安捷倫 (A) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Agilent Technologies Inc. earnings conference call. I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Rodney Gonsalves, Vice President of Investor Relations. Please proceed, sir.

Thank you, and welcome to Agilent's third quarter conference call for FY 2009. With me are Agilent's President and CEO, Bill Sullivan, and Executive Vice President Finance Administration and CFO, Adrian Dillon. After my introductory comments, Bill will give his perspective on the quarter and the business environment. Adrian will follow with his review of the financials and the performance of each of the businesses. After Adrian's comments, we'll open up 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 on our webcast module from our website, you can click on the link for supporting materials. You will find additional information such as our in 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 measures, you will find on our website the required reconciliation to the most directly comparable GAAP financial measure. In addition, I would like to remind you that we may make forward-looking statements about the future financial performance of the Company that involves risks and uncertainties. These risks and uncertainties can 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 of 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.

Lastly, before I turn the call over to Bill, I believe everyone on this call is aware of Agilen'ts pending $1.5 billion acquisition of Varian. Given that our deal hasn't closed and we're currently in the regulatory approval process, we will not be providing any additional details on the deal, post closing integration, synergies or cost savings. For information on the acquisition, we recommend that you review Agilent's and Varian's most recent SEC filings.

Now I would 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 third quarter results by business and geography. I would like to provide a brief summary of the results and discuss the key themes of the quarter.

Given the extraordinary difficult economic conditions around the world, Agilent performed well in our third quarter. Non-GAAP earnings were $53 million or $0.15 per share. Revenues of $1.06 billion surpassed the high end of analyst's expectations. The Company, by excellent expense management and improved gross margins, the combination of these two drove a strong operating profit incremental. As a result, Agilent beat earnings per share consensus by $0.04.

These earnings along with strong asset management allowed Agilent to be cashflow positive for the quarter, even with $65 million in cash restructuring charges. We had operating cash flow of $41 million at ended the quarter with net cash of $981 million.

My first major message today is that all evidence points to Q3 hitting the bottom of the economic downturn as we had predicted last quarter. third quarter revenue is down 27% from a year ago at $1.06 billion. Orders were $1.07 billion, down 23% year-over-year. This is the first time in five quarters that orders came in higher than revenues. Orders also showed sequential growth of 4% from the previous quarter.

Moving forward, we are forecasting sequential higher revenue growth in Q4 and we believe revenue growth will continue to increase in FY 2010. Our economic measurement group, which includes our electronic measurement and semi-conductor board test reporting segments, reported revenue down 38% year-over-year at $561 million. With continued weakness across all end markets and all reagents. However, or order trend suggests signs of stabilization. Q3 was the first quarter in more than a year that book-to-bill ratio was greater than one. In addition, while third quarter orders were down 29% year-over-year, they grew sequentially. Normal seasonality at this time would have predicted a drop in quarter over quarter orders. This furthers our conviction that our Electronic Measurement Group markets have bottomed out and demand is improving.

As I indicated last quarter, we expect to return the Electronic Measurement Group to profitability in Q4 of '09 on higher revenues. Assuming that these revenue trends continue, we further anticipate that EMG, our Electronic Measurement Group, will return to double digit profitability in Q2 2010 as we complete our restructuring.

On the other side of the house, Bio-Analytical Measurement revenues for the quarter were down 8% from a year ago. Excluding the effects of currency, we were down 4%. Bio-Analytical Measurement now comprises 47% of Agilent's total business.

In Chemical Analysis, we saw strength in food safety and in china and continued weakness in petrochemical, environmental and forensics markets. In Life Science, revenues in academic and governments were off 2% from a year ago. Declines in pharma have slowed from the previous quarter. We are forecasting sequential revenue growth as we move into our seasonally high fourth quarter.

The second major message is around sequential margin improvement. Operating profit margins were slightly below 8%, up more than one point over Q2 2009 on lower revenue driven by continued cost structure savings. We began to take a progressive and proactive measures in Q3 of 2008 when the downturn was just beginning. Measures included expense controls as well as restructuring, wage reductions and exiting of some of our businesses.

Sequential margin improvement also came from gross margins. Lower manufacturing overhead resulted from these cost saving measures coupled with favorable product mix drove the gross margin expansion. Our restructuring actions to lower Agilent's revenue breakeven by over $500 million are on track. Our global infrastructure organization will complete its restructuring program by the first quarter of fiscal 2010. Our Electronic Measurement Group restructuring is also on track. With the combination of Electronic Measurement and Semiconductor Board Test, we expect to achieve a cost structure that delivers 12% operating profit on revenue of $2.4 billion or $600 million per quarter.

