安捷倫 (A) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the fourth-quarter 2012 Agilent Technologies earnings conference call. My name is Derrick, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session towards the end of the conference.

(Operator Instructions)

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

Thank you, Derrick, and welcome, everyone, to Agilent's fourth-quarter conference call for fiscal-year 2012. With me are Agilent CEO, Bill Sullivan, as well as Senior Vice President and CFO Didier Hirsch. Joining in the Q&A after Didier's comments will be Agilent's President and Chief Operating Officer, Ron Nersesian. Also joining are the Presidents of our Electronic Measurement, Life Sciences, Chemical Analysis, and Diagnostics and Genomics Groups, Guy Sene, Nick Roelofs, Mike McMullen, and Lars Holmkvist.

You can find the press release and information to supplement today's discussion on our website at www.investor. Agilent.com. While there, please click on the link for financial results, where you will find revenue break-outs, business segment results, and historical financials for Agilent's operations. We will also post a copy of the prepared remarks following this call.

Bill and Didier's comments today will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website.

We will make forward-looking statements about the 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. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors.

And now I'd like to turn the call over to Bill.

Thanks, Alicia, and hello, everyone. For Agilent's fiscal fourth-quarter, orders were flat year over year, while Q4 revenues were up 2% over last year. Operating margin was almost 22%, and non-GAAP EPS was $0.86 per share. The headline for this quarter is that most of our end markets remained soft. But as a result of executing on our operating model, we improved gross margins, tightly controlled our expenses to deliver a record non-GAAP operating profit, exceeded our EPS guidance, and strengthened our balance sheet as a result of excellent free cash flow. We are pleased with our financial results for the quarter, as we have rebounded from our Q3 earnings miss.

In regards to end markets, Q4 played out as predicted. Fourth-quarter revenue, excluding Dako, was flat compared to Q3. Electronic Measurement revenues declined 5% over last year. Communication markets were down in high-single digits, with softness in R&D and manufacturing. Aerospace and defense spending was down 2% year over year.

All of our Chemical Analysis markets remained soft except for forensics testing for drugs of abuse, with overall business revenues down 3% year over year. Our Life Science business was flat compared to the previous year, as we continued to see positive growth for pharma, and continued weakness in academic and research. Overall, organic growth in our new Diagnostics and Genomics business was slightly up year over year. Dako met its fourth quarter revenue plan and continues to deliver on our expectations.

Looking ahead for the full fiscal-year 2013, Agilent expects revenue of $7 billion to $7.2 billion, and non-GAAP earnings of $2.80 to $3.10 per share. Forecasting the outlook for FY '13 is difficult, especially in the face of a potential US financial or fiscal cliff. However, we would like to share the thinking that supports our FY '13 guidance. First, we are assuming there will be no new financial crisis in the United States or Europe. However, continued uncertainty will dampen demand until the second half of our fiscal year.

Second, Agilent will face higher pension expenses, and the traditional increases in compensation and benefits. These costs will be less easily absorbed in a slow growth environment. We continue to deliver on our ambitious manufacturing cost improvement plan. However, we're also facing price competition, again, because of the current slow growth environment. Overall, we are forecasting an FY '13 core revenue growth rate in the range of plus or minus 1.5%. Total reported revenue growth, including the impact of acquisitions, is expected to be in the 2% to 5% range.

In regards to business segments, we're forecasting a 1% to 3% decline in our Electronic Measurement business. We are not counting on increased investments in cellular infrastructure in the first half. Our Chemical Analysis and Life Science businesses will be flat to up to 3%, with no fundamental changes in end markets. For our Diagnostics and Genomics business, core growth will be in the range of 3% to 7%, with Dako growing around 6%. Finally, we will continue our investments in R&D. We will ensure that we continue to meet customers' needs with innovative and cost-effective solutions to solve their most critical measurement challenges.

Thank you for being on the call. And now I'll turn it over to Didier.

Thank you, Bill, and hello, everyone. As Bill stated, we are quite pleased with our fourth-quarter results. Revenues were in line with our guidance. And our operating margin reached a record high of 21.7%, a noteworthy performance in a challenging economic environment. We delivered substantial sequential and year-over-year improvements in gross margin, thanks to [varying] cost synergies and other cost saving programs in CAG and LSG. We also maintained the street operating expense controls implemented six months ago.

Reflecting on our performance for the full year, we reached a record 20.2% operating margin on 2.5% core revenue growth. Our core revenue growth was close to the low end of the guidance we provided in November of last year. But our all-time high is $3.12 EPS, including $0.04 on Dako stand-alone, was $0.12 above the low end of the guidance. We generated over $1.2 billion in operating cash flow, $100 million more than the guidance provided one year ago.

Now turning to the guidance of fiscal-year 2013. As Bill stated, our fiscal-year '13 revenue guidance of $7 billion to $7.2 billion assumes the economy will muddle through in the first half of our fiscal year, and pick up moderately in the second half. We do not assume a fiscal cliff scenario, but do expect stringent government spending. The $2.80 to $3.10 EPS guidance takes into account year-over-year increases in compensation and benefits of $100 million. As well as an increase in sales commissions of $15 million as quarters are being reset, offset by variable pay reduction, cost synergies, and the incremental Dako stand-alone operating profit contribution of about $30 million. At the low end of the revenue guidance, one would also expect a tougher price environment.

