Agilent Technologies, Inc. (A) Q4 2011 Earnings Report, Transcript and Summary

Alicia Rodriguez - William P. Sullivan - Chief Executive Officer, President, Executive Director and Member of Executive Committee Ronald S. Nersesian - Senior Vice President and President of Electronic Measurement Group Nicolas H. Roelofs - Senior Vice President and President of Life Sciences Group Didier Hirsch - Chief Financial Officer, Principal Accounting Officer and Senior Vice President Michael R. McMullen - Senior Vice President and President of Chemical Analysis Group

Ross Muken - Deutsche Bank AG, Research Division S. Brandon Couillard - Jefferies & Company, Inc., Research Division Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Jonathan P. Groberg - Macquarie Research Jeff Ares - Goldman Sachs Group Inc., Research Division Nandita Koshal - Barclays Capital, Research Division William Stein - Crédit Suisse AG, Research Division Derik De Bruin - BofA Merrill Lynch, Research Division Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division Doug Schenkel - Cowen and Company, LLC, Research Division Tycho W Peterson - JP Morgan Chase & Co, Research Division Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Agilent Technologies Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Keith, and welcome, everyone, to Agilent's Fourth 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 view 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 materials. There, you will find information such as revenue breakouts, 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 and a reconciliation between the 2. 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. 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. Agilent had Q4 orders of $1.75 billion, up 4% year-over-year. Q4 revenues of $1.73 billion were up 9% year-over-year. The revenues were slightly below our guidance due to currency. Non-GAAP EPS was $0.84 per share, above our guidance, and operating margin was 21.6%. Agilent's operational performance was the best in its history. Electronic Measurement had Q4 revenues of $855 million, up 12% over last year. Communications growth of 20% was driven by wireless manufacturing. General purpose growth of 8% was driven by industrial markets, while Aerospace and Defense grew 2%. Quarterly operating margin was above 24%, another record high for the business. Chemical Analysis saw revenue growth of 4% over last year to $405 million. Petrochemical grew 8%, with strong GC sales to industrial accounts. Food was up 5%, driven primarily by China. Forensics and environmental revenues were up 1%. Q4 operating margin was 24%. Life Science revenues of $471 million were up 9% over last year. Strong demand from applied markets led the growth. Pharma grew 5%, academic government was up 4% and operating margin for the quarter was 14%. In summary, our applied markets grew 9%, our core Life Science business grew 4%. We generated $510 million of cash from operations and ended the fiscal year with $1.4 billion in net cash. For the year, Agilent's revenue of $6.6 billion were up 21% over last year. Operating profit of $1.3 billion, 20% of revenue, was up 40%. FY '11 was an excellent year for Agilent. Our outlook for FY '12 is for the revenue to be $6.85 billion to $7.15 billion. FY '12 EPS is expected to be in the range of $3 to $3.35 per share. The basis for our forecast is as follows. Today, the outlook for the worldwide gross domestic product growth is about 3.5%. We are going to take a conservative position in the measurement market and assume that, that market will also grow 3.5%. Based on our geographic and product mix of our 8 market segments, we will believe we'll have an additional 1.5% growth. And finally, the Electronic Measurement Group's backlog flush will contribute 0.7%. Therefore, we'll end up in the midrange of our guidance of roughly 5.7% growth for next year. By market segment, Electronic Measurement is expected to grow 4.2% inclusive of the anticipated reduction of backlog. Life Science and Chemical Analysis combined are expected to grow 7.1%, again resulting in our midrange growth guidance of 5.7%. First quarter FY '12 revenue guidance is $1.65 billion to $1.67 billion with non-GAAP earnings of $0.67 to $0.69 per share. Our revenue EPS guidance reflects the impact of the lunar holiday in the last week of January, which is the end of our fiscal quarter. We remain cautious as we entered the new year but believe there are several excellent market opportunities. We believe communications and petrochemical markets will remain robust along with solid opportunities in the food markets. We also see continued opportunities to increase our presence in the Life Science market. Couple these market opportunities with our continued investment in emerging markets and we believe our growth expectations are realistic, barring a financial crisis. In addition, we'll continue to focus on improving gross margins in the Chemical Analysis and Life Science Groups. As I have noted in the past, we are leveraging Agilent's design capability, supply chain and low-cost manufacturing capability to improve our Chemical Analysis and Life Science gross margins. While this effort will take several years, we can believe we continue to make solid progress in FY '12. Finally, we plan to continue to invest 10% of revenue in R&D. We have a deep pipeline of new product launches in FY '12 across all of our products -- across all of our product lines. We are committed to be the technology leader and to maintain our #1 position in customer satisfaction. Thank you for being on the call, and now I'd like to turn it over to Didier.

