安捷倫 (A) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Agilent Technologies Inc. earnings conference call. My name is Tawanda and I will be your coordinator for today. All participants are in listen-only mode. We will conduct a question and answer session towards the end of today's conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Miss Alicia Rodriguez, Vice President, Investor Relations.

Thank you and welcome to Agilent's first quarter conference call for fiscal year 2010. With me are Agilent's President and CEO Bill Sullivan, and Executive Vice President of Finance and Administration and CFO, Adrian Dillon. Joining in our Q&A will be the Presidents of Agilent's electronic measurement, life sciences, and chemical analysis groups -- Ron Nersesian, Nick Roelofs, and Mike McMullen. After my comments Bill will give his perspectives on the quarter and the overall market environment. Adrian will follow with a review of financial results. And 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 to our webcast module from our website, please click on the link for supporting materials. There will you find additional information such as our revenue break-outs 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 websites required reconciliation to the most directly comparable GAAP financial metrics.

Additionally I would 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 the factors at work. The forward-looking statements, including our guidance provided today during the call are only valid as of this date. And the Company assumes no obligation to update such statements as we move throughout the current quarter.

As a reminder, regarding Agilent's pending $1.5 billion acquisition of Varian, given that the deal has not closed and we are still currently in the regulatory approval process, we will not be providing any additional details on the deal, post-closing integration synergies, process, or cost savings. For information on the acquisition recommend that you review Agilent's and Variant's SEC filings.

Let me turn the call over to Bill for his comments.

Thanks Alicia, hello everyone. In a few moments Adrian will provide you with detailed analysis of our Q1 financial results. I would like to provide you with a summary of results, an overview of the market perspective, and our outlook for the year.

Agilent's Q1 revenues of $1.2 billion were up 4% year-over-year while orders of $1.2 billion were up 9% from a year ago. Non-GAAP earnings were $135 million or $0.38 per share. Agilent's first quarter earnings combined with solid asset management enabled to us generate $30 million of operating cash flow. Q1 operating cash flow is usually negative or flat. However, we ended the quarter with a net cash of $1.2 billion. Agilent's Q1 performance exceeded our own expectations and a very solid start for fiscal year 2010. Several themes have emerged from this quarter that I would like to highlight. First, all signs point to recovery in most of our key markets. Second, Agilent has significant up side potential as a result of the recovery. Assuming a continued market recovery, Agilent will deliver 10% revenue growth and an earnings per share of $1.65 to $1.70 for the full fiscal year 2010. In Q1, we're already reporting mid-cycle operating margins of 15% and a 21% return on invested capital.

The global recovery is being led by Asia and by China in particular. Excluding Japan, Asia's revenues are up 20% and China's revenues were up about 30%. Agilent's continued ability to participate in a rapid Asian recovery bodes well as we progress into 2010. Q1 orders in non-Japan Asia grew more than 25% year-over-year. This level of orders equaled more than 30% of Agilent's Q1 orders. The Americas and Europe has stabilized, and we're relatively flat over last year on a currency-adjusted basis. Our business in Europe is benefiting from a favorable currency exchange. Due to stabilization in America, and Europe, and strong growth in Asia, we believe Agilent's annual revenue growth will be in the range of 10% for fiscal year 2010 excluding the recently announced divestiture of our network solutions business and the future acquisition of Varian.

From a market perspective, we saw year-over-year revenue growth in almost every key market. Our chemical analysis business had an outstanding quarter. Revenues were up 13% year-over-year with all key end markets up in double digits; food, plus 17%, Petrochemical, plus 12%, and environmental forensics up 9%. The team has executed very well and experienced excellent growth in GC/MS and ICP-MS instrument platforms. In addition, we had solid double-digit growth in our consumables business as well as excellent growth in our service business. Our life science business also had an excellent quarter with revenue up 10% over last year, driven by solid performance in pharma, plus 8%, and continued growth in academic and government, up 15%. The market acceptance of our new 1290 LC has been outstanding. Likewise, we saw double-digit revenue growth in our microarray, RAGE and PCR, and informatic businesses.

Electronic measurement revenue was down 2% over last quarter, but a dramatic improvement over the last four quarters. Industrial, computer and semiconductor markets were up 13%, Aerospace and defense was up 12%. However this strong growth was offset by a 23% decline in our communication business due to the lack of demand for handset test capacity. And again, we believe this may continue for the next quarter. We have fundamentally reset. Even more encouraging was the order growth of 8% year-over-year. Given our order growth and quarterly comparison to a very weak 2009, we are still expecting a double-digit growth for the remainder of 2010.