As you update your models for fiscal-year '13, please consider the following. Annual salary increases will be effective December 1, 2012. Stock-based compensation will be about $90 million, compared to $76 million in fiscal-year '12. And as we [throw] include the recognition of stock-based compensation, the Q1 expense will be about $32 million. Pension expenses will grow from $70 million in fiscal-year '12 to $85 million in fiscal-year '13. Depreciation is projected to be $195 million for the fiscal year. Net interest expense is forecasted at $95 million, and Other income at $15 million. The non-GAAP effective tax rate is assumed to remain at 16%, and the diluted share count at 355 million shares. And we expect operating cash flow of $1.25 billion, and capital expenditures of $220 million.

Now, finally moving to the guidance for our first quarter. We expect Q1 revenues of $1.68 billion to $1.70 billion, and EPS of $0.65 to $0.67. As a reminder, we typically see EPS decline materially from Q4 to Q1 because of the impact of the December salary increase, [including] stock-based compensation, and the increase in payroll taxes due to the disbursement of the variable incentive pay of the previous semester.

With that, I'll turn it over to Alicia for the Q&A.

Thank you, Didier. Derrick, will you please give the instructions for the Q&A?

Certainly.

(Operator Instructions)

Jon Wood from Jefferies.

Hey, good afternoon, thank you. Hey, so Bill, obviously we've got four more years here to look forward to of, you know, somewhat less accommodating tax policy. At what point does the Board -- do you sit down and rip the band-aid off, so to speak? So you can put in place kind of a more, you know, more formulaic capital deployment plan, given your tax situation today?

Well, I think that our fundamental tenants in terms of looking on capital employment has not changed. Our number one priority continues to be investing in the businesses as we have done. Secondly is to tax effectively, return excess cash to the shareholders. We've done that through stock repurchase, as well as paying for a dividend. And so I don't believe that there will be any fundamental change whatsoever. And don't understand why one would deliberately not maximize your balance sheet to insure the health of the Company going forward.

Understood. So Didier, why not put in more of a buyback or capital deployment event into 2013? From what I understand, you've got some $500 million or so coming back tax efficiently. What have you assumed in terms of earmarking that US cash for next year?

Yes, I mean, we intend to continue on the kind of programs that we've had since the last three years. As a reminder, in fiscal year '10 we bought back $411 million of shares. We [carry '11 497], this year $172 million. We've maintained our basic share count of 346 million shares. We do have opportunities potentially to bring -- to put some of the money we did bring back by the way of November 5 as committed to good use in the US through potentially, you know, acquisitions, small acquisitions. You know, we spend about $200 million every year on small acquisitions. And we will continue to do, you know, regular buybacks as per about the average of what we had done in the last three years. So we will put the $500 million-plus to use. In terms of the, you know, the projected share count, I mean, it's always difficult. It's so much influenced by the stock price and everything. It's difficult to (technical difficulty) so it's just, you know, what we think. I mean, it's just a nice round number.

And the Board fully supports our fundamental position that we will remain investment grade, we will make prudent acquisitions to drive the success of the Company, and do everything possible to tax effectively return excess cash to the shareholders.

Thank you.

Doug Schenkel from Cowen & Co.

Good afternoon. It appears that you are guiding us to model about 100 to 150 basis point decline in operating margin. Is that right, Didier? And if so, is that all mix and some of the other items that you called out on the call? Are there areas of -- other areas that we should be thinking about where you are making investments this year?

Yes, I mean, the -- we are, you know, in the range that we have provided. At the high end of the range, we are pretty much aligned, you know, with the kind of gross margins, I mean, this year's results. But at the low end, yes, indeed. That assumes that there will be a tougher pricing environment and corresponding potential hit to the bottom line.

Okay, and --

Fundamentally, at essentially zero organic growth rate being the middle of our range, we are not going to get the leverage. We felt at this point in time, given the economic uncertainty, that to make any sort of restructuring charge to make up the difference is not prudent. Secondly, to back away from our investment in emerging markets, to back away from the investment we are making in Dako, to back away from any investment we are making in Research and Development, is not the prudent thing to do. We are having very, very solid forecasts in uncertain economic times. And I believe that we not only need to be well-positioned today, we need to make sure that we are well-positioned for the future.

Okay, that's all very helpful. And one follow-up. How did the expectations that you factored into 2013 guidance for Dako compare to those outlined at the time you closed the acquisition? You know, specifically, is the deal tracking, you know, below plan, ahead of plan? You know, I think you had talked about moving towards market growth, and for revenue of $0.33 in the -- or so, or above $0.30 in the first full year of revenue. You know, we are about a quarter and a half into that. So just wondering what you factored into guidance. Thank you.

So the fundamental core business of Dako continues right on plan. We continue to make the investment in Asia. Those revenues are slightly behind plan. The investment in selling SureFISH through their product line is going well in terms of number of customers. We are not quite yet getting a high enough re-order rate to hit the -- you know, linearly on track to what we had said. We obviously have lots of time ahead of us. This is going to be a multi-year effort to be able to drive the value of Dako. But we are very, very pleased to the progress that we've made today, very pleased with the integration. And as I said, the core business at Dako continues to recover as originally outlined.

Okay, thanks again.

Daniel Brennan from Morgan Stanley.

