安捷倫 (A) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2009 Agilent Technologies, Inc. earnings conference call. My name is George and I will be your coordinator today. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please proceed.

Thank you, George. And welcome, everybody, to Agilent's fourth quarter conference call for fiscal year 2009. For those of you who don't know me, I'm Alicia Rodriguez, Vice President of Investor Relations. With me are Agilent's President and CEO, Bill Sullivan; and Executive Vice President for 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 up 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 into our Webcast, look at the module on our Website and click on the link for supporting materials. There you'll find additional information, such as our end market revenue breakout and historical financial information for Agilent's continuing operations. Also, 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 metric.

In addition, I'd like to remind you that we may make forward-looking statements about the future financial performance of the Company. These involve risks and uncertainties that could cause Agilent's results to differ materially from management's current expectations. As a result, 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 our guidance provided today, during the call, are valid only as of this date and the Company assumes no obligation to update these statements as we move throughout the quarter.

A few words regarding Agilent's pending $1.5 billion acquisition of Varian. Given that the deal has not closed and we're still currently in the regulatory approval process, we won't be providing any additional details on the deal. That includes details about post-closing integration, synergies, process of the regulatory bodies or cost savings. For information on the acquisition, we recommend that you review Agilent and Varian's SEC filings. Before turning the call over to Bill, I want to remind you that Agilent's annual analysts meeting, typically held in early December, has been postponed until March 2010. This will enable us to talk more freely about Varian and the integration at that time, pending regulatory approval.

Last but not least, I'd also like to note that Ron Nersesian, President of Agilent's Electronic Measurement Group, will be presenting at the Credit Suisse annual Technical Conference on Tuesday, December 1 in Phoenix, Arizona. Now, let me turn the call over to Bill for his comments. Bill?

Thanks, Alicia. And hello, everyone. In a few moments, Adrian will provide you with a detailed analysis of our Q4 results by business and geography. I'd like to provide a brief summary of the results and discuss the key themes of the quarter and the year. Fourth quarter revenues of $1.17 billion were down 21% over last year, while orders of $1.27 billion were down 11% from a year ago. Non-GAAP earnings were $111 million or $0.32 per share. Results were above management guidance due to the higher revenue and the resulting leveraging of the benefits of our restructuring efforts. Our Q4 earnings, combined with strong asset management, enabled Agilent to generate $208 million of operating cash flow, even after restructuring payments of $55 million. We ended the quarter with net cash of $1.2 billion.

Evidence continues to indicate that Q3 did represent the bottom of the economic downturn in our markets. We saw an above seasonal increase in sequential orders in Q4, up 19% over Q3. We now have seen two quarters with a book-to-bill ratio greater than 1. This gives us confidence that we will deliver positive revenue growth in 2010. Our electronic measurement group, which includes our electronic measurement and semiconductor board reporting segments, reported revenue down 30% year-over-year. We continue to see a difficult environment in all regions of the world. However, we are seeing sequential growth in both revenue and orders. This is being led by our general purpose business, where aerospace defense revenue was up 28% sequentially. We're also seeing stabilization in computer and semiconductor markets.

On the other hand, the communication market continues to be very difficult, with sequential revenue growth of only 6%. The fundamental problem is overcapacity in test equipment supporting existing wireless standards. While we believe we're at the bottom of the communications test market, we don't think we'll see meaningful improvement until the roll-out of 4G in the second half of 2010. In our chemical analysis market, revenues were off 10% year-over-year but up 10% sequentially. The chemical analysis team continues to capitalize on opportunities in China where there is continued strength in the food industry. In addition, China continues to make investments in petrochemical and environmental markets. Moving forward, we will continue to focus on China, opportunities in the food industry and additional opportunities as the worldwide economy begins to recover.

In life science, revenues were down 7% over the previous year, impacted by weakness in pharma and biotech markets. Sequential revenue growth was up 9%, particularly in government and academic research. Sequential order growth was quite high, up 29% over the previous quarter. Unfortunately, much of this order growth came late in the quarter, where we were not yet able to translate into revenue growth. We're in a solid position going into the first quarter of 2010. We continue to believe we are well positioned in LC and LC/MS, as well as in sample prep, microarrays, informatics and lab automation solutions.

Beginning next quarter, we will report business results in three segments; our Electronic Measurement group, Chemical Analysis group and Life Science group.

Looking back at 2009, it was a very difficult year. Revenues were down $1.3 billion, from $5.8 billion in FY '08 to $4.5 billion in FY '09. Operating profit declined almost $500 million. And earnings were down more than $1 per share, from $1.96 to $0.80 per share. However, we made three fundamental decisions that position us well for the future, as we emerge from this downturn. Number one, aggressive response to the economic downturn. We began to take proactive measures in Q3 of last year in anticipation of the worldwide economic recession. We made a series of decisions to control expenses, reduce manufacturing costs and focus on R&D investments.

Measures included restrictions on hiring, travel and discretionary expenses, as well as a Company-wide payroll reduction. We announced restructuring within our global infrastructure organization and Electronic Measurement business. And we initiated several other programs to reduce fixed costs and increase variable costs, such as expanding our indirect channels. As a result of these efforts, we expect to realize a total of $525 million in annual run rate savings. In recognition of the progress we have made, we have restored full pay to all employees, effective November 1.

