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

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division Jonathan P. Groberg - Macquarie Research Jon Davis Wood - Jefferies & Company, Inc., Research Division Nandita Koshal - Barclays Capital, Research Division Tycho W. Peterson - JP Morgan Chase & Co, Research Division Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division Amit Bhalla - Citigroup Inc, Research Division Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division Mark Douglass - Longbow Research LLC Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division Isaac Ro - Goldman Sachs Group Inc., Research Division Derik De Bruin - BofA Merrill Lynch, Research Division Daniel Brennan - Morgan Stanley, Research Division

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Agilent Technologies Inc. Earnings Conference Call. My name is Caris, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. And I would now like to hand the call over to your host for today, Ms. Alicia Rodriguez, Vice President of Investor Relations. Please proceed.

Thank you, and welcome, everyone, to Agilent's Third Quarter Conference Call for Fiscal Year 2012. With me are Agilent's President and 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 Chief Operating Officer, Ron Nersesian, and the presidents of our Electronic Measurement, Life Sciences and Chemical Analysis Groups, Guy Sene, Nick Roelofs and Mike McMullen. Also joining is Lars Holmkvist, President and CEO of Dako. 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 breakouts, historical financials for Agilent's operations and an investor presentation. We will also post a copy of the prepared remarks following this call. For any non-GAAP financial measures, you'll 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. Agilent's Q3 orders were down 1% and Q3 revenues were up 2% over last year. Non-GAAP EPS was $0.79 per share and operating margin was 20.3%. Agilent's performance in the fiscal third quarter did not meet our revenue and EPS guidance. This was due to a softening of shippable orders, as well as a much higher-than-normal push-out to delivery from our customers at the end of the quarter. While we are not seeing outright order cancellations, we're seeing all the classic signs of a slowdown. Deals are taking longer to close and customers are delaying shipments. We felt the full effect of this phenomenon in July, the last month of Agilent's third fiscal quarter. The biggest headwind was in the aerospace and defense sector, where revenue was down 11% year-over-year. While U.S. government spending was stable, it was offset by decline in defense contract business. We would normally see an uptick at the end of the year, but we expect Q4 to be lower than normal due to fears of automatic spending cuts. The second headwind was in the industrial segment, which declined 10% amid deteriorating economic conditions. We saw more conservative demand from our customers in distribution channels across the industrial markets. A third headwind was in the environmental markets, which declined 6% amid lower government spending. Finally, Academic and Government research was down 6% while we saw continued softening due to budget concerns. The declines in these submarkets were offset by positive results in other areas. Communications revenues were up 7% over a year ago, reflecting strong wireless manufacturing test demand. Wireless manufacturing growth was driven by smartphone capacity expansion, primarily for devices but also for component manufacturers. Forensics Markets revenues were up 17%. Strength was driven by increased demand for screening and…