Please note starting in Q1 of FY 2010, we'll report Agilent in three segments, Electronic Measurement group, Chemical Analysis Group and Life Science Group. Given that our cost structure savings are on track and in light of the positive business outlook we'll restore all employees to full pay and full work weeks on the beginning of the new fiscal year on November 1st. This will result in an $80 million expense impact in fiscal year 2010.

The third major message is that we continue to invest for the future. In the Electronic Measurement Group, we're investing to maintain our technology leadership in RF and microwave while working to gain leadership in digital technology. Our focus areas continue to include aerospace and defense, wireless R&D, particularly LTE, and low cost instrumentation. Demand is strong for our new Infiniium 2000 series oscilloscope, as well as our new low end DSO 1000 series scope. There continues to be strong customer interest for our new FieldFox RF handheld analyzer.

Our performance spectrum analyzers, PNAs, as well as our PNA-X one box component test system, are being well-received by our customers. The introduction of the PNA-X 40 and 50 gigahertz systems have exceeded our early forecast and expected to be a growth driver as volumes ramp up. While we have taken aggressive actions to return EMG to double digit profitability as the economy recovers, we are committed to continue to insure we remain the leader in electronic measurement.

In Bio-Analytical Measurement, we're investing to build a leadership position in analytical tools and life science. Our microwave business saw strong adaption of our newly introduced SurePrint offerings for array CGH applications. We've also seen strong demand for the introduction of our SureSelect kit for next generation sequencing, as well as for our bioanalyzer kits. In Q3 we also started shipping our 1290 Infinity LC which has been extremely well received by our customers. Coupled with the 1290 launch, we also introduced the first column that was able to operate at 1200-bar high pressure.

During the last quarter we announced our intention to acquire Varian. Varian serves both applied and life science market with approximately 3,600 employees. This acquisition is a major step in Agilent's transformation into a leading bio-analytical measurement company. This is the largest acquisition in Agilent's history and plays to the strength of both companies. We can build on our complementary technologies and we each bring expertise and experience across different geographies and applications. We expect our combined company will be able to provide customers with a more comprehensive set of solutions across a wider range of markets. Agilent expects the acquisition to be completed by the end of the calendar year subject to customary closing conditions and regulatory approvals.

In summary, we are cautiously optimistic that the worst is behind us. We remain diligent and focused on meeting our customer needs and executing on our operating model. For the fourth quarter of FY 2009, we expect revenue to improve seasonally, where the benefits of our restructuring will become increasingly evident in our operating results. We anticipate non-GAAP earnings to be in the range of $0.20 to $0.25 per share.

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

Thank you, Bill, good afternoon everybody. 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 Agilent's fiscal fourth quarter of 2009. Then we'll turn it back to Rodney for Q&A.

In the third quarter Agilent continued to deal aggressively with the deepest economic downturn in 70 years. The good news is that for the first time in over a year, orders and revenues came in at or even a little better than expected and we delivered all of that top line upside to our bottom line. Revenues of $1.06 billion were down $387 million, or 27% from last year. Conditions on our Electronic Measurement and Semiconductor & Board Test markets remained severely depressed with revenues off 36% and 59%, respectively. Our Bio-Analytical segment also continued to weaken, as expected, with revenues 8% below last year. But, uncharacteristic for our Q3, our orders in all three segments rose sequentially from Q2, suggesting that we are at a minimum banging along the bottom of this global recession. And for our early cycle businesses perhaps we're seeing early signs of a new upturn.

Meanwhile, our restructuring actions to lower Agilent's revenue break even by over $0.5 billion are on track. All of the actions associated with the restructuring of our global infrastructure operations have now been taken. In combination with the continued restructuring of our Electronic Measurement and our Semiconductor & Board segments, we will reduce annualized costs by $525 million by mid 2010 and return those segments to double digit profitability on the same volumes we experienced in the second quarter of this year. Overall, we generated operating profits of $81 million in the quarter, off $157 million from last year, and operating profit decremental of 40.5%. Adjusted net income per share of $0.15 was consistent with Agilent's operating model and $0.04 above the average of analysts' expectations.

We also stayed focused on the balance sheet and cash generation. Compared to last year's Q3, working capital is down by $277 million. Inventories are still higher than we would like at 106 days on hand. But they are $100 million below last year's Q3 and our receivables remain best in class at 46 days sales standing. Overall, during the seasonally weak quarter for cash generation, we had positive cash flow of $41 million. Return on invested capital fell to 9% this quarter compared to 27% one year ago because of lower earnings. We ended up the quarter with net cash and short-term investments of $981 million, up $59 million from three months ago.

