Great, and one more, if I could. The working capital improvements have been staggering this year. Adrian, can we expect the free cash flow to continue to remain at a premium to net income in fiscal '08?

I think a modest premium, yes.

Thank you.

And your next question comes from the line of [Terrance Waylan] of Citi Investments Research. Please proceed.

Hi, guys, thanks and nice job in a tough environment.

Thank you.

My first question's related to follow up on working capital. It looks like actually in the retirement liability line there is a decline there. Real quick one, wanted to know what that was.

I'm sorry, in what line?

Retirement and post retirement benefits I think declined by about $150 million.

Oh, that was an adjustment. Oh, boy, we're not going to get into pension accounting but I would tell you that there was an adjustment in our other comprehensive income related to a flop from being slightly underfunded where we had to write off a bunch of this to now being more than fully funded because of the great asset returns we actually achieved and so it came back on the balance sheet and was reflected as a reduction in liability that you mentioned

Okay, great, and then I think more broadly speaking on the top line on the revenue line for the businesses, looking forward to the first quarter what regions could you expect to see improvement? Could we expect to see Japan grow year on year there, and alternatively, Europe and U.S. have been running very strong, yet October PMI for those countries decelerated pretty meaningfully, wanted to get your perspective on business levels both in Europe, Americas and also Japan?

On the analytical side we believe that you're going to continue to see continued market growth and above the historical cyclical average being driven by the demands of Petrochemical, food, environment as well as the huge investment that we had mentioned in the pharmaceutical and life science area. In terms of electronic measurement I believe until something changes that the basic investment in manufacturing will continue to be relatively flat and that is why we are shifting our resources into the wireless R&D, aerospace and defense.

We have a whole new team focusing on electronic surveillance and we're quite happy in a flat quarter that we actually are starting to see some traction in the space. So the story is we're going to hold our own in manufacturing and wait for the return in business driven by the overall global economy and continue to make investments in the research, development and aerospace defense industry.

Okay, then one last one, if I could. On the cash of about $1.8 billion after the debt raise, what amount of that cash is actually patriated in the U.S. and what are your thoughts on how to use cash outside of U.S., whether to take a tax hit and repatriate that, to use another financing vehicle, or to look offshore for acquisitions, I guess, alternatively? That does it for me thanks.

Okay. Well obviously we have $600 million on shore and we have incredibly more than that as well, although to the spirit of your question we, like several other hi-tech companies, have a continuing challenge that we produce the majority of our profits offshore and so funding repurchase programs or other activities that are U.S. based tends to be a challenge. We've been able to beat that challenge and we expect to continue to be able to do that.

Great. Thank you very much.

And your next question comes from the line of Mark Moskowitz of JP Morgan. Please proceed.

Yes, thank you. Good afternoon. A few questions if I could. Could we get back to the chemical analysis in life sciences as far as the outlook in terms of how much of your optimism is based on just continued strength in the markets versus more Agilent specific share opportunities and then also should we anticipate any seasonality in the most immediate quarter?

Well, I think clearly see some seasonality as we move into Q1, particularly inside of Q2 but overall what's driving our business has been the market not only in the U.S. and Europe but in emerging countries such as China and India. Coupled with that is our belief that the product offerings we have, the leverage that we're going to get with the strategy and acquisition, the Velocity 11 acquisition that we believe that we are going to be able to provide very competitive work flow solutions to our customer that will allow us to continue to gain market share.

And then as far as electronic tests, obviously it's a mixed environment out there. I want to get a sense thought in terms of some of the growth opportunities, you mentioned wireless R&D, the WiMAX area is clearly helping you out but can you talk about the low end in terms of the $1,000 hand-held testing solutions, how your momentum is there versus some of the peers?

Well, we have now signed up almost 100 electronic distributors around the world and we completed stocking that environment. We're in the process of launching another round of products into this channel and so we continue to be very optimistic that we can become a significant player in what we call the basic instrument for much broader academic manufacturing, hand-held market. So we're very pleased with the progress that we have made to date.

And then as far as the outlook for the next 12 months, could that be a faster growing part of the business, A, and then B., how, Adrian, should we anticipate the margin impact from that growing part of the segment?

I think from a mixed perspective you just have to be a little bit careful that the low cost instruments tend to have a bit lower gross margin, but associated lower SG&A and R&D expense, and so from an operating margin perspective there's really no difference from the blend of our electronic measurement instruments.