Thank you, Bill, and hello, everyone. I'll start by providing some additional color on our fourth quarter results and then comment on our outlook for Q1 and the fiscal year. And as in prior calls, all of my comments will refer to non-GAAP figures. So starting with Q4 results, as Bill mentioned, we are quite pleased with Agilent's fourth quarter results as revenues, once adjusted for currency, were in line with our guidance and operating margin, EPS and cash flow reached an all-time high. Orders of $1.75 billion were up 4% from 1 year ago, including 2 percentage points from currency. Adjusted for currency, EMG orders declined 1% while LSG and CAG grew 7% and 2%, respectively. The regional distribution of the 2% order growth at constant currency was a combination of flat orders in the Americas, a 2% decline in Europe, a 6% decline in Japan and 11% growth in the rest of Asia Pacific. Revenues of $1.73 billion were up 9% from 1 year ago, including 2 percentage points due to currency. Adjusted for currency, EMG revenues grew 10%; LSG, 6%; and CAG, 1%. The regional distribution of the 7% revenue growth at constant currency was 6% growth in the Americas, a 1% decline in Europe, 9% growth in Japan and 13% growth in the rest of Asia Pacific. Now moving to the income statement. While currency impacts each P&L line, it has minimal impact on our operating margin performance as a result of our geographic diversification and systematic hedging program. Gross margin of 55.1% improved nearly 1 point on a sequential basis, starting to reflect Varian cost of sale synergies. Expenses were very well controlled and only increased 1% year-over-year. Q4 operating margin of 21.6% was another all-time high for Agilent. Operating margin improved 140 basis points from last quarter and was up 250 basis points year-over-year. By segment, EMG's operating margin reached a record 24.4%, CAG's operating margin of 24% was up 340 basis points sequentially, and LSG's operating margin of 14.4% was up 120 basis points sequentially. Finally, Agilent's year-over-year operating margin incremental of 48% was way above the secular 30% to 40% range. While the world economic outlook remains uncertain, we continue to maintain the discipline of our operating model as evidenced by this quarter's financial results. Non-GAAP net income of $296 million, or $0.84 per share, compares to $228 million and $0.65 per share 1 year ago, an increase of approximately 30% year-over-year. Both quarterly earnings per share of $0.84 and full year EPS of $2.95 are historic highs for Agilent. Now turning to the cash flow and our net cash position. Total quarterly cash generated from operations was $510 million, an increase of $137 million compared to last -- to the same period last year. During the quarter, we received $5 million from employee stock programs and repurchased $35 million worth of shares for a net share buyback of $30 million. This year, we invested $497 million in gross share repurchases, or $193 million net of stock issuances from employee stock plans. Our net cash position at the end of October was $1.4 billion, an increase of $426 million from 1 quarter ago and $829 million higher than Q4 last year. Now turning to the guidance for fiscal year 2012. Given our solid Q4 performance and reflecting our confidence in Agilent's competitive position and operating model, we are projecting a fiscal year 2012 revenue range of $6.85 billion to $7.15 billion. The corresponding EPS range is $3 to $3.35 based on 355 million diluted shares and no change in the tax rate. You will note that the midpoint of our revenue guidance, $7 billion, translates into 5.7% year-over-year growth. The midpoint of our EPS guidance at $3.18 translate into 8% growth over our fiscal year '11 EPS of $2.95, which is consistent with the year-over-year operating margin incremental of 31%. As you update your model for fiscal year '12, please consider the following. First, annual salary increases will be effective December 1, 2011. Second, stock-based compensation will be about $84 million compared to $73 million in fiscal year '11. As we front-load the recognition of stock-based compensation, the Q1 expense will be about $31 million. Third, depreciation is projected to be $160 million for the fiscal year. Fourth, net interest expense is forecasted at $83 million and other income at $16 million. Fifth, we expect operating cash flow of approximately $1.1 billion and capital expenditures of about $180 million, which yields free cash flow of approximately $900 million. And finally, we distribute our variable and incentive pay in Q1 and Q3, hence, Q2 and Q4 are seasonally higher cash flow quarters. Now moving to the guidance for our first quarter, we expect Q1 revenues of $1.65 billion to $1.67 billion, an EPS of $0.67 to $0.69. At midpoint, year-over-year revenue growth will be 9%, while the midpoint of our EPS guidance corresponds to a year-over-year EPS growth of 13%. As a reminder, we typically see EPS decline materially from Q4 to Q1 because of the impact of the December salary increase, front-loading of stock-based compensation and the increase in payroll taxes due to the disbursement of the variable and incentive pay of the previous semester. With that, I'll turn it over to Alicia for the Q&A.

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

[Operator Instructions] Your first question is from the line of Jon Wood with Jefferies. S. Brandon Couillard - Jefferies & Company, Inc., Research Division: It's actually Brandon Couillard in for Jon tonight. Bill, can you remind us when you'll have the lateral to potentially repatriate some cash back into the U.S.? And any changes to your capital allocation strategies we'd look out to next year?

Again, we have no changes to our capital allocation. Our #1 focus is continuing to invest in our business. Those types of business has to create value for our shareholders. Secondly, and we have a long history of that, is returning cash back to our shareholders through stock repurchase in particular. As Didier has outlined in the past, next year you should target roughly a repatriation of about $500 million. Unfortunately, it's at the very end of the calendar year. And so until there is a change in Congress, the likelihood of a substantial repatriation in FY '12 is low. S. Brandon Couillard - Jefferies & Company, Inc., Research Division: And then if Nick or -- and/or Mike are there, can you just give us a little more color on the organic revenue growth expectations between the Chemical Analysis business and the Life Science side? And then how should we think about Pharma versus Biotech going into next year? Do you still anticipate, I guess, some replacement cycle demand vitality next year?