By way of perspective, some of you will recall that during the severe 2001 and 2002 recession, Agilent burned over $1 billion per year in cash from operations, $2.5 billion in total over 2001 to 2003 between operating losses and restructuring costs. During this downturn, which in many ways is even worse than the prior high tech bust because this time it also includes the first cyclical downturn in bio-analytical markets since 1983, Agilent will remain solidly cash flow positive.

In short, we're continuing to perform in a manner consistent with Agilent's operating model. And with the successful acquisition of Varian, we will continue the transformation of Agilent into a leading Bio-Analytical Measurement company.

Turning to the numbers, we had orders of $1.07 billion, down 23% from one year ago. Third quarter revenues of $1.06 billion were down 27% from last year, or down 24% in local currency terms. Electronic Measurement revenues were $524 million, down 36%. Bioanalytical revenues were $496 million, down 8%. And Semiconductor & Board Tests at $37 million was down 59% from one year ago. Geographically, the Americas were off 28%, Europe 31% and Asia-Pacific down 22% from one year ago.

Third quarter gross margins at 53.3% were about 3 points below last year and actually 1 point better than last year on a volume adjusted basis. Notice that gross margins were also up 1point sequentially on lower revenues than in Q2, the result of good mix and restructuring benefits.

Given the difficult environment, we have continued to be very aggressive about controlling operating expenses. Total third quarter expenses were down $94 million or 16% from last year. The $26 million drop in the payout from Agilent's variable pay program was responsible for 28% of that year to year decline. As reported, R&D was $145 million in the quarter or 13.7% of sales, down 14% from last year. SG&A of $337 million or 31.9% of revenues was down 17% from last year. The Company's third quarter operating margin was 7.6%, down 9 points from last year on much lower volume but about 1.5 points better than our second quarter's 6.1%, despite the lower volume. Again, restructuring benefits beginning to show up on the bottom line.

Other income and expense was down $19 million from last year, $17 million of which was the drop in net interest income. Our tax rate during the quarter was 21%. Pro forma net income of $53 million or $0.15 per share compares to $0.53 per share one year ago.

Going from operating earnings to cash, page five of our press release financial tables provides a detailed reconciliation from non-GAAP to GAAP income. Summarizing, we had non-GAAP income of $53 million. We had $81 million of restructuring and asset impairment charges. We had non-cash amortization of $11 million, we had that tax benefit of $20 million, leaving a GAAP loss of $19 million or $0.06 per share compared to a GAAP loss in the second quarter of $101 million or $0.29 per share. Notice that during the quarter we recognized the tax benefit of $22 million on a GAAP pretax loss of $41 million or an apparent tax benefit rate of 54%. For reasons only an accountant could love or explain, it appears when you have the conjunction of a gain in other comprehensive income, which we did to the tune of $74 million, and operating loss and evaluation allowance, you trigger a tax benefit on the OCI gain. Hence the additional $13 million tax benefit.

Turning to cash, we had receivables of $544 million, down $217 million from one year ago. On a DSO basis we were at 46, one day better than last year. Inventories of $571 million, down $103 million from last year. On a days on hand basis we were up nine days to 106. So total cash from operations, positive $41 million. CapEx during the quarter $30 million. Free cash flow from operations positive $11 million. We also had depreciation and amortization of $41 million in the quarter.

During the quarter we had no share repurchases and issued about 1.5 million shares via our employee share purchase program ending the with 346 million fully diluted shares outstanding. As Bill already mentioned, we finished the quarter with net cash and short-term investments of $981 million, up $59 million from three months ago.

Turning to segments and starting with the Bio-Analytical segment, as expected, global bio-analytical measurement markets continued to decline in the third quarter but there were also some signs that activity may be bottoming. Orders of $493 million were down 14% from one year ago but were up 3% from Q2. Revenues of $496 million were off 8%, with currency responsible for half of that year to year decline. Geographically, weakness continued to be most pronounced in Europe which was off 22% while the Americas were down 13%. Asia remained an area of strength with Japan up 8% and other Asia up 19%, including a 48% year to year increase from China. By product platform both GCs and LCs continued down double digits from last year while micro arrays remained strong, up nearly 20% from last year.

Life Sciences revenues of $234 million were down 5% from last year. Revenue from pharma and biotech was down 6% from one year ago. Activity continued to be constrained by the economy as well as by delays caused by the recent merger activity in large pharma. But we are seeing some signs of a potential thaw in spending. The launch of our new 1290 Infinity LC has been extremely well received because of its performance and flexibility in operating in both the ultra high pressure mode and in conventional LC mode. While LCMS is strong for life sciences applications in both metabolomics and proteonomics research. Sales to academic and government were off 2% from one year ago with no meaningful impact from the US stimulus expected until the first half of 2010.