Okay, appreciate that. And then Adrian, while I have you, can you talk more about the currency impact in terms of the bottom line. How should we think about that drag going forward, is it going to be mitigated somewhat through hedging?

We have a hedging policy which basically says we fully hedge the next quarter, but then we step it down by 25% per quarter. So looking ahead a year we're only 25% hedged and beyond that we're naked on the theory that over time we need to adjust either our sourcing or our prices if there are large permanent changes. What's happened in the fourth quarter, as happened in the third, is that we got whacked by profound changes in the value of the dollar that are very difficult to offset in a short period of time.

Over time if the dollar stabilizes from here, then a year from now we won't be talking about this and it will be ratably less impactful as the year goes on and along with that over time we will have to adjust our pricing and our sourcing to also mitigate those pressures. So yes, you should expect order magnitude that continued pressure if the dollar falls, if it stabilizes, let alone reverses, that will begin to reverse as well.

Okay, just lastly, echoing the comments from my counterparts earlier regarding working capital and just the strength in the balance sheet and the overall financial position, as you look out to 2008 and beyond, clearly folks are appreciative of the additional share buyback, but could you also even affirm your model more so with a dividend potentially?

That is up to our board and we are in regular conversations with them about how we get excess cash back to the owners.

Okay. Thank you.

But clearly given where our valuation is today we believe it's in the best interest of the shareholders to continue to repurchase stock.

Thank you.

And your next question comes from the line of Rob Mason of R.W. Baird. Please proceed.

Yes, I wanted to know if we could step back on the EM business. If you could break that business down between products that go into R&D applications and products that go into a manufacturing environment, just kind of walk through how those applications, separate applications, trended through the quarter which is on those two respective end markets applications?

If you look at it, the 50,000-foot level and you look at the $18 billion electronic measurement exclusive of installation and maintenance of which we have a small participation, the market is roughly split 50% manufacturing, 50% in research and development. If you look at our overall market share, our market share on the manufacturing side is substantially higher than it is on the R&D side. So that is the crux of the problem that Agilent has faced now for quite a few years.

Again, the reason we have such a large market share in the manufacturing which obviously is dominated by cell phone manufacturing, computers and the associated there's a lot of--still a lot of semiconductor components that go into that end manufacturing, is because of the breadth of our product line, our worldwide reach to be able to do business in 110 countries we have historically had more exposure to that side of the market. So that's where we are.

We clearly have a large market share in the wireless R&D, but it is substantially less than the manufacturing footprint around the world and so if you look at it from an overall industry, the wireless environment is still one of the largest segments followed by the semiconductor computer industry and our job is to realign our resources--our solutions into the R&D while maintaining our position in the manufacturing sector, but I believe the manufacturing sector recovery will be driven by global economic consumer-based driven activity. I think we've done a good job maintaining our margins in a tough environment.

We will continue to have solutions for our customers in this space as they evolve into both low end cell phones and high end cell phones as they continue to try to get capital costs out of computer and consumer products, but the big growth opportunity which we are getting traction is providing integrated solutions from the core design, conformance test, radio test and then, of course, ultimately support manufacturing as these new products go into production, but the big emphasis is in this R&D and conformance testing. Conversely, aerospace and defense where we do over $600 million a year, there's just a continued opportunity in the surveillance, support of electronic warfare and we have refocused and specialized our teams to be able to capture more of that market.

Bill, would you say that as you went through the quarter that you sense really no change in demand from the R&D markets from a market standpoint, share gains excluded?

Yes, this is Adrian and we generally speaking the R&D market had steady 7% year to year growth throughout the quarter, no gain or loss of momentum. Manufacturing market that Bill was talking about was on average down about 2% and as we described, it's been coming up from or maybe (inaudible) bottoming is perhaps the best way to put it after the rapid declines in the first half, the 7% decline in the third quarter it was down just 2% in the fourth quarter. So clearly seeing the bottoming there.

Aerospace defense which Bill also talked about, it was up 15% and that's the type of business that doesn't flop around a lot. It's a long cycle business, so we feel very strongly about that one and other general purposes up about 3% year to year.

Okay. That's helpful and then Adrian, just real quickly, did you give a number--excluding the new debt that you just issued, did you give a number on the amount of cash that's held domestically?

