安捷倫 (A) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Agilent Technologies, Inc.'s earnings conference call. My name is Stacey. I will be your conference moderator for today.

(Operator Instructions)

As a reminder this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, to Ms. Alicia Rodriguez, Vice President of Investor Relations. Please proceed.

Thank you, Stacey, and welcome everyone to Agilent's third-quarter conference call for fiscal year 2011. With me are Agilent's President and CEO, Bill Sullivan; as well as Senior Vice President and CFO, Didier Hirsch. Bill will give his perspective on the quarter, and Didier will follow with a review of financial results. After Didier's comments we will open the line for questions. 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.

In case you've not 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. At our website, please click on the link for supporting material. There you will find information such as revenue break-outs, historical financials for Agilent's operations, and an investor presentation. We will also post a copy of the prepared remarks following this call. If during this conference call we use any non-GAAP financial measures, you will find on our website the most directly comparable GAAP financial metrics.

We will make forward-looking statements about the future financial performance of the Company. These statements are subject to risks and uncertainties, and are only valid as of today. The Company assumes no obligation to update them throughout the current quarter. Please look at the Company's most recent SEC filings for a more complete picture of the risks and other factors at work, and now let me turn the call over to Bill.

Thanks, Alicia, and hello, everyone. Agilent's Q3 revenues were $1.69 billion, up 21% year-over-year on a non-GAAP basis. Q3 orders were also $1.69 billion, up 13% over last year.

Overall, financial results were excellent. Non-GAAP EPS was $0.77 per share, while adjusted operating margin of 20.2% was the highest in Agilent's history. The Electronic Measurement business continues to be excellent. Q3 revenues of $856 million were up 24% over last year. All regions achieved double-digit growth. Quarterly operating margin of 24% was a record high for the business.

Communications revenues were up 33% year-over-year. We saw strong test demand for wireless manufacture, driven by smartphones, 3G, and LTE network rollouts, while wireless R&D was relatively flat. Although wireless manufacturing growth of 80% in the quarter lowered our overall gross margins, we still produced an incremental operating margin of 47%. We will continue to pursue mobile handset manufacturing opportunities, while positioning Electronics Measurement to continue meeting its incremental targets.

General purpose revenues were up 19%, with growth driven by industrial, computer and semiconductor sub-markets. Digital tests was particularly strong, driven by new high speed digital interfaces.

Aerospace and defense was unfavorably impacted by recent US budget concerns; however, aerospace and defense outside the Americas, which accounts for roughly 35% of that business, continues to see solid growth. Market acceptance for our Oscilloscope product offerings continues to be excellent. We have also had strong response to the introduction of our PNA-X network analyzer.

Life Sciences business revenue of $453 million were up 21% over year ago, up 18% organically. We saw solid growth across all regions, with particular strength in China and the rest of Asia-Pacific. While there continues to be market uncertainty in the US and European pharmaceutical industry, we have good momentum, driven by the replacement cycle for lab instrumentation. In academic and government, we continue to do an excellent job of identifying opportunities where our solutions are true differentiators for leading researchers.

The Life Science Group launched several new mass spec products in Q3. These include the 6550 iFunnel Q-TOF, the highest performing Q-TOF in the market, and the 6420 Triple Quad, our entry-level triple quad product. Our mass spec platform continues to perform exceptionally well as a result of a solid portfolio and positioning. All key product platforms, as well as services, demonstrated double digit revenue growth.

The Chemical Analysis business saw revenue growth at 17% to $383 million, up 11% organically. Chemical Analysis continues to outpace the markets, with particular strength in the United States, China, and Southeast Asia. Operating margins continue to expand up nearly 2 points from the previous quarter, to 21%.

We saw continued growth in core end markets. Energy, chemical, and food markets remain strong across geographies, while the environmental market is particularly strong in China. Services also saw double digit revenue growth. Our gas phase business had excellent results, with orders and revenues for both GC and GC/MS up by double digits from a year ago. We introduced our new GC/MS Q-TOF at ASMS in Denver. This is the first newly developed Agilent instrument that incorporates Agilent pumps.

Overall, Agilent is in a strong financial position as we navigate through a challenging global economy. Our third-quarter earnings, combined with solid asset management, enabled us to generate $252 million of operating cash flow. We ended the quarter with net cash of $1 billion. As we have noted previously, we'll continue to accumulate cash to have sufficient liquidity in these uncertain economic times. This enables us to be in a position to pursue value creating acquisitions.

Despite ongoing challenges in the global economy, we are pleased with our results and our momentum. We continue to aggressively allocate resources on market opportunities, with particular emphasis on developing countries, wireless manufacturing, non-US aerospace and defense, academic and research, energy, and food.

We look forward to a strong finish in fiscal 2011. For fourth quarter, we expect revenues in the range of $1.74 billion to $1.76 billion. Non-GAAP earnings are expected to be in the range of $0.79-$0.81 per share. Thank you for being on the call, and now I'll turn it over to Didier.

Thank you, Bill and hello, everyone. I'll start by providing some additional color on our third quarter results, and then comment on our outlook for Q4 and the fiscal Year. As in prior calls, all of my comments will refer to non-GAAP figures. References to organic results are results without the impact of acquisitions within the past 12 months.