Our global infrastructure organization will complete its restructuring by the first quarter of fiscal 2010. Our Electronic Measurement group will complete its restructuring by the second quarter. With the combination of electronic measurement and semiconductor board tests, we expect to achieve a cost structure that delivers double-digit operating profit on revenue of $2.4 billion or $600 million per quarter. We are proud of our ability to respond quickly to the economic downturn, remain cash flow positive and continue to invest in our future.

The second decision is that we ensured that we had sufficient funding of our key new product programs. Even as the Company managed through this very difficult time, we did it in such a way that we didn't jeopardize our investments in growth initiatives and future technologies. In Electronic Measurement, we introduced a new family of high volume, mid-range oscilloscopes. We've launched our PXA and CXA signal analyzers.

We now have a full range of solutions and price performance on a common platform, giving our strongest ever offering in signal analyzers. Our recently introduced PXA has the highest signal analyzer performance in the world. Investment in our PNA-X series of vector network analyzers has resulted in record orders in Q4. Wireless R&D and aerospace defense markets are adapting this platform for a complete component characterization and modeling. And finally, we continue to invest heavily in LTE and our commitment to be the test leader in the next generation of wireless.

In chemical analysis, we continued our new product investments in platforms, including GC, GC triple quad and ICP-MS. We also introduced technology, innovations and sample preparation, GC inert columns, and high pressure LC columns. In Life Science, market acceptance of our new 1290 Infinity LC continues to exceed our expectations. We continue to see order momentum in new technologies such as, LC/MS and microarrays. We have seen strong demand from the introduction of our SureSelect kits for next generation sequencing, as well as for our bioanalyzer kits. In summary, Agilent invested more than $600 million or 14% of revenue in R&D in FY '09. This commitment to technology leadership will position us well as we move into FY '10.

The third decision was our acquisition of Varian. This is the largest acquisition in Agilent's history and it's a major step in our transformation into the leading bio-analytical measurement Company. We can build on our complementary technologies and we each bring expertise and experience across different geographies and applications. We expect that our combined Company will be able to provide customers with a more comprehensive set of solutions, across a wider range of markets of applied chemical and life sciences. At this point, closing is anticipated early in calendar 2010, subject to regulatory approval and customary closing conditions.

In summary, we believe that Agilent has emerged from the global economic downturn in a position a strength. While it seems clear that we are past the worst of the global downturn, the pace of the recovery is expected to be slow and to vary considerably by market and geography. We remain diligent, focusing on meeting our customer needs and executing on our operating model. At the same time, we continue to invest for current and future market opportunities. For the first quarter of 2010, we expect revenues to be roughly flat from one year ago. Non-GAAP earnings are expected to be in the range of $0.28 to $0.32 per share. This is an improvement of $0.08 to $0.12 per share compared to last year. Thanks for being on the call today. And now, I'll turn it over to Adrian.

Thank you, Bill. And good morning, everyone. I'm going to offer a few overall perspectives on the quarter for Agilent, review the performance of the three business segments, and conclude with some thoughts about the outlook for Agilent's fiscal first quarter of 2010. Then, we'll turn it back to Alicia for Q&A. With our fourth quarter results, I think we can say with confidence that we are past the bottom of the global economic downturn. In contrast to our earlier expectations, we saw more than the normal seasonal increase in orders and revenues between Q3 and Q4.

Our Q4 book-to-bill was a healthy 1.09 and we built backlog for the second consecutive quarter. Our $525 million restructuring program is on track and contributed meaningfully to this quarter's results. Revenues of $1.17 billion were down 21% from last year, while orders were off 11%. Conditions in our electronic measurement and semiconductor board test markets remain depressed, with revenues off 29% and 43% respectively from last year. Communications related markets remained particularly weak, while general products and semiconductor related markets are showing some early signs of a turnaround. Our bio-analytical segment also showed signs of bottoming, with revenues off 9% from one year ago but orders essentially flat compared to last year's Q4.

Overall, we generated operating profits of $150 million in the quarter or a 12.8% operating margin, despite the 21% drop in revenues, an aggressive operating profit decremental of 39% that reflects the continued cost control and the increasing contribution of our restructuring program. Fourth quarter adjusted net income per share of $0.32 was consistent with Agilent's operating model but well above our guidance of $0.20 to $0.25, as the benefit of higher than expected revenues dropped directly to our bottom line.

We were also pleased with our balance sheet performance. Inventory days on hand at 97 were off only six days from last year's record low, despite the 21% drop in revenue over the same time period. Receivables days sales outstanding at 46 dropped one day from last year to a new fourth quarter low. During the quarter, we generated $208 million of cash from operations and we ended the quarter with net cash of $1.215 billion. Return on invested capital fell 13 points to 18% this quarter but note that, even with these very depressed economic conditions, we are only 2 points away from our long-term target of 20% ROIC.

