安捷倫 (A) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Agilent Technologies Incorporated conference call. I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the call. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Rodney Gonslaves, Vice President of investor relations. Sir, you may proceed.

Thank you, and welcome to Agilent's second quarter conference call for FY 2009. With me are Agilent's President and CEO, Bill Sullivan, and Executive Vice President, finance and administration, and CFO, Adrian Dillon. After my 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 the businesses. After Adrian's comments we'll open up the lines and take you questions. In case you haven't had a chance to review the 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 onto our webcast module from our website you can click on the link for supporting materials. You will find additional information, such as our end-market revenue break-out 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 measures you will find on our website the required reconciliation to the most direct comparable GAAP financial measures. In addition, I'd like to remind you that we will make forward-looking statements about the 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 the Company's most recent filings with the SEC to get a more complete picture of all 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 quarter. Lastly, and before I turn the call over to Bill, I would like to note that Bill will be presenting at the JPMorgan technology conference on Monday May 18, and Nick Roelofs and Mike McMullen will be at the Deutsche Bank healthcare conference on Tuesday, May 19.

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

Thanks, Rodney, and hello, everyone. In a few moments Adrian will provide you with a detailed analysis of our second quarter results by business and geography. I would like to provide a high-level overview of our results and the overall business environment. Agilent had a non-GAAP earnings of $44 million. or $0.13 per share, down 72% from last year. Revenue of $1.09 billion was down 25% from last year while orders were down 33%. Partially offsetting the revenue decline we continued to reduce both expenses and working capital, resulting in positive operating cash flow of $137 million, as we ended the quarter with net cash of $922 million.

The fundamental cause of Agilent's revenue decline is the continued order and revenue weakness in our Electronic Measurement group comprised of Electronic Measurement and Semiconductor & Board Test reporting segments. Group orders declined 43% and revenue declined 36%. resulting in an operating loss of $22 million. The major driver of the order and corresponding revenue decline was the continued reduction in investment in manufacturing test. As an example, wireless manufacturing was down more than 60%, now representing only 4% of the Company's revenue.

There were a few bright sports. Investments in China's 3G is increasing, but with very competitive pricing, continued investment in LTE, stable aerospace and defense spending and increased investment in education. Due to the 43% decrease in orders in Q2, we expect that the Electronic Measurement group will continue to decline in Q3 versus Q2. While there's enormous uncertainty, we do see some signs of stabilization. We're expecting Electronic Measurement group orders at about the same level as Q2 in Q3 and then expect a sequential increase in orders in Q4. The reason for our hopefulness are: Potential order funnel did increase over the quarter of the quarter; quoting activity has clearly increased in the quarter; and we have actually received orders from customers that we have not heard from in many months. In order -- if orders stabilize in Q3 and are sequentially higher in Q4 we can expect to return the Electronic Measurement group to be profitable in Q4 of '09. Likewise, we anticipate that the Electronic Measurement group will return to double digit profitability in Q2 of 2010 as we complete our restructuring and assuming the volumes at that time are about equal to this year's Q2 revenue.

In summary, our top priorities for our Electronic Measurement group is to return to profitability while ensuring we maintain our leadership position in the key markets; LTE WiMax, China 3G and aerospace and defense. As an example of our continued efforts to introduce leading-edge products we have recently released six new models of our economic oscilloscopes, as well as four new models of our InfiniiVision 7000 series oscilloscopes. In addition, we continue to release measurement solutions based on next generation wireless. For example, we recently released the first LTE realtime signal generator and channel emulation solutions for base stations. We continue to add new capabilities for the analysis of base stations and handsets across all of our product platforms. We are driving to have the most extensive LTE test solution in the industry.

Moving on to our Bio-Analytical Measurement business, revenues of $498 million, or 46% of Agilent's total revenues, were down 6% from last year. Operating profits, significantly helped by the reduction of corporate expense and temporary pay cuts, were $89 million, slightly higher than Q2 of last year. We continue to be very pleased with the performance of our Bio-Analytical Measurement business even though we continue to experience weakness in the pharmaceutical, petrochemical and environmental markets. Our academic and government revenue increased by 10% over last year. Our LCMS and microarray platforms continue to do very well, up more than 30% from last year. Food safety revenue is up 30% and our business in China continues to do very well.

We're expecting a 10% decline in our Bio-Analytical Measurement revenue in the second half of fiscal 2009 over the previous year; however, our priorities remain the same. Number one, continue to invest in our core separation detection instrument platforms; GC, LC and mass spec. You may have read about our recent introduction of our 1290 Infinity LC, offering the best-in-class spec for speed, resolution and sensitivity.