Let me take the second question first, which is the Pharma and Biotech comment. So, yes, we still see strength in terms of a technology upgrade replacement cycle. Geographically, that strength is as good or better in emerging markets where we see large Pharma's new sites as it is in the existing markets, but that's a pretty strong cycle for us through '12. And as I've said before, we get nervous around '13, but for '12 right now, that looks pretty good throughout the year. So that's the first part of the question.

Yes, Bill, and on Nick's comments relative to the Chemical Analysis space, we're still anticipating continued strength in the replacement market in the chemical and energy space as well as the emerging markets will continue to be a source of growth of business, and as Bill highlighted earlier in the area of food and, in particular, in environmental in China.

Your next question is from the line of Ross Muken with Deutsche Bank.

So as we think about sort of the pacing of the quarter, particularly in EMG, can you give a little color on sort of how the order trends played out sort of month by month, and to a degree, kind of you felt comfortable with the trajectory into the kind of the first quarter of your '12 guidance?

Ron?

Sure. Communications market continues to be very strong, as we showed, 20% growth in revenue. And we also had very strong growth in wireless manufacturing. So it would be orders were relatively linear through the quarter, there wasn't a huge hockey stick in the last month of the fiscal year as we've seen in the past, but the guidance that we've given is very consistent with what we are seeing.

Okay. And maybe just quickly on the communication front, there was a number of the large telco players that recently were out making positive commentary on 4G LTE spending for FY '12 in terms of pushing forward some investments. I mean, is that sort of the demand we're seeing in the context of the com business being so strong relative to the rest? And I guess in terms of historical reference in times when that's happened, has the spend continued regardless of sort of the economic environment?

Well, each company is in a different position, and they may go -- they may take different approaches, but we are seeing a race towards 4G. So first of all, we're seeing smartphone growth in -- within 3G -- in 3G cell phones and that continues. In 4G, they're starting to roll out where more the investment, though, is in the base station side. We did see a bit of a pause in base station build-outs in Europe, but other than that, we've seen very strong growth in the overall smartphone market that has driven our overall Communications business.

Great, and sorry to be a question hog here, but one last one. Just in terms of CAG, we've seen a pretty decent deceleration there in demand. Obviously, we could see from a segment perspective some of the culprits. I mean, I guess as you think about sort of whether the product refresh or it's some of the other customer-focused segments, I mean, what's sort of the goal there to kind of get growth back to a normalized trend? Or is it more working through some tough comps?

You answered your own question, this is Mike. So we did have tough comp relative to '10. I mean, we had a big bulge in the Americas business last year as well as the substitution effect in some divested products, but we're very confident about the go forward look for the business as you move into the first half. And it's really centered around 2 major themes. One is this emerging market focus that Bill alluded to earlier. Growth was very strong in emerging markets, again led by Asia in the fourth quarter. Our book-to-bill actually was over 1 despite the sequential growth in orders in revenue. And we're really going to benefit from the strength of a number of new product offerings, as I mentioned in the last call. We had new offerings at both Spectroscopy and high-end Mass Spec area, and we're now starting to take orders for those. And you'll see that flowing into the revenue in the first half of next year. So we're very confident about where we're heading in the early part of '12.

Your next question is from the line of William Stein with Credit Suisse. William Stein - Crédit Suisse AG, Research Division: I'm hoping you could talk a little bit about the Varian integration. I think the years lapped, and I know that you're on the path to integrating these businesses fully. And I'd like you to talk a little bit, if you can, about the cost savings from the integration where you are on that process.

As you know, Will, we've been very clear that in terms of what we would say by leveraging the infrastructure, the company leveraging our IT systems, leveraging our financial systems, that we are able to take $35 million of cost out. And that has been completed. The additional $35 million is around cost of sales. And in that area, both Mike and Nick are working very hard to redesign products, get new products out, leveraging the supply chain within Agilent and, of course, moving products to the appropriate locations. We have set up some of the Spectroscopy product lines are now up and running in Penang, and the teams are working very, very hard. This is going to be a multiyear effort. But as I said in my comments, I believe that we're going to continue to see measurable improvement as we go into next year. If you look at the gross margin difference between LS and CA versus EMG, we have a lot of opportunity moving forward, but we want to do it right. It's easy to tear the costs out to begin with, but what we want to do is make sure that the products that we are developing are highly competitive and we will go through the design cycle to ensure that we have very high-quality, product-leading platforms and, of course, low-cost manufacturing.

Bill, this is Mike. I thought I'd just build on your comments. And I think as Didier mentioned earlier, we're starting to see some traction in the third to fourth quarter as the GM's gross margins saw a pretty good sequential improvement. I think you're starting to see some of the earlier stage effects of the Variant integration of synergies. William Stein - Crédit Suisse AG, Research Division: That's very helpful. And, Bill, or whomever wants to chime in, perhaps, can you talk a little bit about emerging market strength outside of China? Be very interested in developments in India, Russia, Brazil, et cetera.