Thank you, Bill, and hello, everyone. As always, my comments will refer to non-GAAP figures. Since last quarter's conference call, worldwide GDP growth has slowed significantly to 3.1%, and the purchasing manager's new order index has dropped to a 39-month low of 47.2, indicating a significant contraction in the worldwide manufacturing sector. In this context, our orders and revenues were below expectations, but we executed as per our operating model and delivered an operating margin of 20.3%, slightly higher than in the same quarter last year. I'll now cover Q3 orders. At $1.66 billion, orders declined 1% from 1 year ago. Adjusting for the impact of acquisitions and currency, orders were down 2%. By segment, the 2% core order decline is the following: EMG, minus 3%; CAG, minus 4%; LSG, plus 1%; and DGG, plus 8%. The breakdown of the core order growth by region is Americas, plus 8%; Europe, minus 5%; Japan, minus 10%; and the rest of Asia Pacific, minus 6%. Moving to Q3 revenues. At $1.72 billion, revenues increased 2% from 1 year ago. Dako contributed $40 million to this quarter's revenue. The core revenue growth, after adjusting for acquisitions and currency, was also 2%. By segment, the 2% core revenue growth is the following: EMG, flat; CAG, plus 3%; LSG, plus 5%; and DGG, minus 2%. Core revenue growth by region was 9% in the Americas, flat in Europe, minus 7% in Japan and minus 3% in the rest of Asia Pacific. Moving to the income statement and on cash flow. Cost control measures initiated last quarter, coupled with the automatic cuts from our significant variable cost structure and reduced variable pay related to the Dako acquisition, resulted in our achieving an operating margin of 20.3%. To put it in a different perspective, compared to the midpoint of our guidance, excluding Dako, revenues were lower by $97 million, while operating profit was down only $26 million. In a tough macroeconomic environment, we've delivered strong financial performance and continued to demonstrate the power of our operating model. Non-GAAP net income of $278 million or $0.79 per share compares to $276 million and $0.77 per share 1 year ago. Total cash generated from operation was $240 million, down $12 million compared to the same period last year, when we received $31 million from the unwinding of an interest rate swap. Now turning to the guidance for Q4. As always, our guidance assumes exchange rate as of the last day of the reported quarter. We are projecting a Q4 revenue range of $1.76 billion to $1.78 billion. At the midpoint of $1.77 billion, our guidance corresponds to a flat core growth for the quarter and for the full year, to a core growth of close to 3%. Our Q4 EPS guidance is $0.80 to $0.82. At the midpoint of the guidance, full year EPS would reach $3.07, a 4% increase over last year. With that, I'll turn it over to Alicia for the Q&A.

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

[Operator Instructions] Your first question comes from the line of Tim Evans with Wells Fargo Securities.

I was wondering if you could make some comments on this Pharma end market, and I'd be particularly curious about NMR demand there.

Nick, why don't you go ahead and answer that please?

Sure. Pharma end market. Pharma continues to be a decent market for us. We see mid single-digit growth in terms of the orders and revenue in that marketplace. NMR and Pharma is a place that has been somewhat soft. Basically, they're relocating a lot of facilities. And so, they have yet to buy large capital equipment in the chemical molecule space. And NMR tends to be more traditionally a chemical screening tool, so it's relatively flat and flatter than the overall market.

Great. And then just a follow-up. Are there any updates to the outlook for the Dako synergies in 2013, revenue synergies in particular?

So for our forecast for Q4, Dako's revenue is forecasted to be at $85 million. They're coming off a very strong Q3, and we have not given a forecast for FY '13 yet, but we will do that in Q4 earnings. But Lars, maybe you could share on some of your views for the quarter and how the integration is going.

Yes. Certainly, Bill. I think they're making progress. I mean, a couple of factors that I'd like to point out. Number one, the advanced staining market remains strong, funding remains in place. We see robust volume and value growth across our regions. And secondly, and more importantly, Dako is making good progress. So we see sequentially, our business growing and coming up from a fairly low growth rate prior year. This is not a straight line commitment to say that we're going to continue every quarter to deliver this growth rate. There will be some fluctuations as we move forward, but certainly Dako is making significant progress in our base business improvement program. Our investment into the Americas market, as well as the Asia Pacific emerging territories is bearing fruit and we see a very significant uptick of our business. New technologies are also picking up and taking good traction right now.

Okay, so we can assume the synergy targets that were laid out when the deal was announced are still essentially in place.

Well, I referred to Bill's comments. Basically, what Bill said for the fourth quarter is in place and we're going to come back with the specific revenues in this portfolio for '13.

And your next question comes from the line of Jon Groberg, Macquarie.

So I guess just big picture, Bill, maybe you can just -- maybe you can just talk about kind of how the quarter progressed, a little bit more detail. And maybe, as you sit here today, what continues to make you feel a little bit more uncomfortable within your business versus where are you feeling a little bit better?

Well, the big surprise at the end of July was our inability to ship $50 million of revenue due to customers' unwillingness for delivery acceptance. And if we have shipped that $50 million, we would have beaten our guidance with Dako. And so, obviously, that was disappointing. It's very classical in a slowdown that people will begin to push out deliveries. As I said in my prepared remarks, there have been -- there has been no evidence of cancellations during the quarter, but that's the reality of it. So for our guidance in Q4, we assume the same order and revenue pattern from Q3 going into Q4. I think it's prudent. We're not assuming that this $50 million of revenue that was pushed out is somehow going to show up in Q4. And so we are taking a conservative position in terms of our revenue expectation, hopefully. Again, that there will not be continued deterioration for Q3. We are not planning for our seasonally high Q4 growth rate, so we'll assume a flat Q3 in our core business, as Didier said. And then, we, of course, will get the benefit of the Dako acquisition in Q4 and that's how we determined our EPS range.