The micro array business continued robust, up nearly 20%, and we saw strong adoption of the SurePrint arrays for CGH applications.

Third quarter chemical analysis revenues of $262 million were off 11% from last year. Food safety remained robust with revenues up 14% from one year ago while weakness was widespread across other applied markets. From a platform perspective, demand remained weak for GCs and LCs and relatively strong for LCM systems. Food safety continued to be driven by tainted food scares and worldwide regulatory efforts. The Obama's administration Food Safety Modernization Act of 2009, a bill aimed at increasing the FDA's power and funding, could provide a boost for our business should it be passed into our law.

The market in China is growing at 15%-plus fueled by surging demand for pesticide and drug residue analysis in foods. Petrochemical was off 18% and down in every region except China. The good news is the industry reacted very quickly to falling oil prices and the deteriorating economy. More recently, there are signs of stabilization and our revenue stabilized between Q2 and Q3. Revenue into the environmental market was, again, down year-over-year, posting a 13% decline in light of reduced capital spending budgets. A few pockets of strength were water testing applications and in a continuation of recent trends spending by the Chinese government for environmental applications.

Finally, the forensics market revenue was down 33% year over year, driven principally by the severe cutbacks in state budgets. However, we do see some impact of federal funding starting to take hold in this market and our sequential revenues were up 26% from Q2.

Third quarter Bio-Analytical Measurement segment income was $91 million, down $11 million from last year on a $44 million decline in revenues, or a 25% decremental. Gross margins of 53% were off less than a point from last year as were operating margins at 18%. Segment ROIC fell 2 points to a still very attractive 25%.

Turning to Electronic Measurement segment, third quarter orders of $542 million were 26% below last year. On a sequential basis, orders were up nearly 4% compared to a normal seasonal decline of 5% or more. At 1.04, the book-to-bill ratio was above 1.0 for the first time since the second quarter of 2008. Reflecting earlier orders weakness, revenues of $524 million were off 36% from one year ago. Severe weakness continued in all markets with general purpose revenues down 25% and communications off 48%.

Geographically, Europe declined 38%, Japan was off 43%, other Asia dropped 30% and the Americas were down 36%. General purpose test revenues of $326 million were down 25% from last year. Aerospace and defense related revenue was down 6% year-over-year marked by relative strength in the US as well as in Japan and China while Europe remained weak. US demand continues to be driven by a Homeland security related investments, anti-terrorism solutions and secure test operations. However, while direct US government orders are growing, aerospace and defense primes continue to be very cautious about spending at this time.

Investment in Asia continues to focus on modernizing and expanding aerospace and defense capabilities. The computer and semiconductor business started to flatten out versus last year, but it was still down 50% year to year. Demand was strong for our new Infiniium 9000 series oscilloscope as well as for our new low end DSO 1000 series scope. Revenue in the electronics market was down more than 30% year-over-year due to the very weak electronic manufacturing environment. One encouraging development is that orders in the worldwide distribution channel were off only 6% from last year and were up 16% from Q2.

Communications test revenues of $198 million were down 48% from one year ago with extreme weakness across the board. Wireless R&D spending, down 34% from last year, is clearly not immune to the downturn and generally speaking R&D projects are being scaled back. The strength here remains in LTE related investments. Spending in Europe was particularly weak, offsetting partially the continued demand for LTE test solutions in China. Wireless manufacturing, which peaked one year ago, was down 65%. Market phone testing is the only real demand driver where customers are adding capacity to ramp up for the holidays. Revenues were up 3% sequentially, however, potentially marking a bottom.

Network monitoring and network I&M were both down over 40%. Consolidation in the network operator and service provider markets is delaying investments, adding to the general market pressures. Electronic Measurements' third quarter operating profit declined by $124 million from last year to an operating loss of $1 million based on a $290 million decline in revenues of 43% decremental. Gross margin fell by 4 points due to volume, and operating expenses dropped $65 million from last year. Restructuring of Electronic Measurements that we announced in late March is on track and we expect that by mid 2010, the breakeven for this business will have been reduced by $300 million.