We have fundamentally reset the operating model in electronic measurement. Electronic measurement will deliver double-digit profit at a $2.4 billion annual run rate of revenue. This year, electronic measurement will deliver over 100% incremental profit. While the restructuring of electronic measurement has been painful, we continue to focus resources on major market opportunities and product solutions. We have entered 2010 in a very strong market position with a leadership position in network analyzers, spectrum analyzers and a very strong product portfolio of oscilloscopes. Yesterday we announced the divestiture of our network solutions business. This is the third divestiture we have made in the electronic measurement group over the last year. We continue to make decisions to focus on our core electronic measurement capability consistent with the new electronic measurement group operating model. Adrian will provide more details about the change in our electronic measurement group model during his presentation and the corresponding impact on Agilent's financial performance.

In summary, we believe we're in excellent position as we enter Q2. As a result of maintaining our investments in R&D during the downturn, our focus on differential technologies and new product introductions and executing on our $525 million restructuring plan, we will be able to drive significant incremental profit as the markets recover. For the second quarter of 2010, we expect revenues to grow in the range of 12% to 15% from a year ago. Non-GAAP earnings are expected to be in the range of $0.38 to $0.42 per share compared to last year's $0.13 per share.

One final note regarding the status of Varian acquisition. We continue to work with Varian, US, and EU regulators and potential buyers of the product lines to be divested. We have announced one of the divestitures and hope to reach definitive agreements for the other product lines as soon as possible. We continue to be extremely excited about the potential combination of two of the founding companies in Silicon Valley. Thank you for being on the call. Now I will 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 our three business segments, and conclude with some thoughts about the outlook for Agilent's second quarter and full-year 2010. Then we'll turn it back to Alicia for the Q and A.

Overall, we are pleased with our first quarter operating results. The growth in orders and revenues suggest that the economic recovery that we first glimpsed at the end of Q4 has gained momentum over the past three months, and that it should both broaden and deepen as the year progresses. Our earnings performance demonstrates the power of Agilent's operating model as our markets recover, as well as the clear benefits of our $525 million restructuring program. Orders of $1.22 billion were up 9% from one year ago and all three of our business segments were up from last year. Revenues of $1.21 billion were up 4% from one year ago with both life sciences and chemical analysis up double digits and electronic measurement down only 2%. Geographically, the star was non-Japan Asia, which was up 20% while Europe was up 6% in dollars and flat in euros, and the Americas were off 2% from last year. What is perhaps most remarkable about this quarter's performance is that we hit our mid cycle operating metrics at the beginning of a new economic cycle. Operating profits of $181 million in the quarter equate to a 15% operating margin and our return on invested capital in the quarter was 21%.

We were also encouraged by our balance sheet performance. Inventory days on hand at 93 days was 19 days better than one year ago. Receivables days sales outstanding at 47 were two days better than last year. During the seasonally weak Q1, we generated $30 million of cash from operations and ended the quarter with net cash of $1.2 billion. In short, we're pleased with the performance of the Company this quarter and excited to demonstrate what Agilent can achieve for both customers and shareholders in the years ahead.

Okay, turning to the numbers, we had orders of $1.22 billion, up 9% from one year ago. Electronic measurement was up 8%. Life sciences was up 9%, and chemical analysis was up 12% from one year ago. First quarter revenues of $1.21 billion were up 4% from last year and up 1% excluding currency impacts. Electronic measurement down 2%. Life sciences up 10%, and chemical analysis group up 13% from one year ago. It is worth noting that as of the first quarter, Asia, at 36% of revenues, is as large as the Americas for Agilent. In fact, excluding Japan, Asia represents about 26% of Agilent's revenues and with first quarter growth rates of 20%, non-Japan Asia is clearly driving the Company's overall growth trajectory. First quarter gross margins at 56.1% were nearly two points higher than last year with electronic measurement up three points despite lower volumes and both chemical analysis and life sciences gross margins essentially flat with last year.

We have also maintained aggressive control over operating expenses. Compared to last year, total first quarter expenses were down $39 million, or 7%. Excluding currency, the drop in spending was $55 million or 10%. And that includes $11 million higher variable pay than one year ago reflecting our better ROIC performance. As reported, R&D spending at $146 million was down 11% from last year, and at 12% of revenues was down two points from one year ago. SG&A at $353 million was down 6% and at 29.1% of revenues was three points lower than last year at this time. Operating profits of $181 million were up 91% from last year. The Company's first quarter operating margin was 14.9%, up nearly seven points from one year ago, and as mentioned earlier, essential at our mid-cycle target. Other income and expense was down $8 million from last year, including an $11 million reduction in net interest income. Our tax rate during the quarter was 20%. Pro forma net income of $135 million, or $0.38 per share compares to $0.20 per share one year ago.

Okay, going from non-GAAP to GAAP, page four of our press release financial tables provides a detailed reconciliation from non-GAAP to GAAP income. Summarizing, we had non-GAAP income of $135 million. We had restructuring and impairment charges of $48 million, non-cash amortization of $10 million, and $2 million income in taxes and other, resulting in GAAP income during the quarter of $79 million or $0.22 per share, compared to about $0.18 per share one year ago. Turning to cash, as I mentioned earlier, DSOs at 47 were two days better than a year ago, and on a dollar basis were essentially equal to a year ago. Inventories on the other hand, improved dramatically at 93 days, down 19 days from last year, $107 million lower inventories today than one year ago. Total cash generated from operations was plus $30 million. During the quarter we had $25 million of CapEx. Included that in cash is $40 million of depreciation and amortization and we spent $12 million during the quarter on acquisitions.