By way of perspective, some of you will recall that during the severe 2001/2002 recession, Agilent consumed over $1 billion per year in free cash flow from operations, $2.5 billion in total, from 2001 to the first half of 2003, between operating losses and restructuring costs. During the downturn of 2009, which in many ways has been even worse than the prior high tech bust because it also included the first cyclical downturn in bio-analytical markets since 1983, Agilent generated $275 million of free cash flow from operations. A positive difference of nearly $1.2 billion compared to the Company's performance in 2002.

In short, this is a very different Agilent. As the world's premier measurement Company, we've now demonstrated the power of Agilent's operating model over the economic cycle. We're a Company characterized by businesses that; One, achieve an average 20% ROIC over the economic cycle. Two, achieve 30% to 40% operating profit incrementals throughout the cycle. And three, are cash flow positive from operations at every point in the economic cycle, even including three standard deviation downturns.

Okay. Turning to the numbers. Orders of $1.274 billion were 11% below one year ago. Fourth quarter revenues of $1.17 billion were down 21% from last year, with no impact of currency on the comparative results. Electronic measurement revenues were down 29%. Bio-analytical was down 9%. And semiconductor & board test was down 43% from one year ago. Geographically, we were down pretty evenly all over. The Americas down 23%, Europe down 20%, and Asia-Pacific down 19%. As I mentioned earlier, our book-to-bill was 1.09, up from 1.01 in the third quarter, and below 1 one year ago. Our fourth quarter gross margins of 55.6% were about 1 point lower than last year but over 1 point higher than a year ago on a volume adjusted basis.

Given the difficult environment, we have continued to be very aggressive about controlling operating expenses but we also saw higher variable pay, as our operating results improved from earlier in the year. Compared to last year, total fourth quarter expenses were down $71 million or 12%. A $14 million drop in the payout from Agilent's variable pay program was responsible for about 20% of that year to year decline. As reported, R&D of $144 million was down 15% from last year or 12.3% of revenues. SG&A, at $355 million, was off 11% from last year at about 30.4% of revenues. The Company's fourth quarter operating margin was 12.8%, down 5.5 points from last year's record margin, despite much lower volumes.

Other income and expense was down $17 million from last year, $8 million of that being a drop in net interest income. Our tax rate during the quarter remained at 21%. Pro forma net income of $111 million or $0.32 per share, compares to $0.62 per share one year ago. Incidentally, for modeling purposes, you should assume that Agilent's standalone pro forma tax rate in 2010 will be 20%, 1 point better than this past year.

Okay. Going from 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 $111 million. We had restructuring and other impairment charges of $60 million. And $10 million of non-cash amortization charges. Taxes and other net charges were $16 million during the quarter and that was a mix of various things. The $16 million of other net charges is composed of a $31 million business divestiture gain, a $13 million settlement accrual from a presplit exposure that we inherited from HP, a $25 million year-to-date tax true-up related to our better than expected profitability, and $9 million of other net charges. So, on a GAAP basis, we had fourth quarter net income of $25 million or $0.07 per share.

Turning to cash. Receivables at $595 million were down $175 million from last year at this time. And DSO's down one day to 46. Inventories, at $552 million, were off $94 million from last year at this time. And inventory days on hand, at 97, were only six days worse than last year's record performance. Cash from operations, $208 million. We had $30 million of CapEx in the quarter. So, free cash flow from operations of $178 million in the quarter.

Depreciation and amortization was about $39 million during the quarter. And during the quarter, we had no share repurchases and issued about 1 million shares via options exercises. We also had about $2.9 million of share dilution from the increase in the share price during the quarter from $19.61 per share to $26.60 on average. We ended the quarter with about 350 million fully diluted shares outstanding and with net cash and short-term investments of $1.215 billion, up $234 million from the third quarter and up nearly $0.25 billion from one year ago.

Okay. Turning to segments. The global bio-analytical measurement revenues continued to decline in the fourth quarter, reflecting prior orders weakness but there were also increasing signs that these markets are beginning to turn around. Orders of $590 million were down only 1% from one year ago and were up a much stronger than seasonal 20% from Q3. Revenues of $544 million were off 9% from last year in both dollar and local currency terms.

Geographically, weakness was most pronounced in the Americas and Europe, which were off 12% and 11% respectively from one year ago. Asia was generally flat, with Japan up 2% and other Asia off 1%. China revenues were flat in the quarter but only because of an extraordinary surge in volumes last year related to food safety issues. Fourth quarter China orders, for example, were up 30% from one year ago. By product platform, both GC's and LC's remain down double digits from last year, while the reception to our recently introduced 1290 Infinity LC has greatly exceeded our expectations.

Life sciences revenues of $256 million were down 7% from last year. Revenue from pharma and biotech markets was down 8% from one year ago on tough compares. Recall that one year ago pharma was up 15%. The environment in pharma remains tough but we are seeing some signs of thawing and orders last quarter were down only 3% from one year ago. As mentioned earlier, interest in our new 1290 Infinity LC has been extraordinarily strong because of its performance in terms of sensitivity and speed of analysis and flexibility in operating in both the ultra high pressure and conventional LC modes.

Sales to academic and government were off 4% from one year ago but remember, that last year, academic and government sales were up 22%. Fourth quarter orders were up slightly from last year. Microarray revenues were roughly flat to a very strong year-ago period, while orders continued to be up double digits compared to last year. Fourth quarter chemical analysis revenues of $288 million were off 10% from last year.