We had 1.8 and we had debt of 600, so the net cash is 1.2.

Okay. Thank you.

And your next question comes from the line of Deane Dray of Goldman Sachs. Please proceed.

Thank you. Good afternoon.

Hi.

I would like to hear some more color around the weakness you saw in the semiconductor in the computer side of the business. What are you hearing from your customers? Is this a CapEx issue or do you think you may have lost some share in any of these markets?

I think that overall in terms of losing share we continue to hold our own moving forward. There clearly has been in some of our competitors a launching of new product lines moving forward that always puts short term competitive pressure on even though our revenues were flat in our parametric tests where we have a very large market share, the outlook is clearly slowing into Q1. So overall, we believe in a very strong competitive situation, but that segment overall from a spending standpoint was clearly down for us in the quarter.

How about you mentioned parametric. What about logic analyzers and scopes, the high end scopes?

Our logic analyzers and the high end scopes, in fact, as Adrian mentioned compared to a tough compare we're down slightly year-over-year.

And you just think that's overall market as opposed to share or there's some of the instances where your competitors have come out with new products?

I believe that part of it's market, part of it is that our competitors over that period of time have launched a new product line.

You know what this market is like is that a year ago we came out with a whole new refreshed product line and we had a huge surge in volume and good competitors eventually are going to react and upgrade their product lines. They just did that and so there's a little bit of competitive response and this has been a very healthy industry where we have sort of gone back and forth competing on technology and that's going to continue.

Sure. We've seen that leapfrogging pattern for a long time now, but that also brings me to the next question. I'd love to hear, Bill, and then Adrian, both your comments on the acquisition or pending acquisition by Danaher of Tectronics, and how might this change Agilent's thinking about consolidation and test and measurement markets going forward.

We don't make specific comments about acquisitions inside of our industry and particularly ones that haven't completed yet, but needless to say having two good solid competitors joining forces is something that we need to be prepared for, but our fundamental strategy to compete, our investment strategy to be the differentiator in technology and customer satisfaction continues and we will continue to make those investments and compete on innovation and customer support.

Are you seeing any new competitors in potential M&A that you've looked at? And the reason I ask is I went to an analyst meeting this week with Honeywell and they could not have been louder and clearer about their intention to build out their test and measurement platform further. So do you have Danaher moving in and I would think a business as usual look at consolidation may not be the right strategy for Agilent here.

We've made 15 acquisitions over the last two years. We will continue to look at the marketplace and react appropriately and as soon as we make a decision that is approved, we will make that announcement.

Okay, and then, Adrian, just in terms of the news that you all will not be excluding restructuring charges which is terrific from a quality of earnings standpoint, but then is there $20 million that is going to be done in 2008, is that going to be included or excluded?

No, that will still be proformad out. The point we were trying to make is that when we do, as Bill mentioned do restructuring, you can't do--snap your fingers and have this all done instantaneously, particularly with respect to people, severance costs. You have to time that to the actual exit of the people which has to be feathered particularly outside of the U.S. So the point was we are done with the actions that we have taken programmatically what anybody would call extraordinary and so some of those recognitions of cost will lag into 2008, that's the $20 million I referred to, but from a program perspective we're done. The multi-year restructuring, extraordinary restructuring of this company, has been completed.

Got it.

Again, the $30 million of expense savings that you'll see moving forward are very specific on our monitoring business that you know that we have struggled in. We have size reorganization. While the revenue is down, it is back to profitability.

We have consolidated our manufacturing system business, or there was more consolidation, which is really everything that supports contract manufacturing, optical inspection, x-ray inspection and circuit test. We moved a lot of that support into Asia where most of the business is and kept the key core people in the higher cost countries but really wanted to streamline that operation and we also made some adjustments to our global infrastructure, our corporate functions, to make sure that we're well positioned moving into FY '08.

And last for the cash position, Adrian, just because this is a hyper sensitive topic right now, the investments that you have for that cash, any of that include asset back commercial paper, anything that would be at risk at this stage?

Zero.

You want to say that one again?

Zero.

Okay, good. That's terrific to hear and then this is the last one. Did I hear correctly talk about a blast from the past, did you comment on the condition on photonic testing?

You did.

I have to ask what are you seeing?

That's a very small business these days but, in fact, the wire line business has been picking up and there are requirements to add capacity for the broadband especially for the video and so our photonic test business has been picking up.