During the quarter we had $103 million of share issuances related to options exercises and our employee stock purchase plan, or about 4.9 million shares. During the quarter we also repurchased about $100 million of shares, or about 2.9 million shares. We also had about 1.4 million of share dilution from the increase in our share price during the quarter from $26.30 to, $29.34. We ended the quarter with 354 million fully diluted shares outstanding which ignoring the 1.4 million additional shares from the higher share price, is about 2.6 million more than we intended. There were more options exercises than we anticipated, and for much of the quarter, we were under 10b-5 constraints and so weren't able to respond to the higher level of options exercises. This quarter we will try to get the share count back down to 350 million. Again, ignoring the impact of the varying share price on the diluted share count. As mentioned earlier, we finished the quarter with net cash and short-term investments of $1.2 billion, up $350 million from one year ago.

Okay, turning to segment information, as most of you know we redefined our business segments at the beginning of this year, and Alicia's team has provided historical financial data for the new segments. As a reminder we now have a revised electronic measurement segment which incorporates the prior semiconductor and board test segment and is run by Ron Nersesian. We have also split the old bioanalytical segment in reflection of its increasing importance to the Company into Life Sciences, headed by Nick Roelofs and Chemical Analysis run by Mike McMullen. The press release provides a good amount of detail on the segment results and Bill earlier detailed overall market trends so I will try not to be redundant in my remarks. We also have the three segment presidents here and available for any detailed questions should you have them. What I will try to do is focus on the financial results by segment and give you a sense for our expectations for operating performance during the remainder of the year.

Turning first to life sciences, this segment had first quarter orders of $336 million, 9% above last year, and up 4% on a currency adjusted basis. Life sciences revenues of $340 million were up 10% or 5% in local currency terms. Geographically, the Americas were up 3%, and Europe was up 9% in dollars, or about 3% in local currency terms. Japan was up 16%, while other Asia, led by China, rose fully 28% from one year ago. First quarter life sciences segment income was $55 million, up $11 million on a $31 million increase in revenues, or a 36% incremental. Gross margins were about flat at 54%, while operating margin at 16%, was up two points from one year ago. Segment ROIC improved five points to 21%. Looking ahead to the rest of 2010, we expect the first quarter momentum we saw to continue through the remainder of the year, with full year revenues up 10% to 12% from fiscal 2009. From an operating model perspective, we anticipate a mid-30s incremental operating margin contribution, similar to Q1's performance.

Turning next to chemical analysis, we also saw a robust performance from this segment. Orders of $242 million were up 12% from one year ago, and up 7% in local currency terms. Revenues of $244 million were 13% above last year, and up 9% in constant dollars. Geographically the Americas lagged, down 3% from last year. Europe and Japan were up nearly 20% while other Asia jumped 23% from one year ago. By the way, it is probably worth noting that for chemical analysis, other Asia revenue at 29% is now larger than the Americas at 27%. First quarter segment income of $67 million was $10 million above last year on a $28 million increase in revenues, or a very attractive 38% incremental performance. Gross margins were stable at 55%, while operating margins improved one and a half points to 27.5%. Segment ROIC jumped 15 points to 60%. Looking ahead, we expect the recovery of chemical analysis markets to continue and to broaden across geographies. At this point, we expect full-year 2010 revenue growth of roughly 15% and consistent with Agilent's operating model, a 35% to 40% operating profit incremental on that additional volume.

Finally, looking at electronic measurement markets, we are seeing clear signs of a market turnaround that is beginning to gain momentum. First quarter orders of $642 million were 8% above one year ago or up 6% in local currency terms, the first increase in orders since early 2008. Revenues lagging orders were down 2% from last year. Market trends were sharply bifurcated with industrial, computer and semiconductor markets up double digits, but communications revenues still down 23% from one year ago. Geographically, revenues were down 3% in the Americas and Europe. Japan was very weak, off 26%, while other Asia was up 16% from last year, led by a 29% increase in China. Electronic measurement's first quarter operating profit of $58 million was $64 million above one year ago despite $12 million lower revenues, clearly showing the cumulative benefits of the resizing of this business. Gross margins rose by three points to 57% while segment operating margins improved by 10 points to 9%. Segment ROIC rose 13 points to 13%. Looking ahead, electronic measurement's $325 million restructuring program will be completed at fiscal midyear when we expect to hit a 12% operating margin at an annual revenue run rate of $2.4 billion.