Finally, activity related to the Semiconductor & Board Test markets saw the first signs of a thaw in third quarter after being virtually frozen for the prior six months. Orders of $36 million were still down 56% from last year and very depressed, but they were up 60% sequentially. Revenues of $37 million were off 59% but up slightly from Q2. Recent data on worldwide semiconductor sales is encouraging and suggests that we may begin at least to see a modest recovery in the segment in the year to medium term. The segments's third quarter operating loss from operations of $10 million represents a deterioration of $21 million from last year's result on a $53 million decline in revenues or a 40% decremental. Sequentially, income improved $5 million on a $1 million increase in revenues as the restructuring actions began to gain traction. As Bill mentioned earlier, combining the restructuring activities of this segment with that of Electronic Measurement, we expect that by mid 2010 to achieve an operating model with a 12% operating margin and a 21% ROIC at a $2.4 billion revenue level.

Finally turning to the fourth quarter outlook, we do have more confidence than three months ago that Q3 marked the cyclical low point for Agilent. But, as a capital equipment supplier, our orders and revenues tend to lag our served markets by about a quarter. And while the cumulative effect of the global stimulus programs may have clipped the bottom off of what may have otherwise been an even deeper decline, we do not expect to see an upturn in that market before the first half of 2010. For Q4, we expect our revenues to be up no more than seasonally and perhaps even a little bit less than normal. But we do expect the accumulative benefits of our restructuring efforts to be increasingly evident in our results. As Bill mentioned, we expect non-GAAP earnings per share to be in the range of $0.20 to $0.25.

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

Thanks, Adrian. Geri, I would like you to go ahead and give instructions for the Q&A.

Certainly. (Operator Instructions). And your first question comes from the line of Deane Dray with FBR Capital Market. Please proceed.

This is Matt McConnell filling in for Deane. Decrementals were just outside the high end of your 30% to 40% target range for the quarter. Was that in line with your internal expectations and where would you expect decrementals to head in the second quarter.

That was right in line with our forecast of a 40% decremental. We can't call it that closely, that 40% or 41%. We knew that with revenues being down as sharply as they were that it was going to be tough to stay within the operating model and we were very pleased to see that we hit the ragged edge of that 30% to 40% decremental. As things flatten out, we would expect to stay within that range of the 30% to 40%. And as things begin to pick up and we get the full benefits of the restructuring, we would expect to see incrementals that, in fact, could be considerably better than the 30% to 40% in the near term.

Near term meaning next quarter or early FY10.

FY10.

Okay. And there was still some inventory reduction ongoing in bio-analytical markets last quarter. Did that continue into this quarter?

We mentioned in some of the consumables markets last quarter that there seemed to be some destocking. That did not appear to be replicated in this quarter, although we also didn't see a reversal of it either. So I would say that inventories are pretty lean in the channel but we've not seen any material restocking.

Okay. Thank you very much.

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

Great. Thank you. I'm wondering if you could walk through the restructuring program or programs. I think there have been two or three separate things you guys have spoken about and clearly we're making some very good headway with those. But if you can walk us through that, perhaps very quickly, but telling when we expect to see the benefits in each of those programs? Is it coming quarter or two quarters out or three-quarters out?

Again, Will, there has been no fundamental change to our restructuring, as outlined on our last investor update. The headlines are essentially a reduction of roughly 3,800 employees over the course of what we had stated at that time of a year. The bulk of those reductions will, in fact, be completed by the end of this fiscal year. And that's why we're confident in Electronic Measurement if, in fact, the revenue returns to $600 million in Q2 that we will be at a 12% operating profit and anything close will be at double digits. So the focus of the restructuring has been in Electronic Measurement, it's the primary one. And secondly has been in the global infrastructure. I'll have Adrian make a few comments about that.

Great. Just to remind everybody, as Will said, we did have three waves of restructuring. The first was announced shortly after our fiscal year end last year targeting about $65 million of savings. That has been completed at this point even though we had the original target for the fourth quarter of '09.

We also then exited the inspection businesses and announced a restructuring of the global infrastructure operations which would achieve savings of $150 million. We have now completed the exit of the inspection business and all of the actions required to achieve that $150 million of savings from GIO have also taken place. So while the full benefits of that won't show up until the first quarter of next year, that is largely completed from an actions perspective. perspective.

Where the action is now is in the restructuring of the Electronic Measurement business. And that is well underway, to be completed by the second quarter of 2010. That was worth $310 million all by itself. Cumulatively $525 million consistent with what we've been saying for about five months now and still expected to achieve its full result by mid year 2010.

Great. Thanks. That's very helpful. One follow-up, if I can. Did I hear right that the Company is going to be folding Semi & Board Tests back into the EM, to report that as one segment going forward?

That's correct. Yes.

Okay. Great. Thank you.

And your next question comes from the line of Jon Wood with Banc of America - Merrill Lynch. Please proceed.

Can you hear me?