Hi, guys, thanks for taking the call. Just wanted to ask you about, you know, Bill, you're kind of down 1.5 to plus-1.5 for Didier kind of guidance for, you know, fiscal '13. What type of environment -- I know -- do you envision? I know you lay that qualitatively. But it seems to be still kind of a breakage maybe with the model, you know, in terms of the, you know, economic growth and what type of organic growth you would achieve versus that. I'm just kind of trying to reconcile the two.

Well, it's very, very difficult to give guidance in this environment right now. We often joke, it would be a lot better to give guidance after decisions were made on Washington and how the financial cliff was going to be dealt with. But what we have done with each of the group presidents and Ron, have gone in through each one of the groups market-by-market to try to make a balanced estimate of where we see the overall business. We believe that with the political uncertainty in Europe and the US, that you're going to see a, you know, pretty flat growth rate. People are hesitating. It's a muddle forward, as Didier said. And so as a result of that, you give the pluses and minuses of our market segments, which really haven't changed from Q3, you can easily come into an environment of relatively low growth. Our operating model obviously doesn't get the incremental, when you're outside of our range or bottom end of our range of 4%. And then the question comes in is, do you restructure the Company now to force ourselves back into the model? Or do we continue making the right investment for the future? And we have made the decision to continue to make the proper investments to the future while continuing to focus on improving our manufacturing cost of sales, our manufacturing footprint and overall productivity.

Great, thanks, Bill. And maybe just one related to that. Just in terms of EMG specifically, which I think that was the big [fair] in the quarter. But it looks like it kind of came in close to, you know, kind of expectations. Can you assess the pace of what you saw throughout the quarter? Maybe has it -- you know, as you ended the quarter, the down seven in orders. Just kind of what are you -- kind of how are you thinking about that going forward?

I'll have Guy respond to that question.

Well, we had a bit -- it was big [defense] as we expected it, a sequential growth over last quarter. But still under our last year. And in general, all of our market segments were low. Remember the overall communication industry is lower in Q4. And that's what happened in this last quarter or so. So very consistent with our expectation.

Okay. And in terms of the orders down seven, that was -- I mean, there wasn't -- I mean, that kind of was consistent with the way you guys were seeing world?

Yes. Okay.

As Guy alluded to, a lot of the orders and revenue that we have recognized tends to be ahead of the holiday season. And the team has done a great job of delivering those orders. And typically, you'll see it soft in Q4, and potentially soft in Q1 as -- depending on what the inventory carryover is from the holidays.

Let me just one more sneak in. Didier, on the pension expense. Can you just kind of highlight, you know, specifically -- I know you kind of called that out. But how much does that factor into kind of the, you know, the $2.80 to $3.10? How should we think about that increased kind of investment in the pension plan? Thank you.

In terms of the -- I mean, we are very well-funded overall with our pension plan. But we were impacted by a significant reduction year-over-year in discount rates. Which basically implied that our liabilities went up. Our return on assets for the fiscal year '12 was very good, better than our expected return on assets. But net-net, that resulted in an unexpected, because we cannot forecast pension expenses. It all depends on what happens on the last day of the fiscal year. So we saw a $15 million increase, and now we are all set for the fiscal year '13. And that's about $0.03 of EPS.

Thanks a lot.

Jon Groberg from Macquarie.

Hey, good afternoon, thanks for the questions. I guess just first briefly, Bill, is there any change to the ROIC targets for fiscal year '13 in terms of the variable pay?

No. As you know, this year we raised the return on invested capital target from 21% to 25%. And there's no change in that number going forward.

Okay. So it stays that way for '13. And just to be clear on Dako, I think you had guided for '13, I think $0.35 of accretion. I don't know if you can do it this way either, maybe Didier, Bill. But if you like take each of your segments, can you maybe -- and do a walk, you know, you did 312 in earnings this year. Could you maybe, you know, kind of just help us think through, you know, the, you know -- you have Dako. It sounded like you said $30 million in operating profits? So I think, if I'm doing my math right, you're talking only like $0.07. And then, you know, maybe some of the detrimentals that you're expecting in the other business segments?

Yes. It's a little bit different. Yes, I was -- you know, $30 million increase in operating profit for Dako between 2012 and 2013. For the rest, you know, the operating margins, as I answered previously, are the high end of our guidance, are similar to what we have seen in 2012 on the relatively flat, you know, revenue growth. Again, as Bill said, it is --our high end of the range is about 1.5% core revenue growth for the business, and at the low end minus 1.5%. But there's not a fundamental, you know -- I didn't calculate the incremental corresponding -- because at that -- you know, at zero percent core revenue growth, it's very difficult to calculate the incrementals. But we are really, really operating, you know, very -- not only in line with our operating model, but even, in fact, better than what we committed to. When you think that we have reached a record operating margin, both for the quarter and the year, on the -- only 2%, 2.5% core revenue growth, that is way better than what we committed to in our operating model.

So I guess if we think about you have a pretty narrow range of core growth -- I think you said we're at minus 1.5% to plus 1.5%. I mean, if you -- it sounds like what you were saying, Bill, in terms of restructuring. I mean, if you do anything -- but it looks like it is a fairly wide range. So in terms of kind of where the margin could come in. But so if you're going to be flat for the year, don't expect that given what your plan is today, that you would be able to keep flat margins year-over-year. Is that kind of the message, just so we're clear?

Right now, without us restructuring, and because of the increased costs that Didier outlined, we'll be roughly at a 19% operating profit. At this point in time, we will not restructure to make up the difference.