We also expect the market recovery to continue as we continue to track the trend of semiconductor shipments with a one quarter lag. Overall, we expect revenue to be up roughly 10% this year on an apples to apples basis, excluding the divestiture of the Network Systems Division that we announced yesterday. Given the successful restructuring of this business, we expect the incremental operating margin this year will be above 100%. Longer term, as a result of the actions we've taken, including shutting or divesting product lines that couldn't achieve Agilent's operating model, we expect this segment to generate a consistent 40% incremental operating margin.

Okay, finally, turning to the outlook for our second quarter of fiscal 2010, Bill mentioned that on a stand-alone basis, we expect revenues to be about 12% to 15% above last year and non-GAAP earnings to be in the range of $0.38 to $0.42 per share. For the full year, we now expect Agilent's stand-alone revenues to be up roughly 10%, and non-GAAP earnings to be in the range of $1.65 to $1.70 per share. These forecasts obviously do not include the impact of the Varian acquisition. They also ignore the impact of the Network Systems Division divestiture that we announced yesterday. Assuming that the NSD transaction closes at our fiscal midyear the impact will be to reduce our revenue growth this year by two points to roughly 8% year over year growth. The divestiture is expected to have no material impact on this year's earnings per share.

More generally, whatever the economic outlook for 2010 and beyond, our commitment is to deliver performance consist with Agilent's operating model characterized by businesses that, one, achieved an average 20% ROIC over the economic cycle. Two, achieved 30% to 40% operating profit incrementals throughout the cycle. And three, are cash flow positive from operations at every point in the economic cycle.

With that I will turn it back to Alicia for the Q and A.

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

Thank you. (Operator Instructions) Your first question comes from the line of Mr. Deane Dray with FBR.

Good morning. This is R.J. actually on behalf of Deane. Question on the network monitoring business which arguably Agilent invented with its SSS systems and was long considered one of Agilent's core businesses. Why is this no longer core, and maybe if could you comment on any share loss over the last couple years.

Our core capability for 70 years in electronic measurement has been at the physical science level. We have been a leader in network, spectrum analyzers, very very strong competitor is oscilloscopes and the broadest range of electronic instruments in the world. You are right that after the split of Hewlett-Packard this segment of the market became more visible through the work that had been done under Hewlett-Packard, even before the separation.

But our core competence is in physical science. This core competence is also what we're using to leverage into our life science and chemical analysis market. I firmly believe that the Company should continue to focus on its core competence and so making this divesture, teaming with it a company such as JDSU that is really focusing in that area is better for our customers, as well as for our employees. So I think it's absolutely the right decision for the Company going, given the direction the Company is heading.

Looks like Asia had a particularly strong quarter, so maybe if you could provide more color in terms of specific end markets, China obviously was -- did really well. What's driving that growth? Any color on what you're seeing in communications or food testing as it related to stimulus spending?

Well, as Adrian noted, we went through each of the segments per group, but China's business is growing across the board in every one of our segments. Even in aggregate and electronic measurement, even though cell handset test capacity is down, overall growth in electronic measurement in China, was very good. So that goes across all of the industrial, all of the aerospace and defense, the semiconductor markets, and food continues to do very well. Environmental testing, petrochemical and the whole pharmaceutical area. So China is the story of Agilent, and right now China is the story for the world's economy.

Great. Maybe lastly on your revenue growth assumption, 10%, how much of that is organic versus FX? I guess weak dollar helped a little bit, so is your organic still 5%, or is there any change there?

This is Adrian. For the Company overall, in the first quarter, 4X was about 2% -- 2% to 3%. We're assuming constant dollar from this point forward. On a full year-to-year basis it would be about 2% given that the dollar did drop over the course of 2009, but we're not counting on anything material from here as far as the weakening or strengthening of the dollar.

So basically your organic assumption is slightly better than what what it was last quarter.

Considerably better.

Thank you, great quarter.

Thanks.

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

Thank you. Following up on the comments around the divestiture, Bill, are there other parts of the [COMS] test business or the general purpose test business that we might expect to see divested and can you give us an idea what the strategic approach is going to be there?

Sure. I'm going to ask Ron to have a couple of comments. We have made three divestitures in this space, two of them around the networking space -- the N2X platform that we sold to Ixia, the network solutions division that we sold to JDS and we did shut down the optical and x-ray inspection business. And so the ultimate divestiture we shut it down. This will allow Ron and his team to focus on the absolute core competence that we have in our three major platforms, and again, huge capability in all the accessories from programmable power supply to meters and handheld instruments. Ron, will you please make a few comments about the renewed focus that EMG has in your new operating model.

Yes, our focus is built around the physical layer. We have a strength of product throughout the portfolio that we will continue to focus on to achieve our top market position. For instance, for the LTE market, we have electronic design automation software, then core physical measurement products such as signal sources, signal analyzers, network analyzers, and even a new product category that we invented, a base band product called the PXB. All of these production together are the core of the Company. They have produced the majority of the profits for EMG, and we are in very strong market positions. We will continue to focus on these markets to exploit the opportunities that exist as well as to deliver at least a 40% incremental additional revenue.