We continue to make major investments into the genomics market. We have recently introduced the SurePrint third generation CGH CNV Microarray with one million probes in a 1X3 inch slide. We have also introduced the SureSelect Target Enrichment System, which improves the cost efficiency of sample preparation for next generation sequencing. The capability we have gained from the acquisition of Stratagene has been a strong addition to our genomic efforts. And finally, we continue to focus on improving operational efficiency, particularly in manufacturing, to help us offset the increased pricing pressures in the industry. Even with the slowdown in our Analytical business we will continue to invest in R&D and customer support to ensure we can maintain and grow our market position.

As we noted in our press release, we expect full fiscal 2009 revenue to be down roughly 25% from last year. Consistent with our operating model, this revenue performance would suggest an adjusted EPS of $0.65 per share. We should remain operating cash flow positive, inclusive of our restructuring charges. Our top priority is to return to the Electronic Measurement group to profitability while ensuring we remain the leader in high-performance electronic instrumentation. Likewise we will continue our investment in Bio-Analytical Measurement, with particular focus on academic and research, life science and the food industries. We have a rich funnel of new products and we believe we can continue to outperform the market.

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

Thank you, Bill. Good afternoon, everyone. I'm going to offer a few overall perspectives on the quarter for Agilent, review the performance of our three business segments and conclude with some thoughts about the outlook for the second half of fiscal 2009. Then I'll turn it back to Rodney for Q&A.

In the second quarter Agilent continued to deal as aggressively as possible with the most difficult economic environment we've seen in our careers. Revenues of $1.09 billion were down $365 million, or 25% from last year. Conditions in our Electronic Measurement and Semiconductor & Board Test markets were particularly tough, with revenues off 33% and 63% respectively. As a result, we announced and began to implement a major restructuring that will reduce annualized costs by $310 million and return these segments to double-digit profitability on the same volumes as we experienced in Q2 of this year. As expected, conditions in Bio-Analytical markets also weakened in the second quarter, but with segment revenues only off 6% and about flat adjusted for currency we believe we significantly outperformed the market and segment operating profits actually improved from last year, a direct result of the aggressive actions we've taken across Agilent.

Overall we generated operating profits of $67 million in the quarter, off $148 million, and operating profit decremental of 40.5%. Adjusted net income per share of $0.13 was consistent with Agilent's operating model and equal to analyst expectations. We also stayed focused on the balance sheet and cash generation. Compared to last year's Q2 working capital is down by $228 million. Inventories are still higher than we'd like compared to revenues and 11 days above last year, but they did drop $34 million during the quarter, and our receivables remain best-in-class at 47 days outstanding, actually two days below last year. Overall we generated $137 million of cash from operations during the quarter. ROIC fell to 8% this quarter compared to 24% one year ago because of lower earnings.

During the quarter we suspended our share repurchase program, buying back only $32 million of stock, and we ended the quarter with net cash and short-term investments of $922 million. In short we are doing our best in these extraordinary circumstances to control expenses while maintaining those investments critical to our future, to aggressively manage the balance sheet, generate cash and generally to deliver operating results consistent with Agilent's operating model. That's our commitment to performance over the cycle, good times and bad.

Turning to the numbers, we had orders in the second quarter of $1.026 billion, down 33% from one year ago. Second quarter revenues $1.09 billion were down 25% from last year, or down about 21% in local currency terms. Revenues in Electronic Measurement were $558 million, down 33%, Semiconductor & Board Test revenues of $35 million were down 63%, and Bio-Analytical revenues of $498 million were down 6% from one year ago. Geographic distribution was surprisingly uniform around the world; Americas being off 25%, Europe 24%, Japan 32% and other Asia-Pacific 22%. Turning to gross margins, our second quarter gross margins at 52.1% were about four points below last year, with the decline due entirely to volume and a $6 million increase in E&O expense. Semiconductor & Board Test gross margins at 26% were off 25 points from last year due to dramatically lower volumes and Electronic and -- Measurement margins at 52% were seven points below last year. Bio-Analytical gross margins at 54% were 1.5 better than last year because of improved margins in our life sciences businesses.

Given the difficult environment we have been very aggressive about controlling operating expenses. Second quarter expenses were down $103 million, or 17% as reported, and down 12% adjusted for currency. The $28 million drop in the payout from Agilent's variable pay program was responsible for 27% of the total decline in OpEx compared to last year. As reported, R&D was $152 million in the quarter, down 16% from last year and 13.9% of revenues. SG&A was $349 million, down 18% from last year and 32% of sales. The Company second quarter operating margin was 6.2%, down 8.5 points from last year on the much lower volumes and about one-half point, or $0.02 per share better than the consen -- than the analyst consensus.