And so that just begs, as your last question, Bill. What would you need to see in order to say, okay, let's actually take a little bit of a deeper step here?

Well, I think you would have to have -- first of all, you'd have to see a negative growth in the business moving forward. And that that negative growth would happen beyond a year. You know, typically, restructuring costs an enormous amount of money, it's enormously disruptive to the Company. And to do something like that we would have to ensure that the return would be better than a, you know -- you would get your return for making those cuts within a year. So you'd have to see a fair amount larger drop in business, and the duration would have to be beyond a year, or at least forecasted to beyond a year.

Okay, thanks.

An additional comment on the 19%. This is on the overall Agilent business including Dako, which still has -- especially with investments we've committed to make -- a lower operating margin than the rest of Agilent.

We're very close to holding our business, our margins quite high in a slow-growth environment. And obviously, if in fact that we are wrong, the economy does recover -- and I always joke, if we had a budget resolution in Washington, a Euro bond and $0.5 trillion Chinese stimulus, our view might be a lot different. You know, we are still going to be able to get the type of leverage that we've gotten in the past.

Okay, thanks.

Tycho Peterson from JPMorgan.

Hey, thanks for taking the question. Bill, in your comments, you commented on the pricing environment a number of times. Can you just talk about where, you know, you're experiencing some of the greatest pressures? And, you know, whether you get a little bit more aggressive on price going forward?

Any big deal where the customer is getting multiple bids from all of our competitors, we're going to have pricing pressure moving forward. We've actually done a very good job this year of holding our discounts across the Company. And again, we measure those. But as Didier said and I have said, if that you go into an environment of slow growth, you just don't have as much leverage in terms of the overall pricing. And so, to not assume that there's going to be some downward pressure, I think would be unrealistic. And that's the message that we're conveying.

And then, in your comment a minute ago, you joked about China stimulus. But can you just talk about whether you're expecting a re-acceleration in China over the coming year? And how much of that will be EMG versus Life Sciences and other areas?

Well, right now in China, EMG is down because that's where most of the end communication test equipment ends up. And as it stands now, and Guy can correct me, that the G4 standard in China is now not going to even be approved until March. And so I believe there's not going to be a lot of growth in the first half of the year. Our overall analytical business, in terms of Chemical Analysis and Life Science, the revenue was modest this quarter. The good news was that the orders themselves were in the teens. And as I said, we continue to leverage our infrastructure for Dako's products inside of China. So given all the issues in the world, China is still the number one story. And one could imagine that if our order trend continues, that China could, in fact, see a pick up, particularly in the second half of the year.

And then maybe last one for Didier. You know, as we think about the guidance, are you baking in extra conservatism here, given the experience you had in 2012? Could you just talk about the philosophy behind guidance, if you will?

Well, it's tough to say that we are either conservative or not. I mean, we looked at the -- in terms of the GDP projections that our guidance is anchored on, we are assuming that flat GDP growth at about 3% until at least the end of the first calendar quarter. So that's basically going into our third fiscal year -- fiscal quarter. And then going up slightly, 3.4%, something like that. So it's really -- we are assuming more of the same of what we have seen in the last quarter or two, for the next two quarters. And then potentially a little bit of an improvement. There's no doubt that, you know, as we've said many times, you know our guide -- when we provide a guidance range, I mean, as executives, you know, our target incentive is based on at least the high-end of the guidance. But that doesn't mean in itself there's a level of conservatism. I mean, we are setting the bar at the right level for executives.

Okay, thank you.

Ross Muken from ISI.

Good afternoon, guys. So I guess, you know, if we sort of take everything together that's happened -- I mean, you know, the global economy has obviously been challenging. And that's made your, you know, core difficult to grow from an EBIT perspective. And then we have all these moving parts. It seems like the new numbers, you know, probably from what most of us were expecting in terms of the outcome, were more so around sort of the pension expense and the comp. I guess as you're sort of stepping back, it was a busy year. You guys did a fairly big acquisition. It's a tough environment. You know, you're looking at an equity that's been sort of in this level, in the mid- to high-30s for quite a while going back, you know. Ex sort of the period where it was depressed in '08, '09. What do you feel like from like a market perspective in terms of what the stock is telling you, given all of this mix? I mean, what -- how are you -- what are you most focused on? I mean, when you step back and you say, you know what? I need to keep investing in the business, I don't need to do more cost pruning, I don't need to aggressively do something different with capital deployment, and the stocks are sitting where it is. What do you think the disconnect is between sort of what you're executing on the plan and kind of what the market is telling you?

The market is telling us that, for the investors, that they are still skeptical on the revenue projections moving forward. If you, in fact, lower the revenue, then the valuation of the Company quickly becomes in the range. Our number one focus is to invest where businesses, driven by the emerging market. Our other priority is to invest in the segments of the measurement market that we believe we can get more growth out. And the [average] communications or on the Life Science side, the mass spectrometers, the investment in pathology across-the-board, or energy in Chemical Analysis, we need to continue to focus on where we think the longer-term mega trends of investment are. And that's what we're going to do. And I believe that when the investor community feels either more confident in the macro economy, more confident that we're going to be able to execute on the investments that we're making in the higher growth areas, then the results will turn around moving forward. But the fundamental issue is, is I believe that our overall revenue growth rate projections are being discounted.