Just roughly in India, our growth rate was over 30%, similar to China. Brazil was up 70%. Russia was up 40%.

Your next question is from the line of Jon Groberg with Macquarie.

Just 2 questions for me. I guess, what -- Bill, what's your outlook for the Aerospace and Defense and then the government end markets and the LSG space for 2012?

Yes. I'll make a comment again, and then, Ron, if you'll -- to chime in terms of the aerospace and, again, Nick in terms of the overall government where we're in a different position given our market share tends to be low. But we're assuming, as we move forward, Aerospace and Defense is going to be flat. We did get 2% growth this year. We do have opportunities outside the United States. But the model that we are -- we have built on our growth has really conservatively looked at growth opportunities in some of these segments and then looked at where the opportunities are such as communications, such as petrochemical, such as the mix into the emerging markets. And that's how we derive the range of outcome or like that outcome in FY '12, barring another financial crisis. But again, we are taking a conservative position given where we are. Even if there is not a resolution in the U.S., the impact on Aerospace and Defense, and particularly the DoD, won't happen until '13. So my overall guess is that the market in '12 will be flat in the U.S. Ron, any additional comments? Nick, comment.

Now that's exactly what we're seeing in Electronic Measurement business. That's roughly flat. We feel very competitive about where we are, but we're seeing programs push out as people are a little unsure on spending. But as Bill has mentioned, about 33% of our business is outside of the U.S., and that business, depending on where it is, may or may not be different.

And on the academic government, let me just do a couple of slices for you. First of all, we see that as a pretty healthy mid-single digit market on a worldwide basis. We're going to see real strength in the emerging markets, although it's a small number. Europe looks positive, believe it or not, in academic government, and the Jeffers [ph] team did an analysis, about a 5% growth rate there. That's consistent with our analysis for Europe, so we think that's what the market will do. The U.S. is a real problem. And so the question is what does that look like? NSF budget's down about 2.4%. NIH budget, although it has not fully passed through Congress, looks like it will be slightly up. But right now, we're on continuing resolution. But to give you an effect of how small an impact that is to us, we had a significant double-digit down in North American academic government and still had strong numbers. And that's for Q4. So we're not too worried, but it could be a rough year for academic government in the U.S.

So just to clarify, Nick, in this last fourth quarter in the U.S., you were down strong double digits?

Let's put it in the teens, down teens.

Okay. That's helpful. And then on -- if you look at the EMG business, you said orders were down, but it sounds like you saw a backlog that you're going to burn off here. How are -- I guess, how are you thinking about that business pacing in 2012 given the -- I've never seen you just give such detailed guidance, Bill, with 4.2% and 7.1% kind of outlooks?

Well, needless to say, we've done a lot of work trying to figure out what the likely outcome is given the overall political cloud over Europe and the U.S. And the backlog, given as -- if you go back and you look at our backlog growth in EMG over the last year, it has been very, very substantial. And so you have one argument saying that the book to build is below one, so that's bad news. On the other hand, Ron's doing a great job ramping up the revenue as we had said we're going to do, putting on capacity as quickly as we can. And the underlying orders actually weren't so bad. And so it's which side of how do you look at the glass half-full or half-empty? So, Ron, why don't you make a couple of comments about at least your thoughts as you move into '12?

Yes, as Bill had mentioned, we grew approximately $200 million worth of backlog last year, and we've been trying to get that down. This quarter, we managed to ship or burn about $33 million of backlog, so we'll continue to do that. And that adds, as Bill had mentioned about 0.7 points of growth for Agilent, or roughly 1.4 points of growth this upcoming year for EMG. But the order situation, is flat, but we see a dynamic environment. Some of the smaller businesses that we're in, such as little pieces that we still have left in the semiconductor market, are down. The Aerospace and Defense businesses is flat, but we're seeing other areas, such as the industrial market, grow. It grew 20% this quarter. And we've seen wireless manufacturing grow over 50% during this last quarter, and communications in total grow 20%. So it's a mixed picture, but the underlying trend of moving towards 4G and the rollout of these new technologies that we see around the world, I do not believe that is going to take a significant pause. We have seen many companies in the past put their foots on the break when there's been an economic situation and never recover from the cycles. So we're working very closely with the customers to make sure that we capture all the opportunity that's out there.

Again, just to restate what Ron had said, the big difference with EMG going to '12, it's all communication. We need to continue to grow much faster than the overall market and really capitalize on the 3G opportunity and emerging markets and win in 4G. And I think based on another quarter of excellent results, we are clearly performing well in the communication market.

Your next question is from the line of Paul Knight with CLSA. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: Bill, what was the China growth? Maybe I didn't hear it?

Both China and India grew over 30%. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: And the organic growth by each of the 3 divisions?

All the growth is organic this quarter, Paul. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: Okay. And are you building currency into your estimates here on FY '12? Or are you using current status?

Well, like every time, we use the exchange rate as of the last day of the previous month, for example, euro equals $1.40, and that's what we use for our guidance. So using those rates, currency plays very, very minimum impact in the -- on the year-over-year growth, about 1 percentage point in the first half, positive; and 1 percentage point in the second half, negative; 0 for the whole year. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: And then lastly, you guided -- I think it was to $83 million net interest expense, which seems with your cash build up higher than FY '11. What's that all about?