Great. Then just one more quick one, if I can. The restructuring, how much of that is left to achieve? In our model, should we assume that after April, we're back to a normal 30% to 40% contribution for the whole Company, or do we start to see something that may be for the July and October quarters is still a bit higher, owing to the rebound that seems to continue?

I'll have Adrian give you the weighted average, but we will continue at 30% to 40% increments in our chemical analysis and life science, you should assume that Ron's business in EMG will have greater than 100% increment for the remainder of the year. Adrian, about the weighted average?

Sure. To answer your questions, we probably have about $30 million of annual rate savings yet to go between now and midyear to complete the program in EMG. Because of the full year FX we'll continue to look like we have very attractive incrementals in aggregate going forward. Roughly they're in -- well, they're above the 50% range -- even after your -- in the second half of the year, again because of the full year FX of what we did last year. But, Bill gave the real story, which is that going forward, even after you have the full year FX taken into account, we're talking about a 30% to 40% incremental and with EMG being at that solid 40% high end of our operating model.

Thanks, guys.

That was reflected in our earnings per share estimate, assuming that we fully participate in the world wide recovery.

Great, thank you.

Your next question comes from the line of Mr. Jon Groberg with Macquarie. Please proceed.

Adrian, few questions on this network divestiture. Trying to reconcile what JDSU said about the business and how you seem to be describing the business. And so they were describing it as having very high both gross and operating margins, but you're saying really not going to be meaningful to earnings. So can you maybe just characterize that business for us in a little bit more detail?

I will not comment on what JDSU had to say. We mentioned in the press release that this is a business that has about $160 million in annual revenues last year. So about $40 million per quarter. And that for Agilent, it will not be dilutive this year when we divest it. And so you can come to your own conclusions about profitability.

Just look at the network business historically has had higher gross margins, a little bit lower operating modules versus the core business that Ron manages, and so overall, there just won't be any impact to our electronic measurement business as we move forward.

Okay and then just to be clear -- big part of the story on the EM side has been this migration to 4G and a lot of people wondering, trying to figure out where now you're left in benefiting from 4G. Is it primarily on the handset side as new handsets are developed and then just on the R&D, or what other pieces of your business are left to benefit from -- as move to LTE?

Ron, why don't you take that.

Sure. We're benefiting from, first of all, the overall design of products such as cell phones and base stations on this LTE buildout. And as I had mentioned previously, we make electronic design automation software which helps people design wireless production for the LTE and WiMAX buildout. On top of that, we make signal sources and signal analyzers, other products that are used in early R&D -- mainstream R&D -- as well as in production, and we've also added some installation and maintenance product that will allow us to capitalize in that area. But we have over 15 different products in our LTE portfolio, and we will capture a high percentage of the overall revenue and a good bulk of the profit from our focus on the core markets.

Okay, that's helpful, thanks. Adrian, you've often described the EM business as just one quarter lag to the global semiconductor market. If you go back and look at the correlations, there's very good correlation there. If you look at the coming quarter, your second fiscal quarter over the global semiconductor market, just given the severe drop of a year ago, it's looking like it could be a very big quarter.

You're guiding to a little bit less growth. Is that conservatism, or is there something we're missing in terms of your particular benefit from this really easy comp that you get year-over-year?

There may be a little bit of both, but that's a directional indicator, the correlation is about 90%, but it's more directional than it is to take it to the decimal point on the annual growth rate with a one quarter lag. Gives us a lot of confidence directionally that this business is gaining momentum, but I wouldn't take that correlation too literally.

For the second quarter specifically is your visibility pretty good there, or is there still -- I'm trying to remember on the EM side. I know a little bit more on the BAM side in terms of orders versus shipments in a quarter and the type of backlog you have. For EM for second quarter would you describe your visibility to the guidance you gave as good, or there's potential for that to be much higher?

The guidance is pretty good. We have an unusually high level of backlog at the moment, and so I think that the amount of turns business we need to achieve the second quarter is unusually low.

Okay. Perfect. Thanks a million.

Hey, John, this is just one data point for you and others. To the spirit of your question on communications, remember that the NSD business represents less than 20% of our communications business. So as Ron indicated, we have plenty of exposure and opportunity in 4G moving ahead, and where it plays to our core. This network monitoring business was less than 20% of communications.

Okay, thanks a million.

Your next question comes from the line of Mr. Mark Moskowitz of JPMorgan. Please proceed.

This is Anthony [Luscree], on Mark's team. Wondering if could you talk a little bit more about the book to bill ratio in your bioanalytical business overall. It seems a little light. Is this seasonal? Shouldn't it be picking up more at least year over year trends given the easy compares?

I'll have have Mike and Nick respond to your question.

Nick, do you want to take that?