And so, I guess I understand that. But I guess when you look at other -- I mean, there was something, it was a Wall Street Journal article that said something like 50% of businesses in the S&P 100 are talking about cost controls and sort of CapEx controls for next year, given the uncertainty. And I guess when you were sort of sitting there and debating whether or not the incremental, detrimental margin you're sort of delivering on next year, given sort of the fact you're kind of deciding to eat some of these incremental costs, and as you're sort of debating that versus the growth outlook. I mean, was it really just a function of you look back at '08, '09 and you said -- alright, you know, maybe we cut too hard in certain places, or maybe we think we'll competitively disadvantage ourselves if we do so? I'm just trying to get the sense for what was the key sort of determinant. Because we're seeing other businesses that I guess are spending more time on the middle part of the P&L, given the fact that top-lines in general are kind of constrained.

Yes. So if you go back to the question on 2009, there we had a unique opportunity. One is that we did dramatically reduce the size of our corporate infrastructure. And secondly, we reset the operating model in our electronic measurement business under Ron's leadership moving forward. However, during that period of time, we did not make dramatic cuts overall in Research and Development. So if you look at today in the corporate infrastructure, we will continue to negotiate with our vendors to try to get better IT support costs, and support of our real estate, and that's an ongoing business moving forward. But the other two big buckets are related to sales and R&D. And in the sales area, not making investment for the future, not making the investment to continue to expand in [brickums], I think would be highly short-sighted.

On the Research and Development side, disrupting that organization, where we know we have a very, very strong pipeline of products, also I think would be a terrible mistake. And finally, in terms of manufacturing, we have been very clear that we have continued to aggressively focus on manufacturing. We are closing down sites. We still have a lot of work to do to get our analytical business up to a 55% gross margin. And that effort is going on as quickly as we can. So, and again, that's not new. But we are continuing the progress. As we noted this quarter, I think you're starting to continue to see the benefits of the effort on manufacturing. But in terms of our expense structure right now, given what we know and how quickly it could change, if in fact that we get some stability Europe and the United States, I believe it just would not be prudent to make back and cut back our probability of winning for the long-term.

Thanks, guys.

Isaac Ro from Goldman Sachs.

Hey, guys, thanks for taking the question. If I could just put Bill's comments and the last question into context with the guidance, I just want to revisit some of the assumptions you have between the pension item and then sort of all of the other investments you're making in the business. And the reason I ask is, if I look back at the last couple of quarters you guys have down, you're a little bit over -- you know, averaging over $0.80 a share. And, you know, if your business conditions are more or less stable versus the last couple quarters, you know, my assumption is that you guys should be able to annualize, you know, north of $0.80 a quarter. Which would imply, you know, $3.20-plus. You know, if we back out the $0.10 of the pension expense, just wondering, you know, the balance there between what's left and then your guidance. Like, could you maybe help us understand what those items are on the rising expense side?

I'll have Didier go through the numbers. But the model is very simple. We will absorb the incremental compensation costs. And we are assuming that the manufacturing cost reduction efforts that we will implement may be offset by pricing pressure in a slow-growth market. But Didier, could you go through where the Delta expense compensation expenses are?

Yes. The increase in pension expense is one out of many factors. You know, I have mentioned the $100 million year-over-year increase in overall compensation and benefits. Obviously, the salary increases as of December 1 is half of that. The rest being either payroll taxes, increase in health expenses, stock-based compensation because our stock has gone up over the last four years, and things like that. You have situations also like, you know, this year we didn't pay out sales commissions at Target. And as we reset the budget for the fiscal year, obviously we are planning now to pay at Target this fiscal year on and on and on. And offset by -- and then as Bill said is, you know, the impact of the [viarian] -- the last tranche of the variance cost synergies. And then other cost savings coming from the manufacturing rationalization that is taking place, that we consider, especially at the low-end of our guidance, could possibly be offset by, you know, some level of pricing pressure. So you have all those things. And I think, you know, extrapolating the Q4 EPS is, you know, very, very aggressive.

That's actually very helpful color.

You know, again, to offset the compensation increases, an easy calculation of how many people have to be terminated I think would just be a terrible decision for the Company at this point in time for what we know to do that.

Okay, that's very understandable. Let me ask one more follow-up on that. Which is, you know, could you maybe, Didier, offer us a little bit of color on the margin assumptions you have by the business unit. Just so as we think about the rising cost here, is it fair to say most of it on the margin pressure should be tied to the EMG? Or is there another item here in the other segments we should keep in mind as we model through the margin impact of the various segments?

Yes, in terms of operating margin. Again, you know, it is -- if you exclude the Dako, which has a lower operating margin than the legacy business, at the high-end of our guidance, operating margin is expected to stay relatively flat versus 2012 -- very, very slightly lower. And there's not -- you know, there is some improvements, more in the [VAM]. And, you know, more conservativeness for electronic measurements. So the two are kind of offset each other. Continuous improvement on the VAM front, and more pressure on electronic measurement because of the reasons that have been highlighted. But overall for Legacy Agilent, about relatively stable operating margin year-over-year.

Okay, fair enough. Let's hope for a better environment next year to benefit all these investments you're making. Thanks a bunch.

Patrick Newton from Stifel Nicolaus.

Hey, good afternoon, thank you for taking my questions. I guess point of clarification, Bill. I think on an earlier pricing related question, you said that you're seeing pressure on big-ticket items. I just want to make sure I heard that correctly.