So starting with Q3 results. As Bill mentioned, we are pleased with Agilent's third-quarter results, as both revenues and EPS were significantly higher than the top end of our guidance and the consensus estimate. Orders of $1.69 billion were up 13% from 1 year ago, or 11% on an organic basis, including 4 percentage points related to currency. Organically, EMG orders grew 12%, LSG orders 11%, and CAG 9%.

The regional distribution of the 7% organic order growth at constant currency is as follows -- Americas grew 7%, Europe 3%, Japan 10%, and the rest of Asia-Pacific 9%. Revenues of $1.69 billion were up 21% from 1 year ago, or 19% on an organic basis, including 5 percentage points related to currency. Organically, EMG revenues grew 24%, LSG 18%, and CAG 11%. The regional distribution of the 14% organic revenue growth at constant currency is as follows -- Americas grew 17%, Europe was down 1%, Japan up 20%, and the rest of Asia-Pacific up 23%. China revenue growth continues at a significant pace, 47%, and China revenues represent 17.5% of Agilent worldwide revenue.

Now, moving to the income statement. While currency impacted each P&L line, it had minor bottom line impact, the result of our broad geographic diversification and systematic hedging. This quarter, we reached a milestone, and exceeded 20% operating margin for the first time in our history, as we continue to adhere strictly to our operating model.

Operating margin of 20.2% was up 92 basis points from last quarter, and up 220 basis points year-over-year. Our strength in the very competitive wireless manufacturing market had a negative impact on our gross margin, but was more than offset by well-contained operating expenses.

Also, as previously indicated, we are delivering significant operating expenses reduction as we complete the Varian integration, where our cost of sales synergies will materialize mostly over the next 2 years. Non-GAAP net income of $276 million, or $0.77 per share, compares to $191 million and $0.54 per share 1 year ago, an increase of 43% year-over-year.

Now, turning to the cash flow and our net cash position. Total quarterly cash generated from operations was $252 million, an increase of $162 million compared to the same period last year. During the quarter, we received $95 million from our employee stock programs and repurchased $192 million worth of shares, for a net share buyback of $97 million. Our net cash position at the end of July was $1 billion dollars, an increase of $116 million from 1 quarter ago, and $734 million higher than Q3 last year.

Now, turning to the guidance for the fiscal year and for Q4. Given our sound Q3 performance, and reflecting Agilent's strong competitive position, we are raising our revenue and EPS guidance for the year. At midpoint, our revenue guidance is up $70 million, and our EPS guidance is up $0.05. We now expect fiscal year '11 revenues of $6.64 billion to $6.66 billion, which at the midpoint of the range, represents 22% year-over-year revenue growth, or 17% growth on an organic basis.

This implies Q4 revenues of $1.74 billion to $1.76 billion. At the midpoint of the range, Q4 year-over-year revenue growth would be 11%. Consistent with our 30% to 40% year-over-year incremental operating margin commitment, we are also raising our EPS guidance to $2.90 to $2.92, based on 357 million diluted shares, and no change in the tax rate. At the midpoint of the guidance, EPS will grow by 46% year-over-year. This corresponds to Q4 EPS projections of $0.79 to $0.81. The midpoint of our Q4 EPS guidance corresponds to year-over-year EPS growth of 23%. We're also raising our operating cash flow projections to $1.1 billion, up $50 million from previous guidance. Capital expenditures for the year are still projected to be approximately $200 million, hence free cash flow is projected to be $900 million. With that, turn it over to Alicia for the Q&A.

Thank you, Didier. Operator, will you please provide the instructions for the Q&A?

Thank you. (Operator Instructions) Your first question comes from the line of Ross Muken with Deutsche Bank. Please proceed.

Good afternoon. This is Mike in for Ross. Congratulations on a nice quarter.

Thank you.

So, obviously, things in the world have changed a little bit over the last few weeks, and since the Analyst Day when you guys gave some of the sensitivity analysis. Can you talk a little bit more about, in terms of the way you see the broad macro factors, how that correlates to the sensitivity analysis you provided at the Analyst Day?

So first order of the sensitivity analysis that you referred to at Analyst Day has not fundamentally changed. We had a most probable growth rate of 8%, with 1 sigma points ranging from 4% to 12%. Clearly, there's a lot of economic uncertainty overall, and again you'll see this on our website, the overall market growth rate that we're seeing is clearly going to be down a point, as it stands today, with all of the caveats that anything could change tomorrow.

What's interesting in this environment, though, is that we have some hot opportunities, as I mentioned in my prepared remarks. The developing world continues to be quite robust. We continue to do very, very well. The cell phone manufacturing continues to kick into high gear, and again with the 80% growth that Ron's organization demonstrated, our big numbers can help drive some growth, likewise the digital continues to be doing well. We continue to do well in pharma, even on the uncertainty and, of course, on the chemical side, we're doing an outstanding job in the environmental area and food safety and, of course, petrochemical.

So it's a mixed bag out there. Assuming that there's not a financial crisis or a lack of liquidity, if companies are able to reallocate their resources quickly, and that's exactly what each of the three group presidents are doing right now, there appears to be business out there, and customers are buying the best measurement solution, if you can find those customers first.