Great. When you say a small scale, approximately where does that fit today?

It's the smallest of the businesses that we pay attention to.

Okay. All right. Appreciate, thank you.

And your next question comes from the line of Ajit Pai of Thomas Weisel. Please proceed.

Yes, good afternoon.

Hey, Ajit.

A few quick questions that I think you partially addressed both of them, but would love to get some more color there. The first one is just talking about inflationary pressures, outside of currency, I think you addressed the currency side but are you watching wage increases even in local currencies, and also in the prices of the materials that you've been purchasing rise recently? And then on the same note I think you did mention that given the set of new initiatives in electronic measurement while they might not--some of them particularly the low cost intimidation might not be much higher on the gross margin side and the hand-held instrumentations and the operating margin side they do help. So could you walk us through why sequentially in year-over-year the operating margins in electronic measurement actually went down despite higher revenues in the October quarter?

Well, first of all, in term of inflationary pressures, the Sari's in Asia and China and India are clearly increasing quite rapidly and that's part of the business that we need to focus on. The second thing that has changed is the cost of logistics has moved given the price of oil. I mean that number has moved as we move instruments around the world and again, they're relatively heavy.

On the flip side of that, though, we have always had a very rigorous program in our manufacturing organization to continue to offset costs, improve productivity, improve the overall efficiency and so actually if you look at the overall--our gross margin structure from a company, we continue to do quite well given the pressures and some of the issues that Adrian has outlined particularly in some of these currency issues moving forward. The manufacturing footprint on the electronic measurement is clearly competitive and I actually thought the team on flat revenues did one heck of a job holding their gross margins.

And on the operating margin side?

Ajit, let me try that.

Again, what we have is a discontinuity or if you will, a mismatch in some cases between the currency of the revenue and the currency of the production. Historically and during times when you have more normal gradual movements in the dollar, that's not much of an issue and I think there's only been two times in the last six years we've really talked about currency. When you have such huge dislocations as we've had in the last two quarters, some of these things do become slightly disconnected.

An example I'd give you is Malaysia, the ringgit has been tied to the dollar for a long, long time but has recently become disconnected from the dollar and is tracking more closely to the yuan, the China yuan and so we have very significant production that takes place in Malaysia. Most of those products are invoiced in dollars and so we're going to get a margin squeeze in the short term as local currencies are converted back into dollars. It's not a long term thing. We will make those adjustments, but that's the nature of what we're struggling with along with as Bill said some real cost increases related to trade and logistics.

Right, and the cost increases that you're seeing right now particularly the wages going up in some of the emerging markets, are you able to pass on some of those or all of those to your customers or you're still not being able to do that because of the competitive environment?

The competitive environment really hasn't changed, but we--as Bill said, we really have a very rigorous program of productivity improvements and we have not been particularly feeling significant wage pressure. In fact, our wage increases on average are no higher for '08 than they were in '07. What is happening is that we through our variable pay programs are rewarding our employees when we achieve superior performance. They're getting a piece of that pie through our variable pay program.

Historically coming from our roots in HP, we've had a very high fixed salary and as Adrian talked about, we have systematically over the last three or four years moved to a more variable component that obviously then is tied directly to performance of the Company and not tied to inflationary salaries. We are absolutely committed to be competitive in the test and measurement market and versus the big top technology companies in the world. We have almost a 90% acceptance rate to join the Company. So we're competitive, but we have clearly moved a lot of our compensation into a variable cost structure tied to performance, not tied just to the fixed salary that we have historically done.

Got it, thank you so much.

And your next question comes from the line of Will Stein of Credit Suisse. Please proceed.

Thank you. Bill, I'm wondering if we can take a step back and look at the broader economy. There's so much commentary out there today about potential slowing and yet you're endorsing the street view for next year and I think the guidance is pretty much in line with the consensus for the coming quarter. Any comments in terms of what you're hearing from customers and your CEO counterparts out there?

It's the topic and again I'm biased by Silicon Valley. I think and again not to speak for the CEOs in the Valley, but in general the signal of noise ratio of issues of liquidity, housing, gas pricing is high, but the underlying demand for business and outlook continues to be okay and we're all nervous about this. You have an election year, historically recessions don't start before the election. So we're all very, very cautious moving forward, but the underlying demand for high quality solutions continues.