Food safety remained robust, while consumables and services were stable compared with one year ago. Beyond that, with the exception of China, weakness was widespread across other applied markets. From a platform perspective, demand remained weak for GC's and relatively strong for high end LC/MS systems. Food safety revenues were up 19% again year-over-year, driven by the tainted food scares and worldwide regulatory efforts. Europe and Asia were particularly strong. The market in China is continuing to grow at 15% plus, fueled by surging demand for pesticide and drug residue analysis in foods.

Petrochemical was off 19% from last year and down in every region except China. With oil prices stable, there are more signs that this market is flattening and our revenues were up 8% sequentially in Q4 after stabilizing between Q2 and Q3. Revenue into the environmental market was down 10% year-over-year. Forensics also remained very weak, off 32% from one year ago. But the business was up sequentially for the second consecutive quarter, suggesting a bottoming in this market. Fourth quarter bio-analytical measurement segment income was $109 million, down $27 million from last year, on a $50 million decline in revenues. Gross margins of 55% were off 1 point from last year, while operating margins at 20% were down 3 points from last year's record performance. Segment ROIC fell 5 points to 31%.

Turning to Electronic Measurement, fourth quarter orders of $641 million were 18% below last year but were up a more than seasonal 18% sequentially from Q3. Fourth quarter book-to-bill at 1.10 was above 1.0 for the second consecutive quarter. Reflecting earlier orders weakness, revenues of $582 million were 29% below one year ago. General purpose markets showed clear signs of bottoming, while communications markets remained very weak. Geographically, Europe declined 31%, Japan was off 38%, other Asia dropped 24%, and the Americas were 28% below one year ago. General purpose test revenues, of $373 million, were down 17% from last year but were up 15% from Q3.

Aerospace and defense held up best, unchanged from last year and up 27% seasonally from Q3. We saw relative strength in US demand, as well as in Japan and China, while Europe remains weak. Investment in Asia continues to focus on radar test, satellite test, metrology and signal monitoring. The computer and semiconductor business showed more signs of a turnaround. Revenues were still down 32% from last year but were up 36% from Q3, consistent with the rebound we are beginning to see in semi related markets. Adoption of the new Infiniium 9000 Series oscilloscope ramped strongly from its July launch, including strong demand for both hardware and applications packages.

Revenue in the electronics market was down more than 27% year-over-year and about flat sequentially, reflecting the continued weak electronic manufacturing marketplace. Communications test revenues, of $209 million, were down 43% from one year ago with extreme weakness virtually across the board. Wireless R&D spending was down 35% from last year, with the only pockets of strength being in LTE and the China 3G infrastructure build-out. Wireless manufacturing, which peaked one year ago, was down 64% with little demand for new capacity in the near term. Network monitoring did show some signs of life, down 27% from last year but up 34% sequentially.

Broadband was also very weak, off 51% from last year but up 42% sequentially, with increasing load levels on networks stimulating some quality of service investments by service providers. Electronic Measurement's fourth quarter operating profit, of $41 million, was $95 million below last year on a $233 million decline in revenues. An impressive 41% decremental resulting from rapid actions to reduce structural costs in this severe downturn. Gross margins fell by less than 2 points from last year, while operating expenses dropped by $50 million below last year. Operating margins dropped 10 points to 7%. While segment ROIC fell 22 points to 12%. As you can tell by these results, the restructuring of electronic measurement remains on track for a successful mid-2010 completion.

Turning to semi & board test results. In the very depressed semiconductor & board test markets improved for the second consecutive quarter. Fourth quarter orders, of $43 million, remain 25% below one year ago but were 22% ahead of Q3 and nearly double the pace of six months ago. Revenues of $41 million were off 43% from one year ago but up 10% from Q3. With a book-to-bill of 1.05, we are beginning to see the early signs of a new semiconductor cycle reflected in the order funnel for this business. The segment's fourth quarter operating loss from operations, of $1 million, represents a deterioration of only $1 million from last year's result, despite a $31 million decline in revenues. Sequentially, income improved $9 million on a $4 million increase in revenues. At this point, the segment has completed its restructuring program and exceeded the original cost reduction goals.

Finally, turning to the outlook for our first quarter of fiscal 2010, Bill mentioned that on a standalone basis, we expect revenues to be roughly flat with the first quarter of 2009. On that basis, we expect our non-GAAP earnings to be in a range of $0.28 to $0.32 per share, an improvement of $0.08 to $0.12 per share compared to last year that results from the success of our restructuring activities. Other items to keep in mind as you model fiscal 2010 include; first, we did restore full salaries around the world November 1. That represents about an $80 million increase in annual costs compared to 2009. Our fiscal 2010 equity compensation costs will be about unchanged with 2009, at just over $70 million. But remember that we front-load the recognition of 123R costs. So, when you compare fourth quarter of '09 total comp costs with the first quarter of 2010, the increase will be about $32 million, not $20 million. There will be no change in pension expense in 2010 compared to 2009.