I'll take the first part of it, which is we are working off some backlog, but their point of view, remember that the life sciences business was not as deeply affected in Q1 of last year as the chemical analysis side of the business. So relative to our compare, I think will you find that it is what you would expect in terms of book to bill.

Yes, this is Adrian. I will just give you a little color for the life sciences business. The book to bill is usually below one in the first quarter. It was 0.99 in this quarter. It was also 0.99 a year ago at this time. So quite normal seasonality.

Anthony, very similar message on the chemical analysis business. Had a very strong revenue quarter as noted, worked off backlog we came into FY10 with, but we also continue to have strong, robust orders, which puts us in good position, which you see in terms of our forward guidance on revenue.

Thanks for that color. Can you talk a little bit about -- it seems Agilent is moving from being an incumbent in most of the markets it plays to moving into more higher growth, but yet markets in which you have a lower share. Can you talk about how the shift is going to change your sales compensation strategy, your channel strategy as well as maybe your sales and marketing spend longer term?

Roughly 70% to 80% of our business in the Company is sell through a direct sales force channel. The first priority is to have highly competitive product to differentiate ourselves from in these new markets that we're entering. We have been very, very pleased with the progress that we have made in our high end mass spec product offerings that we have had.

I strongly believe that the separation into two dedicated sales teams, one focusing on life science based customers and the other on the more traditional chemical and industrial based customers will really enhance our ability to get the right skill set in front of the customers to be able to explain, sell, and deliver on differentiable product. The separation of our sales force between Nick and Mike has gone exceedingly well. Nobody has ever accused us of underpaying the market from compensation. So I believe our compensation systems are very, very competitive. And I believe with this very strong product funnel that we have, with an upgrade in the absolute skill set and more importantly the focus of our sales teams, we'll able to keep our momentum at a level we believe is one of strongest if not the strongest in the industry.

Thank you.

Your next question comes from the line of Mr. Jon Wood with Jefferies. Please proceed.

Thanks, good morning. Adrian, can you give us some of you on the operating free cash flow outlook for the core business in 2010?

Yes. We will have a very attractive cash flow characteristics again this year. I would say it's in the range of, based on the guidance that we gave for the full year, in the range of $600 million.

Then the world trade piece of debt that matures in early 2011, calendar year 2011 -- is there any potential to refinance that early, given where the corporate bond markets are today?

We do not have an early refinance option, but obviously we're working with our partners there on deciding exactly what to do -- whether to refinance it, whether to extend it, or whether to pay it off. And we have the ability at this point to do any of the above, and as the Company has become recognized more and more as a very solid Company from a credit perspective, the value from having a secured facility like that does diminish. So we're looking very careful at that -- we have about another 11 months, but all options are available to us.

Great. I think this is for Nick Roelofs. The strange thaw in the pharma biotech business you saw in the first quarter -- would you characterize that strength as all a function of the product launches or has the replacement demand for that customer base started to improve?

Listen Jon, thanks for the question. We are seeing a bit of replacement demand because the pharma guys are just figuring out what they or going to do. They had a reality that the patent cliff a year ago was a problem and they've come out of that. But it is primarily new product, new technology demand and it is global. So we're seeing a lot of relocation of pharma adding equipment and capacity.

Great. Can you comment on any discernible impact you saw from stimulus, either internationally or US in the bioanalytical business in 1Q?

Jon, I'll take that as a starter. Really, our exposure to this is small. We are moving up our academic government sector, so we're at about 28% in the life science group of exposure to academic government.

But our exposure is small, and what we've seen to date is de minimus, so both comments -- one geographic point is that we did see some money flowing out of Japan and so if you looked at our detail that we posted for you, you will see that the life science group did very well in Japan. If you back the FX out of that most of the rest is that is Japanese stimulus. But in a macro this is a very small number relative to the life science group.

Okay. Understood. Thanks a lot.

Hi, Jon, Mike McMullen. Just to add on -- similar story for Japan for the chemical analysis business as well.

Thanks, Mike.

Your next question comes from the line of Mr. Tony Butler with Barclays Capital. Please proceed.

Good morning, thank you very much. China this morning announced, I think for the second time, in a couple of weeks, that banks should increase their overall reserves, thereby limiting the amount of money which can be loaned. While you've had tremendous growth in China, I'm just curious if the ebullience that you think will continue to occur there is also taking into account there may be some slowdown in the overall GDP.

Thanks, Tony. This is Adrian. I will take that first. We were not suggesting that China was going to continue to grow at the 30% rate that we saw in the first quarter. We've been very surprised, happily surprised, and so the forecast that we've given suggests continued double digit growth but low double-digit growth, not the 30% you've seen there.

Of course, no one could ever predict with confidence what happens when banks tighten, as opposed to raise interest rates. But China has done a pretty good job so far of modulating that. No guarantees for the future, but we're pretty confident they will not overdo it and cause a sharp slowdown. We will see.

We've done a very good job of participating in the government infrastructure investment overall, given our exposure and the growth of our analytical business in China. A lot of our -- hopefully a lot of our customers -- would not be first order affected by any change in availability of lending.