Yes.

Bill, the order trends in Bio-Analytical Measurement, they look like they're breaking down as a predictor of the next quarter's revenues. Is that an accurate statement?

I don't think so. This is Adrian. I think that it has tracked reasonably well. Obviously there can be changes in backlog. But I think the orders have led the revenues by roughly a quarter.

Okay. I was just looking, Adrian, it was down 16% last quarter on the order side and you were only down 8% in revenue this quarter. I'm just trying to get a sense. So when you look at the 14 -- go ahead.

Yes. Q4 typically will be the highest order month of the year. We'll get a slightly higher conversion but for us to get sequential revenue growth, as I suggested, we should be in very good shape with the backlog we have going into the quarter as well as the expected orders in Q4.

Okay. So is the 12-90, is that a material driver to the sequential improvement in Bio-Analytical you expect?

Not yet.

Not yet. But the problem is that the GC/LC market in total has been down. We believe that the 1290 is a very, very competitive product. And so in a stable or flat market from here being down, we believe that this is a very competitive instrument and the reception to date has been very successful. In aggregate can it change the numbers enough? Not likely unless we are incredibly fortunate, but in terms of us being in a stronger position in a down market, I believe the 1290 is a real contribution.

Okay. Great. And then Adrian, are you still expecting operating free cash flow of around $100 million this year with $300 million or so of cash restructuring?

That's correct.

Okay. And can you give a sense of what percent or what proportion of the $525 million run rate was in the third fiscal quarter? Do you have an estimate for that?

I would say about a third of it was, Jon. Just a rough estimate.

So you will be on that full run rate exiting April 2010 quarter?

Correct.

All right. Great. Thanks a lot .

And your next question comes from the line of Jon Groberg with Macquarie. Please proceed.

Thanks a million for taking the call. Adrian, I think in your comments you mentioned that you thought some of the early cycle businesses were starting to tick up. And I was just curious -- most of the businesses I tend to think of are a bit more late cycle. I was curious which ones are maybe ticking up that you were talking about?

They're mostly, in fact almost entirely, on the Electronic Measurement side. Semiconductor & Board Test is the first derivative of Semiconductor. Semiconductor has improved sequentially quite a bit, something like 20% quarter-to-quarter. And our Board Test business from a very, very low level,l at least directionally, has gone in the same direction. Our Electronic Measurement business tends to lag that by about a quarter. And we're seeing that both in funnels and in quotation activity, both of which have picked up quite a bit in the past several months. So these are indicators more than they are fundamental demand. But they do tend to cyclically follow a pretty regular pattern. And the consistency of that pattern and the follow through that seems to be reflected in our funnels and quotes gives us some confidence that we're seeing something that's real and not just a dead cat bounce.

I mentioned last quarter and everyone, or at least some people, got pretty excited that we actually had one order a barometric test. And this quarter we got 13 orders from one customer. So clearly, if there is any indication, that's one of them. Obviously you tend to look for good news given how difficult it has been. But as we have said, the orders are sequentially up and the order funnel from our salespeople is clearly up, as well. So that's the best you can hope for.

Okay. Thanks for the clarification. And then is there anything, as you look at China which has helped particularly the bio-analytical business on the chemical analysis side hold up pretty well, are you looking at these as one-off orders? I think you mentioned last quarter some of the stimulus was going to some new refineries and they were building out the instrumentation they needed there. Are these one-offs or is there anything -- how do you think about modeling how fast China is growing on that side?

In my opinion, China is doing a lot better than we had originally modeled. There was some concern that the order growth or their growth would drop down to the 5% to 6% range. Clearly it's going to be better than that and continue to be the growth engine of the country. And so we're actually quite optimistic for continued growth in China. And, secondly, we're just very well positioned given our legacy and our long-term relationships in China. We believe we just do one heck of a good job of getting our products to the various customers across a large country, second to no one. So we believe this will continue as we move forward in Q4 as well as 2010.

Okay. And last question, since you didn't do a call when you announced the Varian acquisition, I know you're not going to comment about synergies and those types of things. But Bill or Adrian, was there a particular technology or was there a particular aspect to Varian that made it more interesting to you than maybe some of the others that seem to be in the bidding? I'm just curious if there was anything specific about Varian that we should be looking for you guys to do as it gets folded into your organization?

Again, we just think that Varian is a great franchise or we would not move forward. There are lots of factors that go into when one acquires a company. We just think it's going to be a great fit for us as we go through the regulatory approval.

There's one technology, NMR, that they and another company are most well known for, and I didn't know if you had particular plans or anything with that particular technology?