And with that $50 million, was it more weighted towards -- I know you talked about weakness in aerospace and industrial and chemical, but was it more weighted towards one particular either industry or segment?

The delivery delays were very consistent to where we saw the slowdown of business. And again, the slowdown we're seeing and I think, has been well documented in the newspapers and whatnot in terms of issues with prime contractors in the U.S. in particular and some issues inside the industrial segment. The environmental, which is still a large part of our business, again, is very much dependent on local government funding. And obviously, a lot of jurisdictions are in -- particularly in Europe and the U.S., under enormous spending pressures.

Okay. And if I can, just 2 other quick ones. One just on Dako, just so I'm clear, that plus 17%, was that just July or was that a quarterly growth rate year-over-year?

It was from the time we acquired Dako, so towards the end of June, a little bit over 1 month.

And Dako, was that -- has Dako introduced any new products, I kind of -- what was -- those kind of new, more automated products have yet to be introduced, is that right?

So Lars, why don't you talk a little bit about why the quarter, I think, in total was a record, I mean, in terms of absolute terms in July, as well as very strong organic growth? And maybe you could describe some of the drivers.

Sure. I mean, again, as I said, the market remains strong. We can see the reports from the industry and that confirms that the funding is in place and I think fundamentally, Dako is making good progress, and I refer to the base business improvement program that includes us upgrading our instrumentation base and us adding more sales people in front of the customers. We are yet to see the impact of a new automated stainer. And as I referred to that in the earlier call, we are hard at work at that. We are a couple of months away from market release, and we expect to see that hitting the market during 2013. And obviously, that's going to be the incremental impact of the way they're going to position that stainer. But fundamentally, the market remains strong and Dako is making good progress here, and this is across the regions that we see.

Okay, that's helpful. Then last one, though conceptually here just kind of following along on the Dako. I've got lot of questions, given the weaker environment in your -- the more flexible cost structure that you have, as your ROIC declines and you have less of a variable payout. Can you maybe conceptually just talk about how that plays out, say in an environment in which you're planning on the ROIC hit because of Dako but then, let's say, the environment is just a lot worse than you anticipate as well. Can you maybe just talk about how that -- how does that flexibility play out in that environment?

So we have targeted, in terms of variable pay, 10% variable pay based on the overall salaries. And so that's the base. And I think, roughly our total salary is about $1.3 billion. And so at the beginning of the year, we had moved the target at the 10% from a 21% return on invested capital to 25%. And so depending on the Dako obviously lowered for a short period of time, the overall return on invested capital, but any performance less than target, it automatically adjusts the Agilent variable pay. And we calculate that in terms of payout, the Q3 plus the Q4. And so roughly in Q3, our return on invested capital in total was at 18%. So I mean, it's a pretty linear extrapolation from a 25% target at 10% variable pay. It slides down very linearly along that vector. So it's pretty easy to determine what an 18% return on invested capital would end up as a variable pay component. Does that make sense?

Okay. Yes.

And your next question comes from the line of Jon Wood of Jefferies. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Bill, so you guys have done a pretty good job, I think, over delivering on the core operating model, I guess up until the fourth quarter here. Obviously, with the revenue below. How -- at what point do we start taking structural cost actions, kind of in preparation or assuming this environment on the core revenue side continues?