The increase from '11, '12 comes from the fact that in Q3 and Q4, and you will have noticed that in our cash flow statements we unwound interest swaps on that, so we had $65 million of cash inflows. And again, that will amortize over the remaining period of the debt. But in the short term, it also means higher interest expense. So interest expense is moving up a little bit and along the line of what you're seeing in Q4.

Your next question is from the line of Nandita Koshal with Barclays Capital.

Maybe I'll start with EMG. Ron, if you could expand for us on the base case for 2012, what are you assuming -- in that base case, what needs to happen for you to meet that midpoint goal? And then maybe a little bit on the key upside and downside risks that you foresee.

Sure. It's all about communications. That's what we're seeing grow, that's what we continue to be very strong in. We have a very -- we have an excellent competitive position, and that's where our focus is. So we're going to continue to focus in that area, and we're assuming that, that market will remain moderately healthy. Not even -- we're not even assuming that there's any real inflection point at all in that business for the good. We are assuming the Aerospace Defense business will be roughly flat in the same period of time, so you could make assessments on that, but we're very comfortable with the guidance that we have given.

Just to add on that, just -- if you just look at the market growth of Aerospace and Defense is flat, coms is 7 and industrial computer is 5. You sort of get what the guidelines we've given for Ron.

Okay. And we've seen some of your large competitors on the EMG side putting into some significant restructuring programs have actually taken them up recently. How are you thinking about operating flexibility in that business in case those upside/downside scenarios play out?

Well, we've been working for a couple of years to have a much more variable cost structure. We reduced our headcount of internal employees, 3,000 people from 11,000 to 8,000 in the 2009 and early 2010 standpoint. And as we have grown over $1 billion in the last 2 years, or close to 33%, we've only put in about 2% of headcount growth. So we've kept our fixed costs very low. And that has allowed us to deliver this year the highest operating margin ever, the highest return on invested capital ever and the highest gross margin ever, as well as the highest operating profit dollars ever, even including the dotcom boom. So we're very comfortable with the structure that we've put in place, and we've been very, very disciplined not to add people on the upswing because we realize in the capital equipment market there's a little bit of cyclicality that is in it. But the fundamental bases are strong, and we've set ourself up to have double-digit profit, even if revenue were to drop significantly, which we do not expect and on the upside produce phenomenal incrementals like we have done in the past.

Okay. That's very helpful. And, Bill, maybe just one more. You've been investing quite aggressively on some of the Varian product lines, for instance, NMR, you put in place one of the highest part NMRs in the world and then trying to sort of build Agilent's strength there. How much of a drag have those investments been on margins through the past year? And what are you expecting in terms of benefits and growth and competitive positions for those products?

Yes, I'll have on the products side, Nick, and Mike may comment both in the Spectroscopy platform and in terms of the NMR. Actually, where the biggest investment has been has been in the expense line. We're obviously working to improve the gross margins. We have increased the research and development investments in both groups. We have expanded our service and support to address some of the customer issues that we face. Again, the company just wasn't large enough to make some of the investments that were required. And so most of the drag has been in the expense area. But as you can see, our expenses have been incredibly well controlled because we did such a good job of driving efficiencies from what would be a corporate view of the Varian expense structure. So again -- so it really doesn't show up very much in terms of an Agilent P&L. But Mike and Nick why don't you make a couple of comments in terms of the status of the transformation of the product lines?

Yes. I mean, we're fully engaged. We're coming to market with a number of new products over the last several quarters, so we're really starting to see the initial yield in terms of the new product introductions and the increase that we made in the R&D. And particularly, in the area of our Spectroscopy business, we have a number of new offering that have come out in the last quarter, a revolutionary introduction in the element analysis with our NPAS product along with the world's smallest FT-IR benchtop in the past quarter as well. So the yields there, we're getting the growth and we're going to get the share gains as we move forward into '12. And then in terms of a relative comment about the drag in margin, we actually look at -- on the CAG business, each quarter, the margins actually have increased and are up over last year's level as well. So as Bill mentioned, we've been able to fund these increases in R&D through the operational efficiency approach that Bill mentioned along with we're starting to see the uptake in terms of our gross margins.

Yes. And on the Life Science side, as you know, the bulk of that is NMR, and you're correct at pointing at it. It is a longer cycle until we see all the investments return, but we have consoles, which is about 1/3 of the NMR instrument fully out of Penang now. It's got design technologies from EMG in the product, and that's been shipping. So that's been a great help out in terms of both product reliability and cost. We've invested in reformatting the factory for magnets, and that productivity has gone way up. We are doing a technology roll there, but that technology roll won't be out for another year or so. But we have significant productivity in the magnet factory going up. And we're putting money in the probes, which is the third subcomponent of an NMR system. So we are making real progress. It's exactly what Bill said. Long cycle, it's mostly technology roll, and the money to date has been in infrastructural costs like sales and service and some factory modifications.