We did issue $750 million of notes in September to finance the Varian acquisition. I don't think that increase in interest expense has been adequately reflected in some of your models. I also mentioned that the standalone pro forma tax rate this year would be 20% versus 21% in 2009. Capital spending this coming year should be in the range of $130 million to $140 million. And depreciation and amortization costs will be about $165 million, roughly equal to 2009. Finally, looking at our markets for the coming year, we are comfortable with the range of analysts' 2010 revenue estimates for our segments, which average about 5% growth for both the Electronic Measurement and Bio-Analytical segments. I think that's it. So, I'll turn it back to Alicia for the Q&A.

Thank you, Adrian and George. Will you please go ahead and give the instructions for the Q&A?

(Operator Instructions) And our first question comes from the line of Mr. Jon Wood from Jefferies. Please proceed.

Hi, good morning.

Good morning.

Hi, Adrian, so can you give us an initial outlook on operating cash flow? I know you mentioned the CapEx but how should we be thinking about operating cash flow and specifically, any spillover in cash restructuring expenses in FY '10?

Yes, the vast majority of the restructuring expenses have occurred. We have about another 1,000 headcount to go out but we accrued about $290 million, I believe. So, we are within about $30 million, $30 million to $50 million, conservatively, of being done. So, cash flow from operations, next year, we think will be very significantly improved from this year's surprisingly good result and above $0.5 billion.

Okay. And then, how should we be thinking about capital redeployment in FY '10? Obviously, with the Varian acquisition still pending. Will deleveraging be a priority next year or is there the potential for a resumption of the share repurchase program?

As we had stated in the last quarter's call, our first priority will be to reduce our debt. Next priority, we'll continue to look at opportunities to invest in the businesses via acquisition. The third option would be to continue to return that cash to our shareholders via a stock repurchase. And I think that's the way I'd look at it in those three steps.

And I think for modeling purposes, Jon, that everybody should assume that our share count will be unchanged at 350 million throughout the course of fiscal year '10.

Okay. Great. One last one. Bill, can you comment on any stimulus benefit you saw in the Bio-Analytical business, both in revenue, as well as orders in the quarter? And then, any feel you have for that potential contribution in FY '10?

Again, I'm -- this is my observation, that the data is still quite sketchy, but it is our view and my observations speaking to other folks in the industry, that the stimulus money spending has been quite slow. Not only in the decision making process in the various institutions but the actual flow of the money from the government, particularly in the US. So I believe that the vast majority of the stimulus impact won't show up until calendar 2010.

Okay. Thanks a lot.

Our next question comes from the line of Mr. William Stein from Credit Suisse. Please proceed.

Thanks. I'm wondering if, Bill, you can talk a little bit more about the LTE opportunity? In particular, where we are in the cycle of investment there relative to both R&D and whether there's any revenue from production systems yet or is that something more in mid-2010?

Right. Again, many of the service providers have made very public statements in terms of the roll-out of their LTE and where that is. From the comments from this quarter, however, I think you're continuing to see investment in R&D, continuing to do the network definition, the trial testing. As you know, this is a much, much different antenna system for G4. And the net result of that is that we have not seen a lot of measurable expenses or capital investment in LTE, as of yet. Coupled with the reality, there's excess test capacity for G3, G2.5. Our wireless business and manufacturing was down 60% over last year.

I personally believe, and again, you'll get lots of different opinions, that we will not see any measurable capital investment in LTE until the second half of 2010. The reality is is that if you look at past ramps of these wireless standards, you get a slow ramp and then you get the acceleration once you really start rolling out the handsets and people start converting to networks. So, it's very clear that I believe this is an opportunity to have a dramatic recapitalization of test equipment in the industry but in likelihood, that could be out into the 2011 time frame.

That's helpful. Thank you. I'm wondering, also, if you can talk a bit about the distribution strategy? We've seen at least one pretty big announcement from a distribution partner. Can you talk about the changes in the business as it relates to the sales channel?

Since we have announced -- the first issue at hand is that our revenue in Electronic Measurement had dropped $1.2 billion and we have very aggressively resized the organization to the reality of a much lower business level. And that resizing of the organization would, in fact, impact our direct sales organization. And we're roughly, at the time, about 85% direct. In order for us to help in that transition, we had made a decision to partner with the indirect channel, the distribution partners that we had brought online over the last two or three years. I believe that transition is going very, very well.

I believe that we will be able to put more variable cost into our sales channel in general. We will be able to maintain our reach and we will continue to migrate where, hopefully by 2011, as much as 30% or more of our business will be through the indirect channel. I believe that we have a unique position, given the breadth of our product lines. And we'll continue to be a very, very credible partner to our distributors and manufacturing reps and value added resellers.

So, if I'm hearing you right, Bill, it's from 85% to something on the order of 70% direct. It's not a massive sudden change. Is that fair?

Yes, I think that's fair. Historically, we've tended to do very, very well at large accounts. That has been our historical strength. And these large accounts typically, particularly on a turnaround, will disproportionately drive higher capital spending and those accounts will continue to be handled direct.

Thank you.

Our next question comes from the line of Deane Dray from FBR Capital Markets. Please proceed.

Thank you. Good morning everyone. Be interested in hearing how the quarter played out in terms of the months? Just based upon hearing the spurt of orders in life sciences, it sounded like October was quite strong. So just how did the quarter sequentially play out?