That's very helpful. Thank you. Secondly, Adrian, ton gross margins for the EM business, up almost 80 basis points, sequentially, very strong, the question really is around if NSD is divested, should we consider that going down or modulating, or is there still room for some up side in that particular GM side of the business?

I think that you would be hard-pressed to find the Delta from the removal of NSD from EM's gross margins.

Thank you. If you look at $40 million a quarter, yes, the gross margins are historically higher than the 57%, but you are going into the rest of the year where that team is going to deliver greater than 100% increments.

I personally believe no matter what you assume on the operating margin or gross margins, $40 million is going to be lost as we complete this quarter, the restructuring in electronic measurement, and the leverage that we believe we're going to get.

Thanks. Very helpful. Lastly, John, you mentioned some comments from biotech and the life science business. I'm just thinking, is this nothing more than share shifts among other companies, and the growth that you see, or is this really true growth in the total? Is the overall market in the life science business growing?

I think the overall market, again, Mike can make a comment is clearly growing. You've seen a lot of our competitors make announcements on their view of the market, and I will leave it up to you to decide if we're take market share or not. Any comments, Mike or Nick, from an overall market perspective?

I'd just reiterate that we've seen a lot of information come out and a lot of clarity. I think the key issue is there is growth here. Everyone is seeing it, and everyone is being pretty clear that there's a growth opportunity in this space.

Just building on the commentary, really, all of our key end user markets were up double digit.

Very helpful. Thanks, guys.

(Operator Instructions) Your next question comes from line of Mr. Mark Douglass with Longbow Research. Please proceed.

Good morning, everyone, and good quarter.

Thank you.

On the EM side, can we talk about the used equipment sales? Is that starting to abate inventory clearing out of the used equipment and a lot of this -- the orders you're seeing, are for new products?

Ron?

Yes, we're seeing obviously the amount of used equipment that we have, we have been seeing that clear out, and people asking for more and more new equipment, Mark. So there is demand there for used equipment, but we have seen folks be willing to buy new equipment to get shorter deliveries, even when some folks may prefer used equipment.

And I will put a plug in for the team. We are a leader in used equipment. We learned our lesson from the 2000 downturn. Ron's business, which we call RSD, does a superb job, and you would be surprised on how well we do on driving incremental profit in this market.

So we just have a great model, and we allow a customer to finance in numerous different ways. That customer can buy used equipment from us, or the customer can buy new equipment, as Ron said.

Great. And then continuing with EM, the shift to a greater percentage of distributor sales, what was that like in the quarter, and then from a customer standpoint, does it appear to be pretty seamless for them? Have you had a lot of squawking about not having direct sales channel any more to certain customers?

Ron?

Sure. No, it has gone extremely well. Not only have we added more distributors to our overall channel mix, but we've also added Agilent technical partners, and as we had gone through this restructuring, many of the direct field engineers that we have in the Company have been -- have moved to work for these technical partners. So we have expanded our third-party capability through this movement while retaining a lot of the talent that we have in focusing on Agilent products.

And that, of course, gives us the focus that we want as well as it gives us the better variability in our overall cost model. And these Agilent technical partners that we add sell exclusively Agilent products going forward. But overall, the transition has gone very, very well.

That's helpful that a lot of them move just to the partners.

Yes.

Adrian, just quickly, what was pricing in the quarter, if you can quantity it and are there any expectations for pricing in your guidance?

There are expectations for pricing, Mark, in the guidance. In fact, price is quite stable across the past year.

Okay. And then just finally, your CapEx for the year -- last call I think you said it's $130 million to $140 million do you expect that to be a little lower at this point?

Possibly $5 million lower than that range, given what we've done in the first quarter, correct.

Okay, so $125ish million, $130 million.

Yes.

Thank you.

Your next question comes from the line of Mr. Ajit Pai with Thomas Weisel Partners. Please proceed.

Good morning.

Hello.

Quick question on the manufacturing for wireless hand sets. I think you talked about that still being weak and continuing to be weak in this quarter. Could you give some color as to when you expect that to come back and what the driver would be?

Ron?

Yes, we're continuing to see the overall wireless handset manufacturing be a smaller and smaller portion of our portfolio, not only on revenues, but as we look at overall profit contribution from the industry. In particular, we saw a lot of capacity be put in place in 2008, which is still now coming on-line, and being utilized as we're starting to see more growth. We see growth obviously in low-cost handsets for countries such as China and India, and we're also seeing smartphone growth in the higher end products.

But most of the cell phone manufacturers, whether they be contract manufacturers or the original network equipment manufacturers, they have had enough capacity. So of the results that we have talked about forward-looking takes into account, let's say a slower return to the manufacturing sector in handsets.