As we said, we will not be making any comments about our long-term strategy right now as we go through the regulatory approval. We'll continue to work with Varian and if we can help out with them being more successful in that segment, we will.

Okay. Thanks.

(Operator Instructions). Your question question comes from Ajit Pai with Thomas Weisel.

Good afternoon. Just some quick questions. The first one I think is to do with the orders that you talked about Electronic Measurement coming back sequentially. Have you got any color from your sales folks when you're talking about marking the bottom what the actual reason for the orders was? Was it pent up orders, was it just a freeze in spending and this was pent up demand, or was this actually new spending, new projects? Any sort of color over there that you might have?

I don't think we have anything that's particularly analytical. By definition any new spending is new spending. Some of it's pent up demand. Having been a manager that's stopped all capital spending myself, you're not very sympathetic to pent-up demand versus new activity. But clearly there is higher activity for higher end instrumentation required particularly in the development area, government aerospace and defense and we'll do everything possible to capitalize on that. But I wouldn't have a very analytical answer to say what was new and what was just orders being held by somebody to try to conserve cash.

Got it. And then just looking at the inspection business you talked about, are there any other businesses that you are exiting, as well, that you haven't talked about? And the inspection business just for our modeling purposes when you're trying to look at the Company's current business going forward, what did it comprise? The revenue of the businesses you've gotten out of, what were the revenue numbers for that business about two years ago, for example, in fiscal year 2007?

The only business we have exited have been the optical and x-ray inspection. We continue to be focused on our barometric test business which is the largest business in that segment. We are driving that technology into the nano measurement into the R&D sector. The circuit inspection final test business we've done for years and years, that will be tied directly to the increase in demand in the contract manufacturers moving forward. And the third product line is a specialty product line which is a laser and fluorometer that goes inside of the steppers, and that will be 100% driven by increase in steppers as we move forward.

Got it. And the last question would be just on the business development front, I think you mentioned that Varian was the largest acquisition in Agilent's history. Just given the financial implications of that, not specifically of Varian itself or its closing, but I think for the first time in Agilent's history also you are going into a net debt position. Does that change your appetite for further business development activity on a go-forward basis?

Again, in terms of making a large acquisition with Agilent, to successfully integrate it, make sure that Varian's customers and employees are integrated into the Company, that's going to take a fair amount of quarters, assume eight quarters. Given our cash generation ability, we believe we'll be rapidly back into a positive net cash position and we will continue to use our excess cash and financial strength to continue to grow our businesses.

Got it. Thank you.

And your next question comes from the line of Richard Eastman with Robert Baird. Please proceed.

Just two things. Bill, could you just talk to the geographic mix on the EM side of the business for a second or two. When we look at the rates of decline worldwide, they're pretty comparable. But would you look at any of those geographies of potentially being a leading indicator for you, any of which may turn quicker? For instance, in China with their buildouts or any of those geographies that we should look to turn quicker than the others?

Quite honestly for myself personally, I always tend to look at the markets and customers as such a global environment that, for example, if cell phone manufacturing comes back because of the increase of cell phones besides Smart Phones, you're obviously going to see a big increase in China as they manufacture 85% of the cell phones. The aerospace and defense industry is still dominated by the United States. If that continues as it has, there has not been substantive cut back, then you're going to see the US again perform relatively well. I think personally Europe and Japan is the wild card. Japan has been by far the most severely impacted. Even sequentially there still isn't a clear bottom. So I think Japan from a country standpoint and what they're doing is probably unique. I would argue that the US and Asia, particularly China, are far more linked ex the aerospace and defense, and Europe is somewhere in between.

And just one last question. Again, on the EM side of the business, in particular general purpose, it seems like you're making a fairly dramatic change to your go-to-market strategy from direct to indirect. Is that change significant enough to impact numbers sequentially in terms of, say, channel fill?

I think there are two things. First of all, the fundamental reason that we're making that change is that we want to have a more variable sales channel cost model. And, secondly, we're reacting to business that is down substantially. So in my simple thinking, we have to reduce our direct sales force to be consistent to the business. We're telling the world that we'll be back to double digit profit at $2.4 billion of revenue when we, in fact, were at over $3 billion, $3.5 billion, revenue just a year ago. So the first order of this is just resizing the sales force to make sure that it's consistent with our cost model of the Agilent operating model.