Well, exactly, as described. Historically, this has always been the strongest quarter of the year; it's the last quarter from a sales organization. There tends to be a surge of orders at the end of October. That happened this year, plus more. The order intake at the end of October was well above our normal seasonal expectation.

And within that burst of orders, how would you characterize them? Are these new product driven? Is it a refill of the channel? And maybe is there any pricing pressure on that? And how would you describe those?

First of all, in terms of -- as Adrian talked about, our gross margins were in great shape and there should be no anticipation that the orders we received at the end of the quarter would be any different in terms of mix. But as I had noted, during 2009, we continued to spend $600 million in research and development. The introduction of our new instrument platforms, from our network analyzers, to our LC/MS, to our LC, to our triple quad GC, oscilloscopes; we are entering 2010 in just incredibly strong position from a technology standpoint. And I think that's being reflected in acceptance by our customers and the marketplace. We have not lost, at all, in terms of having technology leadership in measurement science as we move into 2010 from our viewpoint.

Great. And Bill, while I have you, and lots of focus on food safety, lots of focus on China, in this case both. And Adrian touched on the fact that these applications are looking at drug residue and pesticides but just give us -- bring us up-to-date on this. What's the product and go-to-market strategy? Is this all high end lab equipment or are there any in-process application specific products that you think that you can bring to market here?

From a hardware perspective, the building block measurement tools in laboratories are GC, LC's and mass spec. And so, if you look at this investment, even the food industry, petrochemical environment, our focus has been in the central labs. As you know, a lot of these standards around the world are standards that have been originally developed in the west. China will, of course, continue to develop their own standards. But when you look at such industries as food industry, one tends to conform to what the worldwide measurement standards would be. That has been our focus. We have a great team in China. We have a direct team moving forward.

I think we have an advantage, given that as you know, David Packard started the first high tech joint venture in China in the '80's. And we are just very well positioned in China, built on our electronic measurement base, which is down this year because of the downturn in cell phones. But the team in China has just done an incredible job of providing measurement solutions with the hardware base. And then, we have large application teams in China to make sure that we are there to be able to provide those solutions. In addition to that, years ago we had started a Shanghai manufacturing center. That's expanded not only into sales and applications but as well as R&D. And we have customized instrumentation, targeted specifically at the Chinese market, local languages, down to the markings on the knobs. And so, I believe the team in China has looked as local as they can. And given the breadth of our products, the breadth of our application capability, we continue to do a great job.

Great. And then, if I could just from Adrian, can you address -- you've done a terrific job on the decrementals. Just kind of this quarter, they seemed a little bit bigger than I thought, so 39%. Was there anything unique here this quarter? And then, comment on the positive incremental margins sequentially because at 63%, that's among the best we've seen. Again, is there anything unique there?

Yes, Deane. On the 39%, a lot of that had to do with the fact, back to our prior conversation, around orders. Our orders were so much higher than we anticipated, that we spent a lot more in commissions in the fourth quarter. Obviously, we haven't delivered the revenue related to those orders because they came in late in the quarter. So, that was a significant increase in expense. Also, variable pay kicked back in with the higher than expected profits. And so on the increment, that was also an added cost but for all the right reasons.

So, we were very pleased just to stay within the 30% to 40% that we always target for Agilent's operating model. But that's the reason it was sort of on the bottom end. And you've pointed out that, sequentially, in fact, it was a superb performance towards the high end and part of that -- or not part of that, a large part of that really shows the momentum we have in the restructuring program. As Bill mentioned earlier, the global infrastructure restructuring is essentially over at this point. The semiconductor board test restructuring is completed at this point. Both of those are both ahead of schedule and getting more. And the electronic measurement restructuring has great momentum to be completed by mid-year. So, what you're really seeing is the clear benefits of the restructuring and lowering our breakeven.

Great. And in my book, the reason giving that you're paying out higher commissions on these orders, that's a high quality problem. So that was -- I'm glad you pointed that out. Thank you.

It's a nice problem to have, you're right.

(Operator Instructions) Our next question comes from the line of Jon Groberg from Macquarie Capital. Please proceed.

Good morning. So, on the communications side of the business, Bill, you also during the quarter sold that data network test product line to Ixia. And I'm just curious, what is the -- and as you alluded to and what I'm hearing from all the people in China, is CapEx budgets for all of these contract manufacturers are basically nonexistent going into next year. So, what is there any -- I guess I'm trying to understand kind of what the model here is or what the business model will look like on the communications side of the business. Are you de-emphasizing certain businesses and going to emphasize others as you move into this LTE transition?

Right. Well, our core capability in cell phone activity has been at the physical measurement, the signal sources, spectrum analyzers, network analyzers. And taking that technology into what we call one box testing as these products go into manufacturing. We've been very clear that our focus has been to continue to maintain our position in the manufacturing environment, which is clearly depressed until this change comes, but to really focus on the R&D environment. Our number one position has always been in the physical layer. We have a great position in the base stations. That's really where the investment is going right now, is the development and the beginning deployment of base stations. And of course, the continued development for the handset technology moving forward.