Other income and expense was down $11 million from last year, with an $18 million drop in net interest income partially offset by a $5 million pickup in other income. Incidently, this seems to be an area where the analysts are consistently missing in their estimates for Agilent; this quarter by about $8 million or nearly $0.02 per share. The arithmetic is that we pay about a 200 basis point spread on the difference between our $1.5 billion restricted debt and the corresponding restricted cash. We also paid 6.5% on our $600 million senior note. At the moment we make less than 1% on our $1.4 billion of unrestricted cash, which works out to about $15 million of interest expense per quarter. Our tax rate during the quarter was 21%. Pro forma net income of $44 million, or $0.13 per share, versus $0.46 per share one year ago. (Inaudible), share-based comp of (inaudible) in this year's second quarter compares to $19 million one year ago.

Going from operating earnings to cash, page 5 of our press release, financial tables, provides a detailed reconciliation from non-GAAP to GAAP income. Summarizing we had non-GAAP income of $44 million, we had restructuring and impairment charges of $98 million, non-cash amortization charges of $12 million, and taxes and other charges of $35 million to get to GAAP net income of $101 million loss, or $0.29 per share. A comment be on our second GAAP tax rate, which was a charge of $43 million despite the GAAP pre-tax loss of $58 million. Like many high-tech multinationals we have a component of our taxes that is fixed regardless of profitability and a component that varies with profitability. In essence, given the very significant restructuring charges we are accruing and the much lower operating activity we expect today compared to earlier this year, our expected fiscal 2009 GAAP pre-tax profit has dropped by roughly $500 million. That much lower full-year expected profitability requires us to accrue a much higher proportion of our fixed tax expense up front than previously anticipated, hence the $43 million year-to-date catch-up charge.

Turning to cash, receivables were $569 million, down $222 million from last year at this time. DSOs, as I mentioned, are 47 versus 49 last year. Inventory, $608 million, down $66 million from last year but up 11 days from last year on a days-on-hand basis and 107. Total cash generation from operations was $137 million and we spent $34 million on CapEx, or free cash flow from operations of $103 million. During the quarter we repurchased $2 million -- excuse me, two million common shares for $32 million before suspending the program. We also had antidilution equivalent to about 600,000 shares due to the quarterly average stock price falling from $18.32 in the first quarter to $15.93 in the second quarter. We ended the quarter with 344 million fully-diluted shares outstanding.

Okay, turning to segments. As expected we saw a clear weakening in Bio-Analytical Measurement markets during the second quarter. Orders of $481 million were down 16% from one year ago, revenues of $498 million were off 6%, although currency was responsible for virtually all of that year-to-year decline. Geographically weakness was most pronounced in Europe, which was off 16%, while the Americas were down about 10%. Asia was generally strong, with Japan up 7% and other Asia up 12%, including a 29% year-to-year increase from China.

By product platform, both GCs and LCs were down double digits from last year, while GCMS was stable and both microarrays and LCMS systems continued to be up double digits from last year. Life sciences revenues of $241 million were down 7% from last year. Revenue from pharma and biotech was down 11% from last year. The replacement business continues to be weak and replacement cycles extended, but investments are still being made in new technologies. Biotech demand is under pressure, as small firms are seeing a decline in VC funding and some are near bankruptcy. While the overall biopharma market remains challenging, we are encouraged that a late quarter LC -- that our late quarter LC orders have provided a sign that demand may be stabilizing, mostly in the US.

Revenue in the academic and government market was up 10% year over year, with robust demand for both mid-range and high-end mass spec systems, as well as for microarrays. The various stimulus plans have caused quoting activity to pick up around the world, but we don't expect a notable difference in actual spending before our fiscal year end. Second quarter chemical analysis revenues of $257 million were off 6% from last year. The clear stand out for the quarter was food safety, which continued its strong momentum, up 30% year over year, while weakness was seen across the industrial markets, with all posting double-digit decline. From a platform perspective demand remained weak for GCs and relatively strong for GCMS, particularly the new GC Triple Quad and for LCMS systems. Demand related to food safety testing remains extremely robust and revenue into this market was up 30% from last year. Increased regulation and testing is being spurred by several well-publicized incidents of large-scale food contamination.

Petrochemical was down 14% year over year. Although weak revenue was better than expected, with the overall drop in petrochemical market demand offset by relative strength in China. Strength in China stems from the building of new downstream plants as part of the energy initiatives announced by the Chinese government. Environmental was also soft, down 12% year over year. Private lab consolidations continue in a trend towards the formation of global testing organizations. Again, we saw strength in China related to the environment.