Great, thanks, and then broadly on the EMG side, organic growth came in very strong for the quarter. Can you talk a little bit more broadly about the competitive dynamics there? Obviously heading into the quarter, a lot of noises with other assorted players in the space, could you give us a sense of what you're seeing? More importantly, how you think you shape up from a share gain perspective?

Again, I'll have Ron add some color commentary. As you know, we never really talk about share. We'll let you guys sort it out, even though I'm always somewhat amused at some of the comments that are made, but nonetheless I'll have Ron give you an overview on how we did in the quarter.

Yes, hi, Mike. As Bill had mentioned, we had 80% growth in wireless manufacturing. So we continue to do a very good job of going ahead and winning business that is not only good for revenue, but is also good for the bottom line and strategic -- our strategic interests. As you can see, our gross margins went down slightly because of that, but we did a great job of turning in a 47% incremental, above our commitment of 40%.

But outside of the wireless manufacturing market, I'll point out one other, our oscilloscope market. Our oscilloscope revenue growth, it was 60%, six-zero percent growth, this past quarter, and a matter of fact, for the past year it has averaged 60%, and we saw great growth from the high end of the product line right down on through the bottom. So we have some very competitive products in multiple segments, and that, along with our good operating policies and our operating expenses, produced the highest operating margin in the history of EMG for any quarter.

Great, thanks and congratulations again.

Thank you.

Your next question comes from the line of Doug Schenkel with Cowen & Co. Please proceed.

Hi, good afternoon, and thanks for taking the questions.

Thank you.

Earlier in the year, you suggested that if there was a period that worried you, it was probably 2013, not 2012. I believe you, in part, attributed this to 2012 to being an election year. Given what's gone on over the last month or so, has your thinking changed at all, or is this still a good rule of thumb?

Yes, Didier will make a comment, as ourselves, as we, [know say] for every corporation in America, in the world we're having this debate. We did not foresee the fiasco in Washington, likewise, the continued sovereign debt problem inside of Europe. If you look at the difference in the rhetoric and what has happened versus the environment, companies are sitting on a lot of money, demand is still there, people are, again, continue to make investments into developing markets. And so, barring a substantive cutback in government spending, in Europe or the US or Japan, there's still not a lot of hard evidence of something substantively different. I personally believe that the day of reckoning is going to get down, government spending is going to come down, which is going to put a negative impact on demand, and hence that was my comment referring to '13. Didier?

Yes, I'll second that. Certainly at Agilent, we are neither Mr. Sunshine, nor Mr. Doom and Gloom. The odds for a softer recovery have increased slightly in the last few months, but at the end of the day, our baseline scenario is still that the economy will go through the same bumpy and slow recovery, with identifying, like a few months ago, and but with worldwide GDP growth in 2012 growing over 4%, approaching parity.

Okay, thank you for that. And in terms of looking at book-to-bill, in EMG and in Life Sciences, book-to-bill went slightly below 1 for the first quarter in a little while, although still looks very robust. Is this at all a function of changes in demand patterns, or for the most part it's a function of bringing up additional capacity in what is typically a seasonally weaker quarter?

So first of all, a lot of the EMG, we have a huge backlog. So it's actually encouraging. Quite pleased that the orders are as strong as they were on the Life Science side, and again, Nick can make a comment, or Ron, regarding EMG. We did see some funny order pattern at the end of the quarter during the debate in Washington regarding the budget. The order pattern in August has returned to normal, and in fact, August is starting off okay early. We tend to be back end loaded on orders but if you believe the computer projections, August looks okay. So hopefully, what we saw in the US and on the LSG side was related to the debate in Washington.

And this is Nick. I'll just add one other comment, which is, Bill characterized the order size very clearly. I'm going to make one comment. We at LSG have been continuing to improve our operational capabilities. So we built a lot of book-to-bill over the last several quarters. Our facility now, in Penang is doing well for NMR, our facility in Singapore, fully engaged for mass spec, and so you are seeing also some efficiency and catching up that backlog on top of that unusual couple weeks of order patterns.

And in EMG, we've seen the growth of backlog over a couple of hundred million dollars during this past year, and we've been working hard to bring that down. So we put some invested capital in to expand our capabilities, and we're very happy with our 0.98 book-to-bill. Matter of fact, we could have had a book-to-bill of 1, if we had 22% revenue growth, but as you know, we were very successful of delivering an extra couple of points of growth of revenue.

That's great, and if I could sneak in one follow-up for Nick. Sometimes there's a slowdown in advance of a new instrument launch, or multiple new instrument launches. Was there anything that you saw in terms of lumpiness that you would attribute to the new mass spec launches in the quarter, and any related impact on 1290 pull through, and thanks again for taking the questions.

Yes, thanks. Well, let's see. In terms of products, I think we have continued to launch new products every year. 1290 is over a year old now. So I don't think there was any, if you will, delay in orders in anticipating of products that was abnormal, because it's already built into the annual baseline, and we were real pleased with those launches. What we really saw was a very US-centric nervousness around grant money and spend, right at the end of our quarter, and as Bill said, pretty early right now for August, but we're not worried at the moment in terms of the way things look.

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

Thank you very much. Nick, if I could stay on LSG for a minute, and ask about biopharma replacement cycles, strong in Q2, and I want to understand if they remained strong throughout this quarter. You mentioned it in the prepared remarks, it's in the slides, but want to get a firmer understanding, and then segue into the weakness that occurred at the very end. I just assume was the academic and government market, which Bill is saying has rebounded somewhat, I guess, in August. Is that clear?