Your next question is from the line of Tycho Peterson with JPMorgan. Tycho W Peterson - JP Morgan Chase & Co, Research Division: First question, I'm wondering if you can just give us a little bit of color on what's expected and guidance from a geographic perspective. Nick had talked, I think, about Europe maybe being up in the mid-single digits for the Academic business, but how -- are you assuming, in general, that Europe holds steady? And then also, China, I mean, you talked about 30% growth this quarter. Does that come in next year? So what's embedded in the expectations?

Clearly, our growth bias is to the BRIC countries that we have. Didier, do you any additional color commentary in terms of any mix other than we're -- I've been very clear that my overall growth expectations in the U.S. and Europe are low.

I would say, in general, you can assume that the growth in the countries will mirror a little bit like the growth in the overall growth where we're talking about 5% revenue growth on the 3.5% GDP growth. Obviously, GDP in China will be more like 7%, 8%, and you will have the same kind of Delta between Agilent growth and the growth in those markets.

And again, the reason that we feel that we're just inherently going to have a higher growth rate in the world's GDP indicator would be is because the continued mix into developing countries where 39% of our business is in Asia. And I've already given you the numbers of the progress we're making in Brazil as well as in Russia. Tycho W Peterson - JP Morgan Chase & Co, Research Division: And then in terms of capital deployment, operating cash flow was great this quarter. Any change in view on M&A? I mean, should we still think about kind of smaller tuck-in deals? Or how do are you thinking about the M&A environment and other capital deployment priorities?

So you, again, continue to model in a couple hundred million dollars a year for tuck-in acquisitions. We continue to look for larger acquisitions. And I've been very clear, the valuations continue to be quite high. And we are absolutely determined to return greater than the cost of capital. Our return on invested capital last quarter continued at 27%, and we will not make an acquisition with the shareholders' money that we don't have high confidence that we can return real value to them. Tycho W Peterson - JP Morgan Chase & Co, Research Division: Okay, and then 1 or 2 other quick ones. In the oscilloscopes, you're seeing strong traction there. How do we think about the cycle? How difficult is it to grow against some of the comps for that business in particular?

Ron?

For the oscilloscopes, we continue to outgrow the competition. We had revenue growth of 33% this last quarter, which I believe is stronger than any other competitor has reported. And we have record market share for ourselves, so we continue to grow that business. It's doing exceptionally well on the top line and the bottom line, and we continue to take share.

And I think that Ron may want to speak to the whole digital I/O investment that continues to go on the computer industry. I think we'll continue to drive oscilloscopes sales.

Absolutely. As we look at faster and faster bus speeds within the computer industry, they need high-performance oscilloscopes to go ahead and be able to measure those signals. So as we see all these new standards, everything from the USB 3.0 and the thunderbolt ports and all of the other high-speed serial ports, they need our high-performance products, and that drives our business. But it's worthwhile to say that not only is our high business going well, if you look at the mainstream market, we are setting records in units that are sold with our brand-new, lower end products. So we're taking share also in the midrange, in the low end of the portfolio. That's why I think you're seeing growth that's with -- from Agilent oscilloscopes faster than the competition, and why -- I may get back to the previous question on why some other competitors are doing some more or doing some restructuring. Tycho W Peterson - JP Morgan Chase & Co, Research Division: Okay. And then last one for Mike on food. He mentioned that's still largely been driven by China. Are you seeing any traction outside China for that business?

I might have specifically called out China, but I'd say there's a real emerging market story for the food, food market. We're seeing new regulations of both being passed and actually enforced in countries such as India, Brazil, the food markets growing, so it's a really emerging market play. I'd say it's stable in the mature markets, and we've seen a lot of rhetoric around some of the U.S. FDA Food Safety bill but not a lot of significant bump in business, but I wouldn't want you to have the impression that's only a China story here. There's growth in many other geographies as well around the food market.

Your next question is from the line of Doug Schenkel with Cowen and Company.

So first question, looking at your revenue guidance and how you have talked about a variable cost structure you've implemented in your target incrementals, again, just having played with my model since we got some more details, so doing this real quickly, but it doesn't seem that easy to get down to $3 per share. Could you just provide a bit of commentary on what the world looks like if you were to come in at the low end of guidance?

I think you're essentially you're going to see a revenue growth that is a couple, couple-plus percent moving forward. And somehow, we aren't able to react quickly to adjust expenses moving forward. But as I said, we -- we're -- I think we've taken a balanced view going into '12, very consistent with the model that we have shared in the past in terms of our growth rate between 4% and 12%. We're essentially giving guidance in that lower part given the economic uncertainty, but we are taking a very conservative position going into next year. We're going to continue to drive our gross margins. And you would have to have some sort of very low growth and a bad mix, I think, to effectively end up at the very low-end range.

Okay. That is helpful. Now turning to EMG. The backlog, the order book was robust in dollar terms. That said, book-to-bill ticked down a little bit again. Anything you want to point out just to make sure that folks don't get concerned? And it doesn't sound like you're concerned about that dynamic.

No, we shipped $33 million or recognized $33 million more in revenue than orders, and we have built up $200 million worth of backlog in the last fiscal year. So our plans are to reduce our backlog more over the coming next 2 years. So we need to get ahead of that. We put capital investment in place and we're very pleased to be able to go ahead and reduce our backlog. And of course, the incrementals that we're producing as we do that are putting real results on the bottom line.