Bio-Analytical Measurement had a strong second quarter operating performance given the softening top line. Operating profit of $89 million was $4 million above last year despite a $32 million decline in revenues. As mentioned earlier, gross margins were up 1.5 points from last year due to an improvement in life sciences, and operating margins at 18% were two points above one year ago. Segments ROIC improved two points to 24%.

Turning to the Electronic Measurement segment, second quarter orders of $523 million were down 39% from last year. Revenues of $558 million were off 33% from one year ago, with pervasive weakness across nearly all markets and all geographies. While manufacturing, computer and semiconductor are all under extreme pressure, given low utilization rates, there are a few signs of thawing in the R&D market. Geographically Europe declined 30%, Japan was off 43%, other Asia dropped 32% and the Americas was down 31%. General purpose test revenues of $336 million were down 28% from last year. Aerospace and defense was the relative bright spot, with revenues down 2% year over year and US demand possibly stabilizing. Direct orders from the US government are growing with strength in homeland security-related applications for surveillance and intelligence, while primes are spending more cautiously. Extreme weakness persists in the computers and semiconductor submarket, with revenue down 56% year over year. The broad weakness has overshadowed a few areas of strength, such as ICs for smartphone and netbook computers.

The general purpose submarket was down 38% year over year, with electronic manufacturing under significant pressure and many customers engaged in major restructuring efforts. As Bill mentioned, there are some tentative signs of life in the semi and electronics markets, but it is too soon to tell whether it's real and sustainable or a dead cat bounce. Communications test revenues of $222 million were down 39% year over year. While down 17%, wireless R&D performed better than the other communications submarkets and sequentially spending was up 15%. Strength here was driven primarily by investment in LTE, as customers try to position themselves to win in the 3.9 [GN forging] market when the economy recovers. China LTE investments continue, as does the roll-out of TDS CDMA. WiMax continues its decline, though some opportunities do exist. Wireless manufacturing, as Bill mentioned, was down more than 60% year over year, with manufacturers simply not investing in new test equipment given low-capacity utilization rates.

Network monitoring was down nearly 30%, as continued consolidation in the network operator and service provider market is delaying investments, and broadband R&D and manufacturing-related revenue was down 55% year over year. NEM business is particularly soft, with delays in ordering resulting from tighter spending in a highly-competitive environment. Electronic Measurement's second quarter operating profit declined $126 million from last year to an operating loss of $6 million based on a 230 -- excuse me, $273 million decline in revenues. Gross margins fell by seven points due to volume and operating expenses dropped $74 million from last year. The segment decremental of 46% reflects just how severe the downturn has been. As we announced earlier in the quarter, we are restructuring the segment to reduce operating break-even by $300 million. As a result of this program, we expect that a year from now we should be able to achieve a 12% operating margin and a 21% ROIC on revenues only 3% above this quarter's level.

Finally, for Semiconductor & Board Test, activity related to the semiconductor equipment and board test markets remained virtually frozen in the second quarter, with orders of $22 million down 75% from last year, and revenues of $35 million off 63% from one year ago. All markets and all geographies are off more than 50%. The segment's second quarter operating loss from operations of $16 million represents a deterioration of $24 million from last-year's results on a $60 million decline in revenues. Gross margins fell 25 points due to lower volumes, while operating expenses declined $15 million. Earlier this quarter we announced an additional restructuring of the segment to lower its break-even cost structure by an additional $10 million.

Finally, turning to the outlook we are aware that there are some tentative early signs that the overall economy may be approaching a bottom and the greater availability of financing does suggest that the global financial meltdown may be easing. There are also some early indicators that our leading-edge markets may be near a trough. But as a capital equipment supplier our orders and revenues tend to lag our served markets by about a quarter, and in any case utilization rates remain very low. Our best guess for the second half is as follows. Our Bio-Analytical revenues will be down roughly 10% from last year and trough at that level. Electronic Measurement revenues are forecast to be roughly 37% below last year, while our Semiconductor & Board Test revenues will be off roughly 55% from one year ago. Our overall second half operating goal is to shed costs quickly enough to remain at the 40% operating profit decremental consistent with Agilent's operating model. If we are able to execute to this plan, we should be able to generate roughly $0.32 in non-GAAP earnings per share for the second half and roughly $0.65 for fiscal year 2009 on revenues that are down 25% from fiscal 2008.

With that, let me turn things back over to Rodney for the Q&A.

Thanks, Adrian. Jeri, please go ahead and give instructions for the Q&A?