In the course of that, though, how do we maintain our reach? We believe that expanding our partnerships with distribution will allow us to be able to be much more effective in reducing our direct sales force. For decades and decades, we have essentially been a direct sales force team, particularly in Electronic Measurement, where we had a very small percentage of our business through alternate channels such as distribution or manufacturing reps. This process and this environment is a catalyst for us to be able to really expand our business in the distribution channel. I think we have enormous value for the distribution channel. We have the broadest breadth of products of anyone in the world. And to date the acceptance has been very, very favorable. Even in a tough environment, we saw sequential growth in our distribution channel and I think we can be a very good partner to the hundreds and hundreds of electronic distributors and manufacturing reps around the world. And I think that we're right on track to be able to make that transition. And the net result of this will be that we'll reduce our absolute cost, we'll increase the variability of our direct channel, and I think we'll minimize any reach problems or customer support issues that we may have had if we had not embarked several years ago into expanding our distribution channel.

Can you maybe just give a quick sense of what percentage of your sales ultimately either in general purpose or EM end up going in direct net?

I believe we'll be over 30%.

Okay. Great. Thank you.

And your next question comes from the line of Isaac Rowe with [Laird Swan]. Please proceed.

Good afternoon. Thanks for taking the questions. I just had two on the HPLC market. First off, I was wondering if you could comment a little bit more on that initial reception you said you've gotten for the 1290. I'm wondering if it's mostly among pharmas and CROs versus maybe academic and safety related customers.

The types of successes we have had in the public feedback has been in the pharmaceutical area. We've had several events around the world where we have gotten just raving reviews on the instrument itself, its capability moving forward. The advantages of flexibility of the column chemistry, sensitivity, ultra high speed separation capability. One quoted world record peak with. So overall we have received a very, very favorable response and the public quotes have come from large research institutions and pharmaceutical companies around the world.

Great. Thanks. And then just secondly, if I think back on the history in the HPLC market, at least in the last couple of years, it seems like market share shifts have been somewhat minimal. And I'm wondering do think that for the 1290 if that can help you gain share perhaps with smaller players or do you think this could maybe signal a shift in the overall market share environment?

We're highly biassed that we think it will shift back to us. The other guy's a very competent, very credible company. And as you said, we have a long history of providing customers to the very best liquid chromatography in the world. But we're excited about this product. And with the successful launch and our continued support, continued support in the column technology I invested, continued investments in our informatics, we believe that we have the best LC in the world.

Great. Thanks very much.

And your next question is a follow-up from William Stein with Credit Suisse. Please proceed.

Thanks. I'm wondering if you could talk a little bit about the stimulus plans in the US and in China and perhaps anywhere else, whether you're seeing this benefit in the quarter that you just reported and/or the outlook and whether you think that might be --

Here is my opinion, again. I welcome Adrian to give his view on the stimulus. China, A plus. Money is being spent. The government agencies are being held accountable to spend the money. In the US, the spending is much slower. In fairness, there was an existing process and NIH and a lot of the academic and research institutions where people go in for approval. There's a grant writing process. So the net result of it is is the money is flowing at a slower rate than we originally anticipated. And Adrian made a comment in his remarks that most likely this money will probably show up more in our Q1, Q2 of our next year's fiscal plan.

Europe is not quite as obvious. It's spending a lot of money in the universities. There is money being in there. They're very good at collaborating across universities. And so that's good. But the expenditure, in my belief, is not to the level that you're seeing in China or the United States. Japan also has its own stimulus package, as well. But, again, the real big money is in the US and China.

Bill, are you at all worried that the strength that we're seeing in China now going to stimulus --

Bill, you're cutting out, I didn't hear the question.

Sorry about that.

Are you concerned that the stimulus strength you've seen from China this quarter and perhaps in the outlook quarter may be temporary in nature and may see that roll over? That's the big concern of all of the stimulus money, that two years from now you've just outfitted everybody for another two years and then you get a drop off. That goes back to the previous question about how we see China. If China continues to grow and expand, then you would hope the stimulus then just gets absorbed in their overall growth. If their growth rate slows down, clearly you will, in fact, see a drop-off, particularly in some of the government agencies and universities that have been outfitted with the stimulus money.

There has never been, I've never seen a university or school that can't think of how to spend more money for research. So I think there is always going to be the demand there. And if the economy continues to grow, I believe the stimulus will do exactly what they intended, is to keep the economy going until China and the rest of the world continues to recover.

Thank you very much.

And this concludes the question-and-answer portion of today's conference. I would now like to turn the presentation over to Mr. Rodney Gonsalves for closing comments. Please proceed, sir.

Thank you, Geri. For everyone on the line, I would like to thank you on behalf of the management team for joining us today. Please contact the Investor Relations department with any follow-up questions from today's call. Again, thank you.

And we appreciate your participation in today's conference. This concludes the presentation and you may now disconnect, and have a great day.