And then finally, one for Didier, and it's around capital deployment, if I may. Didier, if you could comment on, given the strong cash flow, and I realize there's this statement made about not necessarily buying back stock, but there's a real question about what do you want to do with the cash. And I know you've been thinking about some acquisitions, if they're available in the marketplace, but we're concerned they may not be, and again, any commentary you'd have about what you really want to do with that extra billion dollars. Thanks a lot.

So Tony, I'll start with my two. First of the questions. In regard to pharma/biopharm, we are still seeing that technology upgrade trend. It still seems to be relatively robust. Remember, we look at this on a global therapeutic basis, so we did see some First World change, as people watch this economic situation but nothing that I would attribute to a real rate change. And we feel a lot of power in that replacement and technology upgrade cycle coming. So we're pretty comfortable with where the pharma/biotech is on a global basis at the moment.

Your second question was in regard to the academics. Yes. It was, as I said, there was clearly a very US primary question about what would happen, lots of speculation on granting cycles, but I think it's natural nervousness, and right now, we're hoping to continue to see the momentum for August, and not a lot of detail yet, and obviously there's some question as to what will get cut.

I would make one extra comment, which is, remember that we are sitting on a secular fairly strong trend globally in academic/government, with a cyclical stimulus trend riding on top of it. We were naturally coming to the end of that cyclical stimulus trend, and we, Agilent, have not been a heavy participant in that stimulus portion, so we, Agilent, have opportunity in market share. We're underpenetrated in academic/government globally, and we're not too concerned about whatever inflection may be occurring on the stimulus cyclic, because that was already built in or discounted in our view of the numbers.

And Tony, this is Didier, regarding your last question. Yes, we are seeing our cash go up, and pretty happy about it. It's unfolding as per our scenario. Hopefully, we will see in the next year or two more value-creating opportunities in acquisitions that we have seen in the last six, nine months, and that will be a nice way of utilizing our cash resources. Right now, we are very satisfied with having such a significant cash cushion, and more strategic asset for potential acquisition if the opportunity arises.

In addition to that, we hope that Washington comes to the conclusion that repatriation of international cash back in the United States will be a good thing for the country and as you know, a substantial part of our cash continues to be overseas.

Thanks, Bill.

Your next question comes from the line of Mark Douglass with Longbow Research. Please proceed.

Hi, good afternoon, everybody.

Hello.

Didier, can you go -- looking into the fourth quarter, what are the puts and takes, as you're looking for as far as the segments, organic growth rates, and then what you're expecting on incrementals or operating profit margins, again?

Yes, in the fourth quarter, first everything is going to be organic. There will be probably some currency impact, perhaps three percentage points, less than based on the [exeunt] rates as of the end of July. And then in terms of the segment breakdown, at midpoint, it looks something like $850 million, $860 million for EMG at the segment level, plus or minus $10 million, and $410 million for CAG at the segment level, and $490 million something for the LSG at the segment level, and the operating profit incrementals are -- you can compute them from the guidance that we have given you, but it is going to be higher than what we have seen in Q3, and very much towards the end of the high end of our guidance of 30% to 40%.

Okay, so you're not really expecting a significant bump in margins in either one -- either segment, up or down, similar to what we saw in 3Q?

No. The margin, the gross margins I'm talking, the operating margins, again do the math on the basis of the guidance we've provided, is going to go up from the 20.2%, but in terms of gross margins, around the same level.

I guess I was curious, are we going to see -- you talk about two-year time frame on the synergies with Varian. Do we see anything pull forward of significance in fourth quarter? Are we still really going to see a lot of this more in 2012, and then '13?

Yes, it's more 2012, 2013. The important thing is that all the action that we needed to take to generate those cost synergies have been taken, in terms of manufacturing rationalization, whether it's on the RPD, the NMR product lines, or spectroscopy, or in services, or consumables. So all that has been triggered already. So now we need to have the timeline, as we expected, we had talked about reaching a 55% gross margin in Varian from the 45% over a period of four years, and we are exactly, this is unfolding as per the plan.

As we have said, we are in the process of not only moving the manufacturing to lower cost countries in the announcements that we have made, but we are going to redesign every major platform inside of the old Varian product lines. The reason we do that is that we do not want to have those product lines pull down our growth rate. We believe, with redesigned products, that investment we're making, not only will we get the cost out, but we will also get the growth rate higher than what they have historically saying, and that's really where you are going to get the big leverage over the next two years.

Okay, Then fine, my last question is for Ron. Can you go into some of the details on 4G a little more than the presentation? You say that you're better positioned in 4G than you were in 3G. Why? More applications? Broader product range? Customer base is different for you this time around? Can you flesh that out a little bit, and thanks for taking my questions.

Sure. We started a lot earlier on 4G than we did in 3G. We had an early R&D program where we worked with some of the market makers to help develop the test standards, and we've actually even written books on LTE that have been used in the industry. And by starting early we've been able to embed ourselves, and we've offered more products with LTE. We have over 15 different product types that serve the LTE market, one way or the other. So that's it.