Well, I think, again, what we're forecasting is, and I've been very clear on this, is kind of a muddle go-forward business environment. And if in fact that we are able to growth flat core plus the benefit of Dako, we are going to maintain a 20% operating profit without any major restructuring, and that's our first order goal. Ron and the team have taken a lot of action to ensure that we can maintain our margins moving forward. We're not anticipating another 2009. And again, there's obviously issues with the euro still hanging out there. But right now, we're forecasting a flat growth environment, and we believe that we can maintain our 20% operating margin with the existing head count. And again, I mean the one caveat is that Ron and the team and again, are working to drive out manufacturing costs. We are looking at site consolidations. So there will, in fact, be some impact in terms of streamlining our order fulfillment. But again, it's not a major restructuring of the company. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Got it. So Didier, are you willing to give the operating profit of Dako in the fourth quarter? And also, I don't know if I missed this, but can you give kind of the core growth assumptions by division for the fourth quarter? That will be great as well.

Basically, what we're expecting is that a slight year-over-year deterioration in the core growth for EMG between Q3 and Q4, and also for the CAG in about the same core growth for LSG. And DGG, Bill already said that we are assuming $85 million of revenue for Dako.

The overall operating profit on Dako is around the 15% operating profit. This is after restating from ISFR to GAAP. Of course, where R&D can be capitalized in ISFR also includes the investment that we are putting into Dako to beef up R&D and to be able to expand into Asia moving forward. But what's interesting here is that the slowdown is in segments across all of the business. We're not seeing what we saw in 2009 where the electronic business crashed. We're seeing softness in academic and research, environmental, aerospace and defense and industrial. So as a result of it, as Didier said, it's a lot of give and takes that end up with roughly a low core growth rate. Jon Davis Wood - Jefferies & Company, Inc., Research Division: Okay. So just to make sure, Didier, Electronic Measurement you said, so slightly worse than flat. Did I understand that correctly in the fourth quarter?

Yes, exactly. I mean, overall, for Agilent, we are going from a 2% core growth in Q3 to flat in Q4. And so you see about the same kind of -- it's homeostatic for by business or with EMG and CAG a little bit under the average and LSG a little bit better than the average.

And your next question comes from the line of Nandita Koshal with Barclays Capital.

Bill, it sounds like Asia was exceptionally weak in the quarter and it seems like there was a falling off a cliff towards the end of the quarter. Could you talk about the country-by-country trend? Maybe give us a little bit of color around the China environment? Is this something you expect to be persistent? Is there a reset in your expectations? I know in the past, Didier has been relatively confident around the base trends there. Is there any change on that front?

Didier noted the Japan being down 10% and again, I'll have Didier explain exactly how we demonstrate orders versus revenue. But in ship to country, China's business was up 23% year-over-year. This was all driven by the wireless business in EMG. Chemical Analysis and Life Science business were in mid single-digit growth rates. And Didier, why don't you again, explain in terms of how we know regional revenue versus how the orders are necessarily placed?

So we -- in all the reports that we provide and all the regional information that we provide, orders and revenues are consistently computed on the basis of where the order is taken. So if an order is taken in the U.S., it impacts both the U.S. -- the regional, the Americas order growth rate and the Americas revenue growth rate. The number that Bill gave you by country, we are able to track on a ship-to basis. So there might be an inconsistency between -- there is, obviously, between the number that Bill gave you, 22% growth or 23% in China on a ship-to basis, and the Asian overall, Asia-Pacific excluding Japan growth rates. But just because we want to report orders and revenues the same way by -- based on where the order is taken. Sorry for the -- it might add a little bit of complexity but it provides a little bit more information to do it those 2 ways.

Okay. I guess, if you'll fundamentally the view the demand environment in China, Bill, how would you sort of look at that outside of the dynamics of that order there disregarded et cetera but what does the fundamental situation there are look like? Is it sequentially worse? Did you do see a similar sort of falling off in July? And what's the view going forward? We've seen some other competitors have commented on China being weaker than expected, and the recovery likely pushed out into '13. So could you give that sort of fundamental color from an Agilent standpoint?

Yes. Overall, China is slowing, showed up in our numbers. The big swing factor in China will be wireless manufacturing because 85% of the cell phones in the world are manufactured in China. The rest of our businesses is in the mid single-digit growth rate, which is half of what it was a year ago. It's not going negative, but there is no doubt that China is slowing down as a result of issues particularly in Europe and what we're starting to see in the United States.