Okay. And last one on the Life Sciences Group side, the revenue adjusting for FX was dead on with your expectations. That said, America's growth was pretty weak, although it was a tough comp. I'd just be curious if you could talk about pacing, provide any color on what the impact of funding uncertainty was in the U.S. And then again, looking at the book-to-bill, that was actually pretty good. So does that suggest things may have picked up later in the quarter in any geography?

Yes. So maybe I'll dive into some of that and then if Didier wants to add anything or Bill does. First of all, Americas, yes, you did see the softness I mentioned earlier, which was really heavily academic government, and that's what we saw in the quarter. Some orders came in late, so I think you did hit the nail on the head. Good book-to-bill and late orders show that we did have some pick up at the end of the quarter. That pick up was not in the Americas. The continuing resolution funding that's funding economic government is freezing that up, and there's some question about whether the Pharma guys are going to get impacted depending on the special committee and what that does to Medicare. So Americas are still trickling along. Again, to Bill's comment, our expectations on the Americas are above, but in line with GDP there. So America's GDP, going forward, is not going to be a big number and we'll do better than that number, but it's not a big number for us in terms of growth.

Your next question is from the line of Richard Eastman with Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Just maybe 3 questions, 2 for Ron. Ron, is given that you're talking about, and we kind of rolled this up to about 4% growth including backlog shipments, is that enough volume growth to drive margins higher? Or do we see a detrimental on that kind of volume growth?

No, we're committed to deliver the -- roughly the 40% incremental on our incremental revenue. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: And then is -- also on that same volume question, is pricing holding up volume? Is that enough volume growth and a good enough outlook? Again, so given that some has come out of your backlog, is the core volume forecast, growth forecast, for EMG in fiscal '12 enough to kind of protect price?

Yes, there's a very wide range in price depending on the products and depending on the markets that we sell into. So for instance, in oscilloscope, we sell some for $1,000 and other ones that go completely loaded for $300,000. So there's a lot of dynamic range, which is affected in the mix. And when you see a quarter that you have a lot more wireless manufacturing growth than you see in R&D, the margins will typically go down a little and vice versa with -- when R&D is higher. So we feel very comfortable with that. We did have the highest gross margin ever for fiscal year '12 compared to any other year since we've been Agilent. And again, our pricing in general is fine, but there are mix issues that move things around within a point as we move forward. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And just the last question, just on the geographic numbers, Didier, that I think you mentioned, orders were down 6% in Japan, yet revenue up. I think those were LC numbers, local currency numbers. But I'm just curious, in Japan, which of the business groups is that impacting? Is that LS?

So in Japan, 6%, it was very, very comparable EMG; and bioanalytical, about 5%, 6% for both of the -- in terms of order growth core and excluding currency. So it was about the same thing for orders.

[Operator Instructions] And your next question is from the line of Ajit Pai with Stifel, Nicolaus. Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division: So the 2 question, the first one is just looking at the Electronic Measurement segment and your seasonal pattern going from July to October. It was only twice in your history, once in '01 and then again in '08, where your revenues for the October quarter after July have been down. So could you give us some color as to -- from a revenue perspective on a sequential basis, what exactly is happening there? And given your strong commentary on communications test going into the next year, what you expect from your handset test market with all the capacities in place, with the handset demand growth that we see, or whether that's a business you could still expect some robust growth.

Go ahead, Ron.

We think the handset market will continue to grow. It will grow as we see smartphones roll out in the 3G marketplaces. We even see some people upgrading from general 2G to 3G, as well as people putting in new lines for 3G in addition to obviously folks that are going into 4G. So basically, you see all of the different technology waves contributing a certain portion to our growth. As far as our revenue growth, it's not surprising at all. We've had some numbers where we've grown over 20% in the past. And now you can see the growth rates. Revenue growth rate has come down to about 12%, which we think is pretty decent. Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division: Right. And on the sequential growth between July and October, the pattern that you're seeing in this particular year relative to prior years, whether that's going to be -- what is responsible for that? And going forward, if you expect years that are more similar to 2011 or years that are more -- or seasonal pattern that's more similar to the regular pattern of having a nice sequential uptick in revenue in October?

Well, we have some -- we have small customers and we have big customers, and depending on what's going on, it can go ahead and it can move the quarter-to-quarter sequential growth rates between them. But we typically will see in the future Q4 being higher. But we had such an outstanding Q3. We did not have as an outstanding Q4, but still, well -- a very strong quarter overall. Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division: But no significant areas where you saw a weakening during the quarter?

No significant orders. Overall, the orders are softer than the growth rates we've seen in the past when we built off a much, much lower revenue number. But as you can see, our order rate overall was roughly flat. Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division: Got it. And then the second question is just looking at competitive response, you talked about some restructuring at competitors, et cetera. But from a pricing and product introduction perspective, in the past 2 years, with all the focus that you have had in Electronic Measurement and also on the LSCA side, especially with Varian and refreshing your product portfolio, is there any notable competitive response in terms of either changing in the pricing environment or in terms of accelerating new product development that is notable?