We've also been very selective, too, in where we invest to make sure that we invest in the areas that, in general, have higher margins, so we can deliver the operating profit incrementals that we've committed, the 40%, and that's why you continue to see us exceed those numbers, quarter after quarter.

Your next question comes from the line of Tycho Peterson with JP Morgan. Please proceed.

Hi, good afternoon. The first question on pricing. Wondering how you're thinking about pricing in this environment. We've seen some of your peers, in particular on the life science side, push through mid-year price increases. So can you talk to that, and then can you also talk to input costs and how you're managing the input costs for some of the commodities that have risen pretty quickly?

We have a very aggressive policy in terms of working with our vendors and our suppliers to insure the most competitive pricing. There's enormous amount of focus in the R&D community to design products that are targeted manufacturing goals. We continue to manage pricing through our sales organizations very, very strictly. Each of the three group presidents have complete control over the pricing. The pricing is very, very key moving forward, and because we have such a strong manufacturing capability, it gives us a lot of latitude on what deals that we would like to take or not. And so first order I think, if you look at it from our perspective, if anything, our gross margins should continue to improve, given all of the efforts I described, and also coupled in the work that we're doing with the old Varian product lines, and so what will happen is more of a mix change.

For example, the manufacturing tests for cell phones, inherently, has a little bit worse gross margins than standard R&D products, as an example. So first order will be the mix across our businesses that would have any detrimental gross margin impact, and we are absolutely committed to offset that with increased focus on lowering our manufacturing costs.

And then if we could spend a second on some of the geographic color you highlighted. Europe down 1%. What's your outlook there, going forward? And then as a follow-up, Japan up 20%. Was that all replacement business post the issues in March, or how far are we through that process?

It's not the best way to answer your question, because we have such a mix of businesses going through. So I'm going to give a high level, I'll give my view. I think Europe, as the US, is going to be a difficult environment moving forward; however, there are pockets of opportunities. In a moment, I'll ask each of the three group presidents to make a comment on the geographical outlook moving forward.

In terms of Japan overall, our team in Japan continues to do an outstanding job, and we have been able to react very, very quickly to the opportunities that are there. Japan is recovering from the earthquake far faster than what people had predicted, and our team in Japan has done an outstanding job. So Ron, why don't you have a couple comments, then I'll turn it over to Mike and Nick.

All right. I think the first thing is taking a look at how much of our business comes from Asia/Japan, and if you look in this last quarter it was 44% of revenue and 48% of orders. So as you can see, we're very, very strong in Asia and we have very strong market share, matter of fact, stronger than in some other areas. In particular, China continues to be a very, very strong market force, and that grew 59% during the last quarter, and Japan grew 37%. So digital products, in particular, are very strong in Japan, as well as some wireless products, not only for their end markets, but as they sell into China through China's expansion. So our investment for a long period of time in Asia is paying off.

Mike?

Sure, Bill. Maybe I'll start with Europe, as Bill described it. Overall, I'd say difficult economic environment, as we all know, but there are pockets of opportunity that we have and will continue to exploit. I'd really point to two things. One is our new portfolio in the ion spectroscopy, we have very significant market share opportunities that we're aggressively pursuing but I would also point to some of the numbers you saw in our announcement around the services in the after-market. So very strong double digit growth in services in Europe, as well as continuing penetration in the after-market in the consumable side. So there's some real great opportunities we are capitalizing in the services side in the after-market on the consumable side in Europe as well, and then pointing to Japan, I think the Chemical Analysis Group, for FY '11, again, it is the services story. So really outstanding growth in our services area, and we actually think that FY '12 is when we'll start to see the real movement up in terms of the new instrumentation purchases, as the country deals with some of its challenges, both in terms of new testing capability that it wants to deploy, plus, as you know, replacement of depleted instrumentation.

And, Tycho, I'll kind of close out, the same form factor. Europe, as you heard, we had double digit growth, and even organically we had pretty solid single digit growth from the Life Science Group in Europe. So from an overall macro, it seems to be reasonably strong. If you look under the covers, government and academic spending is still pretty decent. There's been a lot of nervousness, but they've been pretty decent in what they are putting in, and we obviously have penetration opportunity. So pharma guys are also about where they were, they are pretty low growth, but about where they were for European pharma.

Japan as a specific, echo what Mike said. I don't think we've seen even the beginning tip of all of their infrastructural rebuild that's coming from what needs to be put back in, so the Japanese have some stimulus money. They've recently made some announcements about potentially redeploying some of that, but we haven't really started to see the beginning of infrastructural rebuild for Life Science. So we think there's some real opportunity in Japan, both in the academic sector and in the pharma sector and we had solid double digit there. So we're pretty comfortable with the next few quarters there.

Great. Thank you, and one last quick one for either Bill or Didier. I know the bulk of your cash is OUS, but can you just tell us how much of your cash is in the US that you can use for repurchases, and Bill you'd also used the term sufficient liquidity. I'm just wondering if you can clarify what you meant there?

Yes, again, most of the cash is outside of the US, but on an ongoing basis we generate -- about 15% to 20% of the cash we generate is in the US. So at the present time, most of it is outside the US, but we'll have ongoing sources of cash, and then I think I had mentioned at the Analyst Meeting, towards the end of calendar year '12, and also in 2013, we expect to be able to bring back more cash tax effectively, but again, that's at the end of 2012.