Certainly. (Operator Instructions). And your ur first question comes from the line of William Stein with Credit Suisse. You may proceed.

Thanks. Can you hear me okay?

Yes.

Great. Thanks for taking my question. Wondering if we can talk about guidance by segment for year-over-year growth between the two quarters. Are we expecting to see deeper a year-over-year decline in the third quarter or the fourth quarter? Can you talk about how that's going to progress? And then I have a follow-up.

Again, as I had mentioned, the predominant issues are Electronic Measurement group, which the two reporting segments, Electronic Measurement and Semiconductor & Board Test, and the continued deterioration is in that organization in Q3. We typically always have a seasonally-higher Q4. That's usually the highest quarter, so the low point we believe, if our order scenario holds out, will be in Q3.

Great, thank you. And the cost savings, the $525 million number that was mentioned I think includes some actions that have been completed here in Q2. Can you talk about what left of that $525 million and where it's going to show up in the model? Presumably mostly in EM but if you could be more specific that would be helpful.

Yes. Well, this Adrian, let me try that. We announced back in December a $65 million restructuring that would be completed in the fourth quarter and that one is more than halfway completed at this point. In February we announced a $150 million restructuring of our global infrastructure operations that would also be completed by the end of this year, and we are about 60% -- 40 to si --so let's call it half, 50% done at this point, so we got a very quick start on that. And we just announced in March 26th the restructuring of our Electronic Measurement and Semiconductor Board Test businesses and that was the $310 million restructuring and we are about 20% done with that. And again, that's not scheduled to be completed until the second quarter of '10.

And then our goal, as you recall, in addition to the restructuring we have also, of course, had the automatic adjustment of our Agilent variable pay that we instituted years ago at a target of 10% and then secondly we have a 10% salary reduction. And so the plans that we have to get Electronic Measurement back to double-digit profits of Q2 of 2010 and essentially flat revenues of this quarter's revenue assumes the restoration of pay for our employees. So again we have a very robust self-consistent plan to be able to resize the Company while continue to invest in future technologies and ensure our employees become salary whole as we move into 2010.

Great, thank you very much.

Your next question comes from the line of Jon Wood with Banc of America. You may proceed.

Hey, good afternoon.

Howdy.

Adrian, given the parameters you discussed on the revenue and margin outlook, can you just give us a sense of operating cash flow for the year for FY '09?

Yes, I think operating cash flow inclusive of all the restructuring costs will be order of magnitude $100 million positive.

Okay. And then can -- Bill, can you give us some sense of the order book in Bio-Analytical in April compared to the Q2 experience of -16%? So did you see a bounce in April?

Yes. We saw a bounce in April, but, of course -- we typically have more orders in the last month of the quarter, but there were enough signs out there that while we'll see a decrease in the second half that there'll be a more stabilization consistent with what people are saying about the industry.

Okay. And then just the consumables and services piece of Bio-Analytical can you just give us a sense of how the after market did versus the actual instrument trends?

Yes. Jon, the consumables trend was not materially different than the instrument trends, largely that's because -- of course, of the attached rates on the instrument sales. But even on the after-market sales and consumables there was clearly some inventory flushing going on on the part of our customers because we did not see the stability that you might otherwise expect in the second quarter.

Understood. Then one more. The NIH monies obviously don't start filtering into the system until probably your fiscal '10, but the money going to the other agencies -- namely DOE, EPA, and some of the other R&D, money flow outside of the NIH -- do you see that accruing sooner potentially?

You can see it at our government academic results have essentially doubled over the last course of the year so the stimulus money is clearly there. We are being very actively pursuing that. NIH though, it's just the magnitude of it is where's the number one target. But yes, we are seeing more investment in other areas. But in fairness, though, if you get down to local area, the local communities where a lot of the forensics testing's done, a lot of the environmental being water safety, they're under enormous pressure until that stimulus money flows down to them and how much trade off versus jobs versus capital investment, I think it's to be determined. The good news on the NIH spending is that it is predetermine that a certain percentage of it has to go to capital investment and we are pursuing those opportunities very aggressively.

Jon, one other element to that. Where we are seeing benefits of fiscal stimulus is in China and that does include all the factors you were talking about, particularly environmental, particularly food safety, but also life sciences research. That's really kicked in big time and it's clearly contributing to our performance.

Okay, great. Thanks a lot.

Your next question comes from the line of John Grober with Macquari. You may proceed.

Hi, thanks for taking the call.

Hello.