Big ticket deals is what I meant to say. In other words, where a customer is putting out X number of instruments for bid, those type of deals can become quite visible to the marketplace and the buyer has a fair amount of leverage.

Okay, so that being said, is the expectation that's baked into guidance that it goes past these big ticket deals, and that the pricing pressure actually expands into perhaps more product-providing segments than in markets?

The big concern doesn't work that way. Biggest concern is, is that in a very tough pricing environment, it leaks back across-the-board. And again, we're not assuming that. But as Didier alluded to, if in fact that you go into a year of negative growth, there's just lots of pricing pressure in the organization moving forward. I think the team has done a great job of holding discounts to date. But, you know, we have seen this before. And to go in and put a forecast in this environment that suggests that that may not happen again, I think just isn't very realistic.

Okay. And then I guess, Bill, you discussed, you know, the expectation of a challenged growth environment in fiscal '13, given Europe and also fiscal pressures in the US. Can you discuss a little bit -- you touched on this. But can you discuss a little bit your expectation more so for Europe for the full year? And also, do you have any expectations around the potential for any magnitude or of potential stimulus coming from China?

Right. In terms of Europe, Europe, as you know, is weak. In fact, Europe in and of itself has been difficult for us. And we're not assuming any greater deterioration, we're not assuming anything particular better in Europe moving forward. I do believe in China there is an opportunity for more focused government stimulus once the political leadership change has, you know, has been settled down and things get back to normal.

Okay. And I guess just last one for Guy. I wanted to dig a little bit into your PXI business. I think you guys have been a little bit more aggressive in offering solutions since you entered the market in, I believe, late 2010. And I wanted to ask you how that platform is growing relative to your traditional EMG business. And just thoughts around your competitive positioning in that market.

Yes, thanks for the question. Definitely we have invested, as you know, and have a clear long-term strategy to be in this marketplace. In fact, we have and we continue introducing new products on the PXI format. And we just introduced and showed last month the fastest switching signal generator in this form factor. So we are making good progress there. Obviously it is still small in our portfolio. I'll remind you the strategic position we have here is that we propose to our customers the choice. Because they look for a total solution where the combination of modular PXI and instruments is really, in general, the right solution for what they look for. So we're pleased with the progress we're making there. But it's a long-term plan to keep building the whole portfolio.

And Guy, can you comment on the growth rate of this portfolio relative to EMG?

Greater.

It's in nine is what we look for.

The growth rate is much greater than our core business.

Thank you, gentlemen, good luck.

Still small.

Hopefully soon you'll be able to ask him how much it is of the total business. But its got the advantage of a smaller base and the growth rate is good.

Thank you, good luck.

Amit Bhalla from Citi.

Hi. I was hoping that Nick could spend a minute to just talk about LSG, and specifically LC and mass speck performance. And what's ben going on with the orders in the quarter there? Thanks.

Thanks for the question. Well, you know, basically what we've seen is two sides of the house of the markets. Which is the academic government side -- everybody is in pause, and that's causing some global ramifications. It's not just in the US. So people are tight on joint grants. Pharma side is pretty solid. So in the LC & LC/MS, obviously they play out in that factor. We do pretty well in pharma, we're still penetrating academic. LC, the market looks pretty soft. And we were actually down in terms of the LC market, low-single digits. Mass speck, that market is still growing. And we're also growing in that market. So we think that market is a good market. We certainly like the LC market. But it's been a bit of a pause in terms of where the things are going.

And I know last quarter, you talked about, you know, $50 million in order push-outs in the overall Company. And you weren't expecting them all to come through this quarter. But I'm just curious, you know. Did you get any visibility on some of those orders coming through, or were there any cancellations overall?

Hopefully we said that we had $50 million at the end of Q3 that customers did not take delivery as expected. The delivery dates, of course, then get rolled over into Q4. We did not see measurable push-outs at the end of our fiscal year. So it appears to have been an anomaly in Q3, and did not repeat itself to any measurable amount in Q4.

Okay, and just my last question. In China, in LSG, any comments you can make on the competitive environment? I know it's getting a little bit more competitive. But anything you can add there? Thanks.

Just -- yes, I mean, it's essentially more of the same. It's a very competitive environment. A lot of people are going there. A lot of our competitors are putting in facilities and infrastructure, which we've already had. So they're getting the shiny newness of that in the marketplace. But it is really still a good economy. We saw quite a solid orders tip-up for the quarter, although as Bill said, the overall revenue performance was pretty soft. So we think we're doing pretty good. We've said we were resetting the team for the next phase of growth. And we are, in fact, doing that. That takes some time. We've got to get people in, we've got to train them. We're pleased with the progress we're making. But we still have progress to make.

Thanks a lot.

Paul Knight from CLSA.

Hi, Bill. Could you talk about the -- is it the scope business that's most competitive in this kind of environment right now?

The scope business?

The oscilloscope market?

Oh, I think all of the segments of the market are highly competitive. Fortunately, that's one area of the market where we continue to do reasonably well. But my guess is, Guy wouldn't change the competitiveness versus cell phone tests versus scopes. I think that's far more competitive. As I said, it's going to be big customers, big deal across the Company. And it doesn't matter if it's a source spectrum analyzer, a mass spectrometer, anywhere where there are going to be large buys and labs or manufacturing facilities, R&D, I think you'll see a competitive environment. As I said though, the team has done a great job of holding our discounts. And we try to add in value and differentiation and after-market support and service. But we are clearly being -- are preparing for a difficult pricing environment if, in fact, our forecast is correct that we are entering into continued flat market.