Okay, thank you very much.

Your next question comes from the line of Jon Wood with Jeffries & Company. Please proceed.

Thanks a lot. Good afternoon.

Hello.

So Bill, I know you didn't specifically comment on fiscal year '12 at this point. My question is around the operating model, and you guys laid out pretty clearly at the Analyst Day that the midpoint of your operating model, the most probable case being about 8% organic growth for the Company, and I think that was based on a global GDP outlook of somewhere around 4%. My question is, why at this point wouldn't you plan for '12 to be at the negative, or the one standard deviation event in terms, the lower one standard deviation event, given what we're seeing in the macro? Do you have a view on where you will shake out for fiscal year '12 in terms of the planning process at this point?

When we make our Q4 earnings announcements, we will give our guidance for '12. We are forecasting right now that we will have a greater than 1 book-to-bill in Q4, and if that happens, we will have more momentum going into '12 than what you suggest. I know the signal-to-noise ratio is incredibly high right now, but there is no hard data that there is going to be a substantive deterioration from the model that we had shared. And as I pointed out, we have -- a few of our industries are actually quite robust, even in this uncertain economic times. As you know, in a capital equipment market, this could turn south instantaneously, but the whole key, I believe, will be the order momentum in Q4 be greater than one, as planned, and if that's the case, then I think we'll be entering into '12 in a stronger position than the newspapers would suggest.

Okay, great. Thanks for that color. The last follow-up is on the Asia business ex-Japan. I think Didier said it was 9% organic on the order side for Asia ex-Japan. So wondering, it seems like your businesses have a ton of momentum in the Asian markets. Just a comment around what kind of factors you saw in the order book in Asia, outside Japan, in the third quarter, please?

Yes. I mean, overall, certainly China was as strong as it has been for some time, and then there was some lower than average, obviously, to get to that average of 9% on constant currency, the results in some of the countries, Southeast Asia a little bit, Korea a little bit, Taiwan a little bit, China was extremely strong.

Yes, and with the China growth at 47%, we are going to blow through our most optimistic forecast in China, and that really is the story, India continues to do well, Southeast Asia, of course, has always been strong for us, but the real story is our continued success in China.

Okay, thanks for the comments.

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

Hi. Just a couple clarification questions at this point. On the handset manufacturing, was that purely a mix issue? Or it sounded like in the prepared comments you mentioned a very competitive environment as well. So I wasn't sure if there was a little bit of pricing in there as well, or if it's just purely the mix issue?

In the handset manufacturing business, we have different products for different customers. It was a mix, because we won a very big strategic deal at a very, very prominent customer, and we still managed to, obviously, deliver 47% incremental, and win strategic accounts that will benefit Agilent for a very long period of time.

So you couple the mix with an 80% growth. Mathematically, it just deteriorated the gross margins by a point.

And Ron, where are we in the whole -- all the manufactures getting up to speed for 4G manufacturing? It seemed like with 2G and 3G, you go through these big builds, and then it plateaus. Where are we in that process?

Very, very early on the handset side. We're really starting to ramp up on the base station side. So base stations are the infrastructure rollout first, and we're starting to see that come up, as you see all the operators put in their systems, or their base stations, throughout the world. So the base stations are hot and heavy, handsets are a small fraction of the overall market. We just saw last quarter for the first time that 3G outpaced 2G for handsets actual unit sales, and we're going to -- it's going to be a long time before 4G outpaces 3G.

Okay, thanks. And then last question, Bill. I know someone touched on a little bit earlier on the M&A front, But if you look at in the Life Sciences side, and if you look at consumable businesses, which is where you guys are -- have a lot less exposure at this point, some of those companies are trading at multiples they've never seen previously because of concern around government and academic spending. I guess, what's your appetite for looking at those types of deals in this environment? Thanks.

Well, as you know, I've noted in the past that some of the valuations were through the roof, and we would not make an acquisition that we couldn't bring value to our shareholders moving forward. Actually, under this environment right now, our opportunities actually increased on opportunities that we think that we can create value for the Company. So that's one of the reasons we want to make sure we keep our powder dry, so to speak, and be in a position to capitalize on these uncertain environments. So if anything I think there are more opportunities today than even there was three months ago.

And would you issue stock to do a deal, Bill?

Given our credit rating, again Didier can comment, most likely we would borrow the money to do it, obviously depending on the size of the deal we could issue stock. We have no lack of stock in our treasury, but most likely, we would either pay cash or raise debt, depending on where the location of the acquired company was.

Thanks.

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

Thanks for taking my question. Can you talk a little bit about the success in the handset test in the quarter? Was that driven by PXI system initiative, or is this more of your traditional product, and is it 3G or 4G, and any other comments about what's driving this resurgence? Is it regaining share that you might have not seen in the last couple years, or is this a new level of demand from its existing customers?

Well I am going to make an editorial comment, and let Ron give you that. There's no resurgence. We've never lost the market share. We've always been the major player, irregardless of some other rhetoric some people may say. We have always been the leader in manufacturing test and cell phone, and so I'll let Ron share with you the details.