Right. But let's assume that you have a shift to the next-generation technology as you've talked about seeing increased demand, some of your wireless R&D test tools. Could you tell us whether there's going to be any impact on the manufacturing side as well at some point, when you shift to the next generation will there have to be upgrades on equipment on that side as well?

The exact rollout of LTE and the higher volumes for WiMAX, anybody can guess where that is based on all the forecasts of each of the players coming on-line. But we don't see a very significant portion of LTE handsets being manufactured at all in 2010. So we're continuing to see investments in 2G and 3G for many of the emerging countries, and LTE and other 4G technologies will build up slowly through 2010 and beyond.

Got it. And then the next question, I think it's been asked before, but just to ask the same question in a slightly different way, when you are looking at the secondhand market, or the gray market for [crosser] businesses in the last slowdown there's a pretty material impact on your sales for electronic measurement group. It took awhile before your sales picked up even though end market demand picked up awhile ago.

Now, you've had unprecedented slowdown across most of your businesses. Now when you're looking at things, you did talk about the fact that you've got much better capabilities to sell, used equipment as well and services along with that. But is there a dampening effect? Are the numbers that are coming out with right now, would they have been much stronger if there was no used equipment in the market? How material is the used equipment on the markets, both on the chemical analysis side as well as on EM side?

On the EM side, it's not very material at all. We obviously try to make the market efficient and really help get used equipment to key players that do not want to buy or could not afford new equipment. As Bill has said, we manage that very well. We make a good return for our shareholders on the used equipment market, but it's not a big portion of the overall sales into any of these end marks.

On the analytical side, we have not seen any material development of the used equipment market, and again, we've been watching that very closely, both Mike and Nick are very well prepared to emulate what we have done in electronic measurement.

But again, the used equipment market on the analytical side gets complicated because of the cleaning process, the decontamination process of the instruments, and so that just has not materialized. And given that the market is recovering, we don't expect that to happen.

Got it. Thank you so much.

Your next question comes from the line of Mr. Rob Mason with R. W. Baird. Please proceed.

Yes, good morning.

Hello.

Wanted to see if -- just to circle back on communications test business, does your full-year outlook for EM or consolidated, does it contemplate the communications test business being flat to possibly up for the year?

Rob, you're cutting out, but I think what your question was, was the guidance that we provided for electronic measurement inclusive or exclusive of the NSD divestiture.

No, he's talking about handsets.

Can you hear me a little better?

Much better.

Okay, does your guidance for the full year for EM contemplate the communications test business being flat or up? I guess exclusive of the impact of the divestiture.

Ron?

Our guidance doesn't expect a very sharp rebound in that business, but we see that business leveling out. As we look at Q2 we have a relatively easy compare, and then going forward, we see a slower recovery in the communications market relative to aerospace defense or industrial computers or semiconductor markets.

One of these issues, as we had such a low levels, and moving into easy compare, it doesn't become material. Obviously if the market magically turned around we'll be prepared to respond but that guidance does not assume any dramatic improvement in a handset. As as Ron said, it's becoming a much smaller part of our portfolio.

With the wireless R&D portion of the business, did it grow in the quarter?

Ron? You want to talk about the investment that you're making on the R&D side of wireless?

As Bill had mentioned that business was relatively flat this quarter, but we have invested through the downturn to bring leading edge products. We've just introduced the number one product category in the electronic test and measurement business is the spectrum analyzer business. We just introduced the world's highest performance spectrum analyzer in the world, which completes a brand-new family of four series of products. And we believe we're in the best market position that we've been in, in well over a decade in that area.

So the investments that we have made through the downturn and even as we have restructured have focused on where the key contributions are in R&D, as well as in other markets. So we think we're positioned very well for any type of rebound in that area. But we do feel very comfortable with our guidance.

Okay. And then just switching to the chemical analysis business, we tend to think of that as perhaps a little later cycle, and your guidance for the full year suggests even more acceleration off a pretty good first quarter. Just maybe comment where you're seeing that strength, I think and specifically, the European and Japan growth of 20% seems -- was a little surprising, just given the macro backdrop in both those countries, but just a little more color on how you think chemical analysis plays out for the years as to what's driving that.

Mike or Rob?

Sure, Rob. Good morning. Thanks for the question. Yes, we've seen robust growth across all the core markets, as mentioned earlier. I think this really is a -- and we're really well positioned to capitalize on that based on some of the decisions we took last year in terms of maintaining our focus on the new product investment pipeline, as well as really staying close to our customers, even when they didn't have have money yet at that time to purchase. I think you are seeing that pay off in places like Japan and Europe where they're ready to buy and we're seeing some recovery, particularly in Japan related to government money coming into the market.

Okay. Thank you.

And with no further questions in queue, I would now like to turn the call over to Ms. Alicia Rodriguez for closing remarks.

Thank you, Tawanda. I would like to thank everybody on behalf of our management team for joining us today. Please call our Investor Relations team with any follow-up questions you may have. We look forward to speaking with you, and, again, thank you very much.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect, and have a great day.