And then, as I look on page 6 of this handout, you know, last quarter I guess, some of the softness was centered around the aerospace defense market. What would be the two areas that were softest in this current quarter? Chemical energy and academic? Or what were the two that, you know, have the least visibility?

Outside of aerospace and defense, which is, as predicted. Government spending is okay, the primes are cutting back, and that's well documented. The Chemical Analysis market clearly had more difficult -- and Mike, you may make a couple comments about some of the softness you had even though there was some positives and the orders were, you know, better.

Yes, Bill, sure. As we commented in the third quarter, we talked a lot about the slowness in the chemical space in our Q3 results. We saw that carry forward into the fourth quarter as well, mainly in the replacement market for chromatography products. And if you had a chance, you may have seen some of our major customers also make announcements in the chemical space after the third quarter, where they are either restructuring or having some plant closures. So as Bill mentioned that, we do feel like we've reached the bottom there. And, but we saw that the weakness that we called out in the third quarter to continue into the fourth quarter.

Okay and then last, Didier. You know, the China growth, negative three in this handout again. And were there any placement orders like the last couple of quarters where the Asia, ex-Japan was not really negative three, but kind of color around anything on what core growth really was?

No. I mean, you're referring probably to large orders in wireless manufacturing test that we had in the second and third quarter. In the fourth quarter, as expected, the volume of orders or revenue came down. So it was not a big factor.

Okay, thank you.

Mark Douglass from Longbow Research.

Good afternoon, gentlemen. Most of my questions have been answered. I just -- I guess, a little bit more on the investments that you're talking about, increased salaries, compensation and benefits. I mean, how much of that is for -- it's called existing infrastructure of people and assets? And how much more is actual incremental say, feet on the street, new facilities, new marketing efforts, new product development? Can you kind of flush out these incremental costs year-over-year, you know, new versus legacy?

The vast majority of the numbers that Didier quoted related to the 22,000 existing employees. We will continue the investment in Dako, in the expansion in Asia, the increase in Research and Development. But first order, all of the additional fixed costs that we're seeing are related to our existing headcount. And we have no plans in this environment for measurable increase in headcount as we move forward.

Okay, thank you.

Derik De Bruin, Bank of America.

Hi. One of my questions have been answered. But just want to make -- just want to clarify something. So it sounds like the softness in the communications business, this was more of a -- you had really strong quarters in Q2 and Q3. And this is just sort of a slowing from that rate? And just sort of delay in sort of the main infrastructure builds?

Go ahead, Guy.

Yes, Derik, this is Guy. This is [true likely].

Okay. And what about the competitive landscape there? Are you seeing any new players, people being more aggressive since Teradyne has bought out LightPoint? Have they become more aggressive in the market?

Well, the overall competitiveness, as Bill was mentioning, is true across those market segments, and now wireless is definitely one of those. So there are a number of competitors. You mentioned one that are pushing very hard, especially in the production environment.

Okay.

But there's been no fundamental change to the competitive environment.

Right. That's sort of what I was getting at. And I guess just to sort of clarify this, the -- you know, there was no further slowing as sort of the quarter went on in some of the academic end-markets. It was basically in [light two sodded]. Things didn't take another step down. You didn't see any further hesitation on that part?

Well, I think they pretty much were on the breaks towards the end of our last quarter. And that's exactly what we expected in Q4. Remember that I have not been highly positive on what would happen, and its been consistent with where we thought they would be. As you all know, I'm not the most optimistic guy in this environment right now. And that was the good news, is academic and research, and overall for the Company, there really wasn't much change in the end-markets from Q4 to Q3.

Great. And just one final question. Can you sort of like give us some of your timeline projections on Dako? And when are we expecting to see new products coming out? And was there -- can you just sort of update us on what sort of the product flow will be?

Okay, Lars, why don't you take that and give an update on where the integration is going and where we're headed?

Yes, absolutely. Thanks for the question. Well, I think, you know, bottom line, as Bill and Didier alluded to, [Guy actually made some crack] and Dako continues to deliver the base business, which is on or slightly ahead of schedule, actually. We still, you know, have some work cut out for us in terms of the ramp-up of the industry in APAC and so forth, and also some of the buy-out of indirect channels. These are things that are in place and actually going to kick in towards the back-half of fiscal year '13. Now in terms of the, you know, the very much long-expected, long-awaited [stay in your next generation] staying there from Dako, we continue to make progress and be on track for a 2013 market loan.

So let me just characterize where we stand right now. You know, as we speak, we are in a -- call it a limited manufacturing ramp. And during the next, I would say three to four months, we will ease our way into the some of the early test sites. And this is now and then going to be expanded into kind of more, you know, what we call the deeper sites. Which is kind of more of the commercial expansion of it. And somewhere between, I would say third and fourth quarter, I do expect that all breaks are going to be off and it's going to be into kind of the full impact of that availability. And this is a global one. So this is, I think, the most significant product launch that we are expecting. On top of that, we have a number of new antibodies coming out. Obviously, the SureFISH expansion with the probes is hitting us on a weekly basis. And this is, you know, rapidly expanding the portfolio products that we're having. But just to characterize Dako and into 2013, and we are on track with the launch of the (technical difficulty).