Unfortunately, because of the arrangements and, literally, the agreements we have with our customers, we're not allowed to share the names of our top customers and what they purchased. All I'll say is, it's a competitive market. We've been in there, and we have been managed to win a large portion of the business and deliver $200 million in operating profit to the bottom line.

Okay. Let me try something else then. Bill, you talked a little bit about how, I'm using my own words, but maybe some perturbations in the order trends throughout the quarter, in particular at the end, that might have normalized in August. Can you dig into that a little bit by -- if we can get it by segment that would be great, but the way things progress throughout the quarter, and how they are in the last couple weeks, would be very helpful.

Yes. Again, just some background. We have one financial system for our Company. Orders, revenue and backlog are sent on iPhones, Blackberries, daily to the top executives in the Company, and we have a computer system that projects likely order outcomes. So we have a very, very automated system to manage this Company. So for Chemical Analysis and Electronic Measurement, the order pattern was normal, and as Nick referred to, the Life Science, we did see some issues at the end of the quarter. The rest of the Company predicted pretty much as is, and we essentially had a 1-to-1 book-to-bill ratio.

If you take the computer projections of the first two weeks of August, the growth momentum in orders continues as forecasted. Again, in capital equipment, this can go south in a hurry, but starting off the month based on the orders that have come in the system, the computer obviously has historical database that it calculates the probability of outcome, and we are right in our forecasted range.

Thanks.

(Operator Instructions) Your next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed.

Yes, hi guys. Thanks for taking the question. First off, on Life Sciences, wondering if we go back to the Analyst Meeting earlier this year. If you're still comfortable with that long-term guidance for 10% organic growth in Life Sciences, and if so, could you lend some color around the strategy there, given your comments for the 2012 and '13 outlook for funding?

Again, I'll make a comment. The Company has not taken any different positions than what we had shared with you in the Analyst Day in New York, and I'll have Nick talk about what he's doing and what his view is of the outlook of the market.

Yes, Isaac, to reiterate what I said and condense my previous comments. First of all, the secular fundamentals, in our perspective, haven't changed. The cyclical [stimulus] fundamentals were known then, are known now, and also don't look much different. So the real question is the nervousness that appeared to be in the customer base in July, and as Bill told you, right now, with very little data in, August, looks like that nervousness is being calmed a bit. We still have a lot of questions. Remember, that the United States is a big economy when it comes to academic/government spending, and a big driver of pharmaceutical dollar profitability. And so there's a lot of nervousness as to what will happen with the special budget committee, but right now looks like the immediate cliff was avoided, but worried about during the last couple weeks of July.

Great. Thanks so much. And then secondly, on communications business, if you could comment a little bit on your visibility in the 3G testing, specifically emerging markets, where I gather there's a fair amount of the upside potential. And then really contrast that with what your network operators are saying on their CapEx plans for 4G?

We not only benefit from selling equipment into the actual manufacturing process for 2G and for 3G, but we also benefit whenever anyone does an upgrade from one generation of technology to another. So for instance, some people that were manufacturing 2G phones, when they moved to 3G, they buy software at very high gross margin. One of the previous questions that came up with regard to gross margins, our mix shift from hardware to software, where we have more and more software, is a big benefit. So we are seeing continued purchasing of hardware, and we're also seeing software upgrade business around the world.

So we're right in the thick of it for smartphones, as well as standardized phones, which were not only made in China that have been shipped off, obviously, to Thailand and other locations around the world, and you see that continuing evolution in the market, but we're in it for 2G, for 3G, and for 4G.

Great, and if I could get one last one, just broadly. The growth in China certainly impressive relative to what we have seen elsewhere in the industry this quarter. Could you comment on how broadly based it was across your major end markets and were there any major one-time orders for us to keep in mind as we model next year?

Our performance in China continues to be broad-based. We have a great team in China. We have, of course, as you know, Hewlett-Packard was the first high-tech joint venture in China, which was essentially what Agilent was when Packard made that relationship, and we just have a very, very solid team. We have sales offices in every major city, great infrastructure of support, manufacturing, R&D, and so, again, I think we are very, very well positioned to be the number one measurement solutions provider in China.

That's it. Okay, thanks a bunch,

Your next question comes from the line of Richard Eastman with Robert W. Baird. Please proceed.

Hi, a couple questions. For Nick and Mike, this may be disclosed somewhere in one of the disclosures, but what was the core incremental margin, EBIT margin, in the business, in each of your businesses for the quarter?

Want me to go, Nick?

Go ahead, Mike.

Okay. Didier, if I'm inaccurate here, but we had about almost a 2 point increase in what I call the operating margin percentage, hoping we use the same language here, Richard, but it was 20.6% operating margin for the Chemical Analysis business.

But on the incremental, as reported, it looks a little bit low, but I presume that there's some restructuring push through on Varian. So I'm wondering about the core incremental?

Richard I don't have that in front of me. Didier, could you make some comments on that?

Globally, for LS and CA, the core year-over-year incremental, excluding the Varian impact, was a little bit under what we had shot for the various mix impact, and then as I mentioned earlier, going forward, we expect the incrementals in Q4 to be more in line with our cyclical growth rate.