Congratulations on being able to navigate what's obviously a very difficult environment. I'm just curious, Bill, the restructuring mainly on the EM side but if you talk to most of your competitors on the bioanalytical side most of them have even taken restructuring charges because things have been bad and they don't expect them to get much better. What would you have to see on the bioanalytical side to be more aggressive?

Again, in the sense that we are aggressive, as both Adrian's comment and my comments, their performance is a reflection of the dramatic reduction of our corporate expenses, as well as the modification of what we've done in terms of the Agilent variable pay since the return on invested capital in the Company down, as well as pay cuts. Given our position and our opportunities that we see, right now we are staying the course. We have great product portfolio, we have great momentum, and this is a case -- and I think one of the advantages of Agilent -- where we, in fact, can make these trade offs and continue the investment in what is now the largest market in measurement and one that we continue to do very well. So I won't give you a number of a trigger point for us to be able to react, but if, in fact, that we can hold in this 10% range, continue the investment, complete the corporate structure, get EMG back to profitability, I think we're going to come out of this downturn even stronger than we entered it.

And John, just as the number, take the Bio-Analytical portion of the global infrastructure restructuring and that's worth $60 million at an annual rate lowering the break-even of Bio-Analytical. So it's significant and it's permanent.

Okay, great. Thanks for the clarification. And then can you maybe just talk about the -- strategically the Electronic Measurement side of the business? Obviously it's the legacy of what Agilent was. Do you expect revenues -- you're building for this -- obviously an environment in which revenues are just substantially lower than they've been in the past. Do you expect these revenues to ever return to these levels and just what's your outlook for that whole business in terms of how you go about figuring out the best way to monetize that business?

It's a great question and again don't have a crystal ball, but if you go back -- and, again,we've modeled this over the last ten years and where we've had two very severe economic downturns -- in fact, the correlation to the semiconductor industry is amazingly close -- what you see is a range of $2.5 billion to $5 billion of electronic measurement if you look at where the cycle is. So I believe if we execute on being a leader in LTE, the next wave of technology is wireless -- high-speed wireless connectivity -- if in fact that we executed on our ability to capitalize in aerospace and defense business there is moving forward, particularly in surveillance, and continue to be the leader in general purpose high-end instrumentation there's no reason, I believe, that as we hit the next wave of technology that you will, in fact, see that revenue return to the range that it has been.

Obviously the peak of that range was driven by the optics boom but if you look at our history we continue to see us grow when we -- when there is a new wave of technology, such as wireless connectivity, high-speed connectivity, and that we're able to capitalize on that. The restructuring that we are taking, I think, positions us very, very well. If you recall, if you go back into the 2001, 2000 crash we lost hundreds and hundreds of millions of dollars and went through just a very, very difficult restructuring. Today, while our restructuring for our employees is very, very difficult we are going to be in a very, very position -- strong position. We have reset our operating model to the 12% at the low peak of the ten years and if we catch this wave, the LTE wave, I think that we can drive some very excellent results for our shareholders.

Okay, thanks for that clarification. Last is just a housekeeping item. You chastised analysts for not getting the income expense line right and I'm just curious, is there anything else? You just have this other line and historically you've had things like government grants, et cetera, in there. Is there anything else that's in that line. or is it pretty much all just interest income versus net interest expense?

It's almost entirely net interest expense. There is some noise around the results of income statement hedging. Remember, as we've said many times, we're pretty much naturally hedged on currency, but we will deal with those outliers and the gains and losses from that minimal hedging activity also show on that other income. But I think for modeling purposes you've got to just assume that it's straight net interest income.

And then on the taxes, I would expect, given all the things you pulled out, that your non-GAAP taxes -- absolute taxes should be higher than your GAAP taxes and you spent a little bit about it on the GAAP side but can you maybe just explain again why the non-GAAP would be lower than the GAAP, even if you're accelerating some of those charges?

The non-GAAP is unchanged at 21%. We still think that is a good representation of our tax rate on operating earnings, not only for this year but in the longer-term context. The GAAP tax rate is a function of that -- of our tax structure that I was describing earlier, where essentially we can go from 100% tax rate to a 15% tax rate depending on the underlying level of profitability. We pay $50 million of taxes come hell or high water and then we pay roughly a 10% marginal tax rate as we go up in profitability and the weighted average comes down to what we think for the remainder of this year will be about a 20% rate for GAAP purposes. But under normal circumstances, the GAAP rate will be a couple points lower than the non-GAAP rate, and when we finally are able to utilize all the tax losses in the US those two ought to be the same.

Okay, thanks for those clarifications.

Your next question comes from the line of Mark Moskowitz with JPMorgan. You may proceed.