We continue to look at our portfolio. We continue to look at where our competitive position is in a lot of these segments. And as well, as focusing our R&D investment in 2009, we have made some strategic decisions to exit certain businesses so that we could focus where we are stronger. And one example that you just noted. The other example, of course, we exited the optical and x-ray inspection. It's another market where, right now, it is nonexistent. There are no orders for x-ray inspection. And the belief is will people spend that kind of money moving forward in the new reality economy. We felt that type of investment would be very low and so we made a decision to exit those businesses. We will continue to look at our portfolio and make sure that we invest where we have the strongest market position.

Okay. That's helpful. And then on the -- moving to the pharma side, on the 1290 and you've talked a lot about the orders. Has that started shipping yet, can you just remind us? And then, can you talk maybe about what you're hearing from your CRO accounts? I think you've been historically stronger in the CRO's and you mentioned pharma was still difficult. But maybe what you're just kind of hearing from some of those accounts?

Well, in terms of the 1290, yes we are shipping the product. The feedback has been very, very positive moving forward and so, we're in the process of ramping that capability into a market that is down. The replacement market for LC's is very, very weak. I think that's the same for our CRO's, as well as pharma. And so, really what you're seeing is a new capability that people are willing to buy, invest in and get the benefits of this new technology. As Adrian noted, we do see some sequential growth in the pharma market moving forward and we will see how that plays out as we move into 2010.

Okay. And then, on your initial outlook, Adrian, for 2010, 5% growth kind of organically for both businesses, given a really difficult comp. I'm just curious how much of that is the overall uncertainty still in terms of the robustness of the economic recovery? How much is just what you're currently seeing and momentum in the business and how you think that plays out? And then, can you maybe talk, given all the restructuring, what kind of incremental margins kind of for the full year you would expect on that type of revenue growth?

Yes. First, I think it is conservatism and uncertainty. You can't go through a year like we just did and have confidence that we know how quickly our markets will recover. So, the comment was really around all of you guys have a range of forecasts that average about 5% and that would be our best guess at this point in time. But recognizing that our commitment is to achieving the operating model results, the 30% to 40% organic incrementals around that. Now, for fiscal 2010, I think you will see much, much higher incrementals than that because Ron Nersesian and his team in Electronic Measurement are doing this profound reset of the breakeven to the tune of $300 million. And so, you will see very, very attractive incrementals from that business. In fact, we're already seeing it. I think you'd see more normal incrementals from the Bio-Analytical side of the house.

Yes, if you go back and look at the recovery after the tech crash in 2001, electronic measurement sequentially grew 17%. For us to ever imagine that, in this environment, would be probably delusional. That is, as you know, the big debate. What will be the slope of the recovery? Will it be a snapback, which is actually quite traditional? Will it be a double dip? Or the new one is the square root, that we'll see this pop and then kind of flatline out throughout '10. I do believe, with Adrian, that we will see some sequential growth, just as the comparisons just become easier, we have a great product, a whole slew of products that we've launched into the market. So, that we believe we will see sequential growth. And again -- but as you know, no one really knows what the growth rate inherently will be in the economy in 2010.

I think what I can -- what we demonstrated in the second half of this year and you will see in 2010, is that, if demand does come in stronger than we currently anticipate, we will react and we will deliver that product. We've got just a world class team, doing sourcing and manufacturing, that's demonstrated time and again that they can really jump through hoops to deliver to customer commitments.

Great, thanks a million.

Ladies and gentlemen, our next question comes from the line of Mr. Mark Douglass from Longbow Research. Please proceed.

Good morning, gentlemen. Thanks for taking my call.

Sure.

Related to the expectation for fiscal 2010, defense/aerospace was up quite dramatically in orders, sequentially. What do the orders look like? Are they kind of blanket orders for the year? Do you expect the sales to become -- be strong in the first half or do you think it should remain strong throughout the entire year?

A couple comments. First of all, in the aerospace and defense does tend to go in cycles, particularly driven by what a country's budget cycle is themselves. And the US has very typical budget cycles. So do other countries moving forward. The biggest concern that we had talked about in previous calls was that with the unwinding of the Iraq war, the pressure on the budgets, would there be a fundamental change in aerospace and defense spending in the United States, which is half the world's market? As it appears now, and again this is public record, that the US defense budget in fact will not change measurably going in 2010.

In addition to that, we continue to do well in China. Continue to do well -- the investment in Japan, continues to increase. Continue to hold our own in terms of the investment Europe is making. So, we're looking at a market that will, at worst, be flat in 2010 with some potential upside depending on which programs and how much of that that we win. But at this point in time, we do not see a major restructuring of the industry, which I think was the -- is really the good news.

Yes, Mark, it's Adrian. Just a little bit more detail to emphasize what Bill said. There's a strong seasonality between Q3 and Q4 in this business. And so, the fact that it was up 27% was a surprise but the fact that it was up was not a surprise. Year-over-year, orders were up single digits. So, that's much more indicative of the secular trend in this business. And the only other thing I'd mention is that there is an initiative taking place to modernize the test and equipment installed base within the military. It has been neglected for a long, long time, as the focus has been on munitions and troops. And as that winds down, there is some reallocation. And so, the level of inquiries around that for us has been pretty attractive.