Great. Just one quick one. You know, Nick what are you doing to sort of revamp the cytogenetics pipeline, and the product portfolio there? There's a lot of new -- obviously with Illumina buying BlueGnome, and [staff beginnings about there], how are you revamping the cyto product?

Well, I have lots of opinions but I had the great opportunity to share those with Lars. And Lars has been managing that. So I'm going to kick this to him, and if he wants the other comments, I'll let him kick it back to me.

Well, thank you, Nick. My pleasure to take that on. I'm sure that you guys noted that we made a joint announcement together with Nimble Jim on the array side just a couple of weeks ago. So we are now, you know, in a coordinated effort moving forward to converge the customer base. And that is a fairly significant amount of customer business. And we continue to make fairly rapid progress in that regard. We are obviously rapidly expanding our SureFISH, you know, line of products. We currently have 450 fish probes and we have 50 new probes actually targeting leukemia. So what you will see is going to be a very concentrated effort around our fish business, our array business, but also around the basically -- the targeted rates increase with HaloPlex that continues to make terrific progress, as we are actually exceeding our expectations in that regard. So it's going to be very focused effort from our side in those areas.

Great, thank you very much.

Tony Butler from Barclays Capital.

Thanks very much. Bill, two questions. One, you commented that you believe there would be a budget resolution. And I'm sorry to ask this, but what do you see that level of confidence? And why doesn't the overall business environment with respect to spending or business spending get materially worse? And then likewise, and perhaps inversely, if there is a resolution, why doesn't business spending actually get materially better? And you've kind of hit, you know, the midpoint I guess to some degree. But I would actually argue that there's potentially a greater window for sales to have even higher upside, and then likewise sales to have even greater downside. Appreciate some comments, thanks.

You just did the two bookends of our discussion for the last two weeks on how to give guidance and facing of the financial or the fiscal cliff moving forward. Our forecast assumes that there's a resolution. That's not my own personal opinion, but that's just the overall assumption. I -- as you know, the odds are somewhere between 30% to 50% that there won't be a resolution. But assuming that there is, moving forward, I think that because of the delay of resolution, you're already starting in the slowdown, you're heading into the holiday season. So for the way our fiscal year is constructed, one could easily see a Q1 that is soft and potentially a Q2. I won't argue with you if there is a successful budget resolution that in the second half of the year, things could get better. And of course, if that happens then we'll, you know, we'll adjust our forecast accordingly, moving forward. But at this point in time, we've been completely candid on what our thinking is, and try to give the best outlook we can with the available amount of data we have. And we all know that there is a wide potential outcome.

Thanks, Bill.

Richard Eastman from Robert W. Baird.

Hi. Just two questions, I guess maybe for Guy or for Didier. But when you look at the EMG business and you look at the order number in the fourth quarter, you know, typically we build some backlog, typically we have a book-to-bill as well, north of 1, you know, in EMG. And what I -- I guess I'm a bit concerned about is, is the first half of the year, you know, look like, you know, down 15% to 20% with the back-half of the year, you know, up 20% to 25%? Is that the way the revenue distribution would look?

For fiscal year '13? No. It's way flatter than that. Basically, you know, Q1 would be fairly similar than -- you know, to Q4 in terms of revenue incremental in Q4. You know, we had a 4% core revenue decline year-over-year.

Yes, but you took about $60 million out of backlog, right? I mean, I'm just -- I mean, generally speaking, your first quarter is, you know, 90% of your fourth quarter orders. Which would put, you know, which would put you sub-$700 million in sales. But that's not the case?

Guy can talk to that. We have looked at the same numbers as, you know, you have for Q4, and have done the exercise. And, you know, that led us to the kind of guidance that I mentioned. Again, in Q4 our core revenue growth was -- decline was about -- was 4%. And in Q1, you know, we expect something more like 5% to 6% revenue decline. That's embedded in our guidance.

Okay, alright. And then ending the year minus 1 to minus 3? Okay. And then, just one thought --

Just as a clarification again. The guidance that we're giving that made up over for EMG is still for a revenue number that is below the incoming order rate in Q4. So again, I don't -- you know, we looked at all of those and, you know, we don't think it's out of bounds. Obviously, that's the number that, you know, tends to have the more volatility. But I think mathematically and what we know the pipeline is, we feel okay.

Okay. And then just one other thing. I mean, aerospace defense, you usually have a bit more visibility there. Obviously one area that could be pretty impacted here, depending on what happens with the negotiations, the budget negotiations -- what did the orders in aerospace defense look like in the fourth quarter?

This is Guy. We had better orders and growth compared to last year in aerospace defense for this quarter. The year-end business has been there as we were expecting it. And in fact, we are still expecting this coming into the last two months of this year. So I would say it was positive.

Okay, great, thank you.

Again, Guy, correct me if I'm wrong, because a lot of this spending comes from the government, use it or lose it.

Yes. That's the year --

It frankly will happen. The primes is where we're seeing the cutback in anticipation. The actual direct government spending most likely will play out as predicted for the end of the year?

That's correct.

Okay, alright, thank you.

At this time I'm showing no further questions in queue. I would like to turn the call back over to Ms. Alicia Rodriguez for any closing remarks.

Thank you, Derrick. On behalf of the management team, we would like to thank everybody for joining our call today. And also wish you a Happy Holidays in advance of the season.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.