Okay. And I also wanted to ask you about the investment, the thought process behind investments in the business. In the past, you've talked about academic and government, just the whole end market being a higher growth potential market for Agilent. And therefore, the investments were higher and we were to expect lower incrementals in the near term. Given all of the challenges we have seen with funding and a slowdown there, has your view changed on sort of the return on investments in that space? And is that a part of the cost savings that you're talking about? Or are the cost savings basically focused on EMG again?

Again, the cost savings that we are targeting are in manufacturing. They're not in EMG. EMG has the best gross margins in the company. The focus continues to be on chemical analysis and life science; predominantly, the Varian product lines. And that is what we are focusing on. I've been very clear. We need to get 5 points of gross margins improvement, and both Mike and Nick through Soon Chai's organization are working on to be able to make that happen. At this point in time, we are not changing our investment portfolio. A company cannot instantaneously jerk a company around for a momentary slowdown. If in fact there's a financial crisis in Europe next year, then we'll deal with that. But we are absolutely committed to continue to invest in research and development, committed to academic and research, committed to ensure that Dako is successful, continue our investment in life science, and of course, be competitive across all the applied markets and electronic markets. Again, we're a company that's been around since 1939, and we will continue to provide our customers the best measurement solutions in the world.

And your next question comes from the line of Ross Niesel [ph] with ISI Group.

So I'm trying to get a sense, piggybacking off of what some of the other folks asked. Just on sort of where do you think we are kind of in the contraction and demand? I mean, when we look at sort of the macro, I mean, we've been seeing PMIs come in for a while. You've seen guys across the tech space on the customer side sort of have inventory issues and go through a lot of the demand pain and a lot of the high end CapEx guides leveraged Asia, it's been pretty bad. Q3 is -- but we're seeing the market and others sort of imply that we're going to see sort of another side of it. That we've kind of come down, we followed this path the last few summers and then things sort of get better in the fall, winter. Now I guess I'm just trying to get in the context of what's implied in Q4 and vis-à-vis, the reaction you saw from the customers, how you sort of characterize this versus other examples, whether it's regionally or by division and just get a sense for, "all right, so this is bad but we knew the economies were slowing." And so was it that much worse than you would have expected given all the data we saw? And what are we looking for to sort of see the other side of this if we actually could see an improvement in growth at some point? Clearly, that's what the market in and of itself is sort of implying.

Well, first of all, the big surprise is that we had a delta change of $50 million of revenue delivery that customers didn't want. Now having been in the industry for a long, long time, this doesn't surprise me whatsoever that when people get nervous about the macroeconomic environment, they slow down spending. 70% of the company is in capital equipment. It's the easiest thing to stop and so that's exactly what happened in the markets that we had outlined. In my opinion, the fundamental issue is that you have economic and political uncertainty in Europe and in the U.S. That's why this is so different in what we've seen in the past. It's not supply and demand, it's not a normal rescission. But given the issues of the euro and what's going to happen and then you have this financial cliff in the U.S. in January, complete political disagreement in Washington, people are really nervous. And I think that depending on, quite honestly, if you would -- if somebody agreed tomorrow to say that Europe is going to do a euro bond and the U.S. was not going to have a financial cliff in January, you would have a different outlook. I think it's as simple as that. And of course, China, where their number 1 trading partner is Europe, is just going to see the second order effect of what's going on in Europe and the U.S. And I think it's that, and that's why it's so hard to predict what's going to happen. Didier?

I would just add that the slowdown, even though it was expected, everybody expected the Q3, Q4 -- Q2, Q3 GDP worldwide to be lower than in Q1, it was more pronounced. I mean when we guided in May, the PMI new order index was at its highest for some -- for awhile, and then it dropped to being the lowest since 2009. So it was fairly sudden because of the factors that Bill has mentioned. And it's not something that even though we are conservative and we are careful -- and on top of that, to date, people say, "well, worldwide GDP is going to be 3.1% growth for Q2, Q3." From our standpoint, when you look at our models and our correlations to GDP, it feels a lot more than 2.5% and 3.1%. So I'm not even sure that the numbers that people are expecting will really, really materialize. I think they are probably going to be revised down in the next few weeks.