Yes, hi, this is [Anthony Luscre] for Mark. I wanted to dig a little bit deeper into the Bio-Analytical side of the business. You spoke in your comments regarding improving margins on the life sciences side offset by increasing pricing pressures, as well as you're going to kick in some operational efficiencies in the back half of the year. How should we view margins going forward in the Bio-Analytical side given that you've seen weakness in Europe but there was no comments on the CRO markets? What did you see this quarter and what do you see in the back half?

In terms of the overall margins, in a slowing environment you're just going to see more pricing pressure. The buying -- or the power goes to the buyer, and we just need very, very aggressive in that area. We were one of the first companies -- or the first company that moved our manufacturing into Shanghai. We continue to look at ways to be able to drive our manufacturing cost efficiency moving forward. We;re in the process, of course, of completing the integration of our acquisitions and, again, to be able to leverage the systems that we have moving forward, getting -- I think Adrian had noted that, that we're going to -- there's some operational efficiencies. What we've done is we bring some of our expertise to couple with the expertise of the companies that we acquired moving forward.

On the CRO, I think that it's a real mixed story. There are lots of pressure on these companies and any type of a slowdown contraction of big pharma there's just going to be lots of collateral damage moving forward. As we have noted, we believe that the academic, research, government market is at least equal to the pharma biotech market and that's where we, and of course our competitors, are really focusing on.

Okay, thank you. And then on the EMG side, you mentioned customers coming back in terms of quoting and/or orders that you hadn't seen in a while, what verticals and what regions are you speaking of there?

Well, I'll talk. My anecdotal story, I got a call about 10:00 o'clock at night from Asia that we actually got an order on our parametric test and that's in the middle of our semiconductor business. And again, it's been a strong position for us and there's just been no orders and people are so excited that we actually got an order they had call me up and shared the news. So what we mean by that is that we have a very, very deep customer base and we're getting people that you just didn't really hear from hey, say, maybe that there is some stabilization in the world economy, the investment that we're putting off, will the budget free up? And as a result of that the funnel's higher and the quoting's higher.

The problem has been -- is the close rate has dropped dramatically over the last few quarters, and this is the part, because so many signatures that are required to get these capital investments made. And I always joke, well, it used take a day to get an order through the system at a company for our customer, now it takes a week, a week takes a month or sometimes CEOs. And, unfortunately, I've been one of those myself, basically approve every capital investment and it's really hard to get these close rates. So, again, this is all anecdotal. People want to see good news, but there's some evidence out there but we have no illusions that this thing will turn around rapidly, or at least that's our view.

Thank you very much

(Operator instructions). Your next question comes from the line of Rob Mason with R.W. Baird. You may proceed.

Yes, good afternoon. Nice job on holding the decremental. Adrian, I guess if sum total the collective savings that you've announced to date from your various programs it does sum to a number around [$900,000 to $1 million], of which you referenced $525 million being more structural related to the corporate infrastructure and the EM restructuring. And then you mentioned that the pay reductions would likely be reversed effective next year. That still leaves roughly $285 million. As we think about going forward into next year, what -- how should we think about that as a variable component or structural savings?

I think you should think about it a variable component but tied, absolutely, directly to the profitability of the Company. Remember we have a targeted 10% variable pay where the target is when we hit 21% return on invested capital every employee gets a 10% variable pay bonus, but it doesn't get to 10% until we get to that 21% and it scales automatically with our results by segment.

Roughly the guideline we have, for every dollar we make in additional profit then $0.20 to $0.25 would go back into the employee pay pool.

Okay.

So that's the good news as that thing scales up. As Adrian said, it's built into the model. You just can't over estimate the increment to the bottom line because we're so far -- well, we're still above threshold. We actually had a Agilent variable pay this half, which I just announced, so we're still above threshold for the employees, but essentially eight point -- eight percentage points below the target of 10%.

Well, let me ask, is the $285 million number that you put forth in December, is that still a good approximation for fiscal '09 in terms of savings?

Oh, absolutely.

Well, certainly.

Absolutely.

Okay. And then just maybe on the restructuring thing, what are you building in operating cash flow this year in terms of restructuring payments, cash out?

About $200 million.

Okay. And then maybe last question. You did speak to some tentative signs, Bill, stabilization come back in EM. If you think broadly for your guidance for the year sales are down 25%, how have you gone about handicapping some of these signs, Bill, rolling into that number?