I want to make sure that when the incrementals can be pretty lumpy, they can be fairly volatile from one quarter to the next one, there could have been some adjustments, some bookings in the previous year that could affect the year-over-year incrementals on a quarterly basis. I wouldn't look at incrementals on a quarterly basis. I would look them over a little bit longer period of time. They could be a little bit volatile, again for reasons that one year ago there could have been some special instances that where operating margins were higher than the average or whatever. So just a word of caution.

Okay.

And Richard, before I bounce it over to Nick, just to build on to Didier's comments. You don't want to dig too deep into one quarter, but we did see in CAG the actual gross margin start to move up in the quarter by almost a 0.5 point. And as Bill mentioned earlier, and Didier as well, we're doing a number of foundational steps to really continue to see improvement in there, including a major announcement in June of this year about a transfer of our spectroscopy manufacturing activity into our hub in Penang.

Okay, and then could you give us the China growth for your segment, as well, in the quarter?

Bill talked about that the 47% that we talked about is fairly the same, yes. So, really EMG close to 50%, LSG starts close to 40%, and CAG is also close to 50%, a little bit over. So very, very much similar growth throughout for the three segments on a year-over-year basis.

Okay.

And the 59% for EMG that we stated earlier was for order growth.

Yes, I'm talking revenue.

Okay.

All right, and then the last question for Ron. In aero-defense, was it implied that business was, in total, was up or down in the quarter?

In total, the business is down 2%. So it was relatively flat, within 2%, as Bill had mentioned. 35% of that business is overseas, and that helped counteract some of the US issues. The good news is that last year, that business was a little bit slow with all the continuing resolutions and the confusion, so it's set at a little bit of a lower level on a compare basis than some other times.

Okay. Very good. Thank you.

Your last question comes from the line of Paul Knight of CLSA. Please proceed.

Hi, Bill.

Hi.

I have a couple of questions, one of which would be your NIH exposure, do you think it's 2.5, 5? I mean, most firms kind of put a plug in the 5 to 10 range. That's question one, and then the second question would be, world worries about '09, and does that get repeated in 2012 in a bad economy? What two or so things would you highlight are much more different now, what have you sold that people should worry less about as we look up into '12?

Sure, I'm going to answer the second question and I am give you my editorial comment on NIH, and have Nick close out on his view of this.

So right now, there's no comparison to 2009 where there was this terrible credit crisis and people couldn't get money. Could that happen again? I guess it could, but this is far different because right now, the people with the credit, that had the credit issue, the people who can print paper, right? So it's no comparison whatsoever.

The second message is, is that Agilent is a fundamentally different company. By electronic measurement, we fundamentally resized the market. Just look at the performance this quarter. We are a much, much different company. We continue to do exceedingly well in 40% of the world economy, that's outside of the US, Europe and Japan moving forward.

And finally, we have great product portfolios across each of the three businesses, and we believe that we're providing superior measurement solutions to our customers moving forward. So again, much, much different environment than 2009, and again we are absolutely committed to deliver our incremental profits, and what's interesting is, if I was going to plug in the economic uncertainty, we have enormous potential to drive more incremental margins as we continue to improve our manufacturing cost of sales and control our expenses very, very tightly.

In terms of NIH, we do not look at it that way. We tend to look at the overall academic and research market as half of this $18 billion life science market, and we look at it, and again, we come from a smaller position, but we say where can we provide the best solutions for the big research institutions around the world? In the last three years we have gone from 3% of the company's business in academic and research life science to 8% this last quarter. That's dramatic, and that's with Ron's business and EMG increasing by over $1 billion dollars in that period of time.

So for us, we need to find where the money is being spent, and we've got to deliver the best solution and given our relatively small market share in this space, Nick's team has done an outstanding job providing those solutions in coordination with our central research lab, under Darlene Solomon. Nick?

Yes. So I am just going to echo a couple of Bill's comments and add a little extra color. First, I think Bill hit the highlight. Not only are we under-penetrated, but we've got value products in there. So whatever we do in academic/government, which is the way we think about it, we have a lot of momentum.

Second comment is, just to give you a feel, a little over 3% of Agilent's academic/government exposure is US-based. So if you think about direct NIH, it's miniscule of the NIH campuses. If you think about total NIH through funded, it's still in the 1%-ish range, because there's a lot of private research funding and other grant and legacy type funding that goes into academics through endowments. So 3% is the total Agilent US academic and government exposure, the way we think about it. It's a very small piece, and last comment is, NIH is moving a lot of money into sectors that we're well positioned with the translational research. So even if their budgets go flat, you'd hit slightly, we're not very exposed. In a true Draconian problem for them, we still have a limited exposure.

And last, in '09, we were seeing 3G licenses being [led] in China. That's my understanding, and where are we in that cycle? I guess the buildout continues to be still early days?

Yes, it's still early days, and obviously, there's the traditional WCDMA technologies in China, as well as their own standard, which is TDS CDMA. And again, we have solutions for both of those products, and as we see more and more TDS CDMA or WCDMA technologies be adopted, we're in good position. I know everybody has a forecast on what we'll win, that is up to you, and we basically covered both bases.

Okay, thank you.

And at this time, I'd like to turn the call back over to Ms. Rodriguez for closing remarks.

Thank you, Stacey. I'd like to thank everybody for joining us on behalf of the Management team on our call today. Certainly, if you have any questions please give us a call at Investor Relations and I wish you all a good rest of the day. Thank you.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.