Okay. Thank you for that. And then you mentioned, Adrian, $80 million to make salaries whole in fiscal '10. How much of an impact are we going to have in the first quarter?

If you were to look year-over-year, it's $20 million. If you look from Q4 to Q1, it's like $32 million because we also begin each new year's 123R related expense, that's front-loaded in the recognition. So, it tends to be lumpy sequentially between Q4 and Q1.

In addition to that, we'll have the normal tax and benefit true-up that starts in Q1 as well. So, there's actually going to be close to a $40 million sequential impact in related salaries.

Right. That's from Q4 to Q1. Again, year-over-year, it's $20 million.

Okay. So, year-over-year it's spread evenly?

Correct.

But sequentially, it's quite a bit a jump from our Q4 to Q1 with the salary restoration and the corresponding tax and benefit true-ups and increases.

And 123R.

And 123R.

Okay, helpful. And then, finally, you mentioned interest expense might be a little light in some of the models. What kind of quarterly run rate would we be looking at there?

Well, I would just point out that we raised $750 million worth of debt, the average interest rate there was 4.5%. We've swapped that and so, the interest rate is closer to 3% but that's still a significant chunk of change on $750 million. And that's not reflected at all in the analyst estimates. I understand that. We're in this surreal area where we haven't consummated the deal with Varian yet and yet, we've financed it. So, you have to forecast as if we're not going to buy it, even though we have the interest expense associated with it. So, my sympathies but just to get the numbers right, you do need to reflect that higher interest cost.

Yes, I had $2 million in there per quarter. You said you swapped the 3%?

3% annual cost, at the moment, with our current swap yield.

Okay. Thank you.

Our next question comes from the line of Sven Eenmaa from Thomas Weisel Partners. Please proceed.

Yes, hi good morning. And thank you for taking my questions. First, wanted to ask about that broadband spending, broadband R&D spending outlook as you go into 2010?

I don't know the answer, other than that we are planning that 2010 will continue to be difficult, that we will not see a dramatic increase in capital investment in 2010. We hope that we are wrong. You're seeing the overall general purpose market increasing but until there's a catalyst of overall installation and change, I think the market's going to remain relatively difficult. We do believe that we're at the bottom. We may see continued sequential growth but until there's a real catalyst of change, I think 2010 will continue to be difficult.

Okay. Second question I had has to deal with the $525 million in annualized cost savings. How much of that is yet to be achieved? And does that flow through the cost of sales line or will that be mostly on SG&A side?

We were about between 2/3 and 3/4 completed. Only the electronic measurement restructuring is yet to be completed. It shows up mostly in the SG&A line because that's the single biggest line item we have but also significantly in R&D. Less of it shows up in the cost of sales.

Thank you. And final question and it's a modeling question. In terms of the next year, how should we think about the seasonality as you go through the year?

Well, I just -- if you think about it from as being the converse of this year, that the comparisons will get a lot easier towards mid-year from this year. Hopefully, we'll have another gangbusters fourth quarter but I think it's a bit of a reverse of what you saw this year.

Great, thank you. Thanks very much.

Yes. One other comment that perhaps on -- back to the Varian financing, since I mentioned the $750 million that we have raised for that. At this point, we are comfortable that we will use our own cash for the other $750 million. So, there will be no additional fund raising required to consummate that acquisition. Just thought you'd all like to know that for your offline modeling.

Our final question comes from the line of Mr. Richard Eastman from Robert W. Baird. Please proceed.

Bill, just one question. Could you talk for a second about the EM order growth being up 18% sequentially? Was there any maybe meaningful difference between the geographies when you're looking at sequential growth? Are you more or less comfortable in EM about any geography recovering quicker and with a sharper rebound?

The Americas was by far the strongest sequential growth.

And again, part of that has to do with the aerospace defense seasonality. But the US and Asia showed the strongest orders rebound. Europe and Japan continue to be very weak.

Okay. And the same general trend holds true on the general purpose as well as com? General purpose was kind of the leader here?

Yes, the general purpose, by far, was the story in EM. Again, when you think about it, where it's a much broader industry moving forward, the data is pretty clear that the semiconductor industry, computer industry is at least stabilizing moving forward. And that's also, if you look at it from a breadth of products, we have the broadest range of products that address the general purpose electronic measurement market. So, it's not too surprising that's where you'd see the rebound. The communication market, again, is dealing with the first downturn in cell phone sales since the history of the introduction of cell phones. And even the smartphone market can't make up for just the fundamental weakness in the overall cell phone handset market. The infrastructure for G2.5 and G3 is pretty much there. And so, you have a void of investment in infrastructure, overcapacity in handsets. And so, you just have a very, very difficult environment until we move to G4.

Very good. Thank you.

Ladies and gentlemen, this will conclude the Q&A session. I would now like to turn the call over to Alicia Rodriguez, Vice President of Investor Relations.

Thank you, George. To everybody on the line, I'd like to thank you on behalf of our management team for joining us today. Please call the investor relations department with any follow-up questions that you may have. And we look forward to speaking with you. Again, thank you very much. Bye-bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now all disconnect. Good day.