Well, we -- it's a good question. We're just trying to take our best judgment in terms of what we're thinking happening, so as I said in the call, we're really looking at if the orders -- will the order [floor] be this quarter and next quarter. That's the premise. So if the orders are essentially flat Q2, Q3, we have a continued restructuring kicking into place and then we see our normal seasonal uptick in Q4 then we hit the trough and then your confidence in the model we have is very, very good. So that is the real key is what is the order rate in Q3. And quite honestly we thought we would see more of the floor in Q2 on the Electronic Measurement side, and we have not, and so we have -- as I was clear we are assuming that you will see a stabilization in orders in Q3, a continued decrease in revenue in Q3 in Electronic Measurement.

Rob, let me correct myself. The number we're using this year for cash restructuring is $225 million..

Okay. Thank k you.

Your next question comes from the line of Agit Pai with Thomas Weisel Partners. You may proceed.

Good afternoon. A couple of quick questions. The first one is just talking about some of the pricing deterioration you talked about because capacity utilization at your customers is low. Can you give us some color as to specific markets, both in terms of geography as well as products, that you're seeing that's particularly pronounced in?

I think the number one part of the pricing is in the Electronic Measurement side and this is both part of our reporting segments in China. That is where there's activity. The full roll out of 3G given this environment There's a fixed number of competitors and the customer knows that. So what's so key in there is that we've got to have differentiable solutions, but in cases where the specs are close enough with our competitors it is very, very tough pricing. So that is by far the -- I think the biggest pressure. And on the analytical side, for us it's going to be in what replacement business that there is, what new mass spec business that we can take. You get into these situations, particularly in accounts that may not be, what I call house accounts, that are predominantly one vendor versus another where the pricing can be quite competitive.

Right. And then when you're looking at the Electronic Measurement side I think you just provided some -- an anecdote about biometric desk getting an order a few days ago, what do you see as driving that particular order? And for that business, especially on the biometric (inaudible) since competitive pressure is now even less than they have been historically, how do you see the margin structure of that particular business operating in the next cycle versus the past cycle? Are you going to be getting better margins and pricing in future cycles?

We will continue to offer our customers very fair pricing for this contribution that we make. The biggest driver for this, of course, will be any sort of stabilization in semiconductor demand.

So this particular order that you saw, was it a capacity enhancement, was it a new customer that's expanding because of a new product? What drove this particular order?

I think that it was related to capacity, but that's my opinion. Given that we have most of the market, I don't think it was a new customer.

Got it. And then just moving to the chemical analysis side of your business, I think you've talked about revenue only being down about 6% relative to last year. Now I think food safety has been extremely strong over there -- I think you mentioned up 30% -- but the rest of the business, especially on the petrochemical side and some of other set of chemical -- petrochemical derivatives, are you seeing things beginning to deteriorate over there? Are you seeing things roughly flat with a somewhat soft (inaudible) quarter? How are you seeing things progressing there?

Agit, I think I mentioned in my comments that the industrial markets were all down double digit so there's no surprises there on the chemical side. The other area of strength is the academic and government, which has been very strong, again up 10% from last year. And from a geographic perspective, as we've talked about, China is up and it's up 29% across the board from last year. So I think those are the different dimensions to it.

Right. So from a -- on a going-forward basis I think you've already talked about a lot of the cost -- the cost cutting that has been primarily on the Electronic Measurement side and not on the Bio-Analytical side, except for the ones that you called out in response to the last questioner. But over there are you taking any actions over and beyond what you discussed about variable pay, et cetera, on the structural level for any further consolidation on the Bio-Analytical side?

First order the answer is no. Again, this is the hottest hand we're playing. We're going to continue to make that investment. Obviously we would have to adjust if somehow the business deteriorates a lot below what we expect, but we have, I think, a very strong portfolio, and we will continue to do that. Likewise, in Electronic Measurement I'm going to make sure that everyone's clear, even though we are restructuring and sizing the manufacturing for the reality of having a much lower volume, we are absolutely committed to emerge from this downturn as -- continue the number one measurement company in the world.

Got it. And last question would just be in terms of bus dev and looking at the fact that a number of your smaller competitors have come under [serious] pressure and your balance sheet is still very strong and you're still generating cash, are you continuing to look at acquisition opportunities as the -- is the probability of something happening greater or lower from your being an acquirer than over the past two to three quarters?

We continue to look at acquisition opportunities. In the last conference that I had one big issue has been that arriving at what is the valuation of these companies when the 52 week high is in such -- everyone's recent memory. As 52-week high fades in memory I think that you could see more acquisition activity in this industry.

Got it. Thank you.

This does conclude the question-and-answer session of your conference. I would now like to turn the call over to Mr. Rodney Gonslaves. You may proceed, sir.

Thank you Jeri. For everyone on line I'd like to thank you on behalf of the management team for joining us today. Again, thank you very much.

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