There's a huge investment going into the next generation of wireless and IPTV, biologics, the university structure and again I noted before if you look at the billions of dollars that are being granted to universities in the United States, universities in China, India and Europe to be able to build facilities for the next generation, the nano technology, looking at semiconductors, material science, life science, it is staggering the amount of money that is going into the whole research area around the world and typically when there's nervousness on the consumer side you tend to see more investment in infrastructure particularly driven by government and we're clearly seeing that and you're seeing it being in California the amount of money that is being invested by the University of California alone in terms of nano technology, stem cell research is just enormous opportunities for a measurement company such as ourselves.

Okay, and then just one point of clarification and then just a quick follow-up as well, I think we heard you say today that you guys have more exposure in the electronics measurement business to manufacturing and less to R&D and I thought that we had been kind of conditioned to think the other way on that, that you guys were really more exposed to R&D trends than manufacturing and then I have a quick follow-up on the buyback.

Well, I'm sorry, any misunderstanding, we've been very clear for many years because of our size and breadth of product line, our exposure has always been in manufacturing. Give you an example. We can set up a cell phone test line anywhere in the world in four to six weeks and that's the capability that not all of our competitors have, and we can do the total solution. So we have always had more exposure on the manufacturing side. Clearly before the restructuring where 40% of the Company was semiconductor related, that was by far more volatile than the manufacturing segment and we of course divested that but we still have a large manufacturing footprint in relationship to our competitors.

Okay, that's great and then, Adrian, perhaps a quick one for you.

The buyback sounds similar to last time, $2 billion over two years. That was, of course, accelerated and if we look at the cash generating ability that you guys seem to continue to be able to do very well and it makes me think that $2 billion over two years gets us to the same total leverage position that you're at today which is still in a net cash position, in other words, it doesn't really move the needle. You're planning essentially to buy back about in line with your cash generating ability, do I have that right? Is there a sense that maybe this could be accelerated at some point?

I'm not going speculate on whether it would be accelerated. I think this is--the spirit of your arithmetic is right. We're not creating quite a $1 billion per year yet, getting close but not quite a $1 billion per year in free cash flow, but we don't make much of a dent and we have said in the medium term we want to get to zero net cash position. So we'll continue to keep our flexibility, but I think the spirit of your question and arithmetic is right.

But given this environment, the issues of liquidity, the economy, having a prudent position with the board moving forward I think is the correct one. We need to continue to look at strategic investment. That's the number one priority that we have talked about and I think we have a very strong track record of being shareholder friendly when it comes to making the right decisions that we moved forward.

Very good. Thanks very much, guys.

And our last question comes from the line of David Egan of Lehman Brothers. Please proceed.

Thanks very much. I thought we might have a few questions regarding food testing. Obviously with the market growing about 9% and you're growing at 18% and you grew 20% last quarter, just wondering if you thought that moving into next year into '08 you think that you'll be able to maintain these twice the market growth? That's first. The second is if you could just provide us a little bit of color around China and whether you're seeing accelerating growth there and which products you think are generating that and then overall which competitors do you think you're taking share from? Thanks very much.

In terms of the overall food testing industry I wouldn't suggest that our growth momentum can stay at that level moving forward and again, that is not in the guidance or expectations moving forward, however, there is a lot of opportunity in the food industry given the issues we have. The United States only tests 1% of the food coming into the country and so I think we are well positioned in this area, but--and again, hope we can continue that growth momentum, but again just the mathematics are against you.

In terms of China, the opportunity in the food and Petrochemical in China continues to grow rapidly. Actually what has changed recently is the increased investment of pharmaceutical. As you know, they had real problems with their equivalent of the FDA. They have brought in a new senior leader to run that and so the big change that we're seeing in China is the sort of the reacceleration of investment in the pharmaceutical and biotech that given some of the issues that they had slowed down dramatically.

In terms of making comments of who are we taking market share, we never make comments of that. Our competitors say that they're not losing market share, so we are very pleased that we continue to expand the overall market.

Thank you.

I would now like to turn the call back over to Mr. Rodney Gonsalves for closing remarks. Please proceed, sir.

Thank you, Akia. With everyone online, I want to thank you on behalf of the management team for joining us today. We look forward to seeing everybody in Santa Clara on December 11th for our Analysts Day. Again, thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.