No. We see competitors moving into the marketplace. We'll see Rohde & Schwarz add some products and some other people try to combine some things, but that's really not driving or changing our result. As a matter of fact, in the oscilloscope market, where you see it, we're outgrowing everybody. Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division: Right. And any changes in the LSCA on the Life Science and Chemical Analysis side to a post-Varian integration and having the entire new product roll out in your new direct sales force of the Life Science side that you've been investing in?

This is Mike. I'll make a few comments and perhaps Nick wants to build on this. But very similar response you heard from Ron, pricing structures remain really quite stable. We have pockets here and there of competitors trying to win certain accounts, but nothing out of the norm. And in fact, as we've improved the strength of the portfolio, made it even more competitive, we're even in a stronger pricing position. So I think the pricing has not been an area of concern for us.

Yes. I'll just echo that, Ajit. In the LS market, you hit the nail on the head. Focus channel, a lot of new products, there's a lot of pressure out there, particularly in the academic government sector, but we have not seen any erosion in our product pricing based on it.

Your next question is from the line of Derik De Bruin with Bank of America.

So a couple of -- most of my questions have been answered, so I'm just going to ask a couple of nitpicky ones. So on the -- you made a comment saying that you potentially thought you could see some softness in the Pharma spending environment as people are worried about the [indiscernible] Medicare impacts, yet you were talking about that your replacement cycle and the Pharma is still looks -- in Pharma/Biotech still looks pretty good. Is that a geographical split we're talking about here, the difference between those 2 comments? Are you talking about North American Pharma being a little bit soft in the R&D, but yet your international and European Replacement business looking better?

Yes, Derik. Exactly correct. The comment on softness was Americas Pharma, and the overall comment was global, which means good strength in Europe and good strength in emerging countries where Big Pharma is moving.

Okay. And just -- I'm just curious, as you've rolled out the 1290, has your attachment rate on the columns improved as you've seen that? Or are people still swapping and in using their -- using other columns on it? I'm just curious if that dynamic has started to come in with the UHPLC business.

Yes, the attachment rate is much improved compared to the past. And I think it's down to the number of people that provide a UHPLC column, is very, very small. And so now what we're seeing is people are buying their columns with their box, and I think others have made that comment, too. And we expect that to be a cycle that holds for a while, while the column technology in ultra high pressure is way ahead for us and others who make instruments, as opposed to general column makers.

Great. And then just one other final one. Obviously, there are some issues in terms of overcapacity right now in the sequencing market and then I think there's also some uncertainty about what the array market looks like. Can you just kind of talk about what you're seeing? Obviously, your in-target selection is a little bit different than where some of your competitors are, but just talking about what's in kind of the genomics markets.

Sure. First, on the sequencing market, there may be overcapacity in boxes, but those boxes are getting used and what we sell are reagents to the utilization of the box. So we will naturally have a trailing edge curve that's at least 12 months out if it flattens and our number growth this quarter in sequencing partitioning is consistent with the growth rate of the major player 4 quarters ago. So it's still very robust in utilization. In regard to -- sorry, what was the other question?

Arrays.

Sorry, arrays. In regard to arrays, that market is very soft. We're doing fine in the specific cytogenetic CGH utilization, but that market is rapidly being cannibalized by sequencing for gene expression. That's not new to Agilent, so we're not surprised by that and we've always been weak there.

Your next question is from the line of Isaac Ro with Goldman Sachs.

This is actually Jeff in for Isaac. Just on the comment to the academic government weakness in the quarter, can you talk about how that paced throughout the quarter, and if there was any split on instruments versus consumables or any specific product area where you saw the weakness?

Yes, I won't split it by products because it's fairly complex. But the pacing through the quarter, we commented last call about the fact that the end of July was a big trough, and that August seemed to pick up. What has happened during the quarter is through August and September, things were pretty decent. That was spending out the year end money of FY '10. The R01 grant money is not flowing because everybody is in continuing resolution mode. And so the October numbers have been very soft.

And then looking at the margins on both LSG and CAG, we saw a nice improvement this quarter in a lot of that says you guys worked through the integration. Can you talk about the pacing and improvements in margins going forward through next year, and if there's any specific events we should be watching for in the first half of the year?

First of all, I just would suggest to look at very, very steady progress over the year built into our plan. I think a realistic number. I hope that Mike and Nick are able to beat that number, but you should see continued improvement as we go through FY '12.

And your final question is a follow-up from the line of William Stein with Credit Suisse. William Stein - Crédit Suisse AG, Research Division: There's been a lot of discussion about the floods in Thailand impacting the supply chain in the electronics market generally. And I'm wondering if you can talk about whether there's been any impact on Agilent's business and whether there may be any opportunity to sell into the optical test market.

There has been no impact to our overall supply chain due to that event. There may be some folks that are retooling, which may present some type of business upside for us, but we've had no supply chain impact.

At this point, I'd like to turn the call back over to Ms. Alicia Rodriguez for closing remarks.

Thank you, Keith. On behalf of the management team for Agilent, I'd like to thank everybody for joining us and wish you a good day. Thanks again.

Ladies and gentlemen, that concludes today's conference. Thank you for participating and you may now disconnect. Everybody, have a great rest of the day.