So I guess, do you think to some degree on a relative basis in your peers, in terms of how the performance just aesthetically looks, obviously you have an exposure to a couple areas that they don't, like on aerospace, defense, which was weaker. But on the sort of traditional tools businesses, do you think the function of the timing of the quarter in that July was net worse and we'll see this sort of play out in 3Q more broadly from a demand perspective? Or were there other things sort of specific to some of the product lines or some of the end markets where you touched that you saw sort of an exaggerated -- sort of delta versus expect relative to everyone else.

I think you outlined the 2 issues. First of all, we had the extra month. So if you believe the macroeconomic environment is slowing greater than in July versus June, then that would impact us differently than our peers who are typically on a calendar quarter. And secondly is that if you do a weighted average growth of our peers, we grew slightly less than them. But we have much higher exposure to aerospace and defense and industrial. A lot of them have much greater exposure to academic and research, but the industrial and aerospace and defense is 18% of the company. So the areas where we've had strong market positions clearly, we saw the most headwinds in Q3.

Okay. And I guess just last point, I just want to get this clear on Dako because I feel like there's a lot of a bit of cross nets [ph] here. In terms of how you're thinking about sort of the revenue opportunity there from the synergies perspective versus the original, are we sort of in the same place? Or are we moderately worse? I guess, it isn't clear to me kind of in terms of how you're thinking about the total return equation there, kind of what the all in sort of conclusion is, having owned this now for a couple months.

Well, we're not going to overplay. We're off to a great start. July was the best month in Dako's history. And as Lars said, there are going to be ups and downs. The data and the forecast is that we are at or above what we told everyone to justify the acquisition. On the other hand, we are only at the beginning. We still have a lot of work to do. And the good news is it wasn't bad news, which often happens in an acquisition, but we won't be bragging about it until we get a couple years into leveraging the capability of Dako and Agilent together. That's really where the proof in the pudding is going to be, to be able to get the return on the investments we had made. But we're off to a very, very good start.

And your next question comes from the line of Tycho Peterson with JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: I appreciate some of the color you've given on guidance. As we think about cash flow, though, can you, Didier, maybe update us on how you think about cash flow guidance for the remainder of the year? Do you still think you can do north of $1 billion for the year?

Yes. No chance, $1.1 billion is our operating cash flow minus about $200 million of CapEx, so $900 million net. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then, Bill, relative to your own expectations for the quarter, can you help us think about how much of the delta was Europe versus Asia relative to your own internal expectations?

It was mostly market segment just as we had defined. Again, we tend to look at business by company and by market, because most of the companies are so multi international. And then as Didier said, we sort of add it up at the end about what region got what orders and what revenue. But again, the surprise was the slowdown in orders and the unwillingness of customers to take delivery. I mean, that was the issue. And again, you add in $50 million back into our revenue number, we wouldn't be having this conversation. And it all showed up at the end of July. And again, as any capital equipment company, all the shipments tend to be biased to the last month of the quarter and we could not get customer acceptance. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: Okay. And then as we think about kind of the diagnostics in genomics business, I think Dako was more or less in line with our estimates overall, because that division was a little bit late light relative to what we were expecting. Did you see a slowdown in genomics? And can you kind of comment on some of the underlying trends there?

Yes. The quarter for the genomics was slightly below expectation in Q3. However, they're going to be able to make that up in Q4. So again, I think we're going to be in fine shape. It's just the seasonality of the quarter on how deliveries are being done there. Obviously, they're impacted the most by academic and research. They had some negative. The continue -- there's a fair amount of pressure on the gene partitioning. It had a sequencing. On the flip side of it is, as I said, the acceptance of our new probe technology has been great. I mean, the number of customers has increased dramatically moving forward. We're introducing this technology through the Dako sales team, and so we're really quite reasonably optimistic as we move into Q4 in terms of our new growth -- our new group diagnostics and genomics group. We're quite optimistic. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: And lastly, can you talk on price? Are you able to kind of hold price in this environment with some of the delays? Or do you have to see some slippage across the board on price?

In this environment, there is a lot of pricing pressure across every one of our segments moving forward. And that's why, as we had outlined, we are very aggressive on moving after manufacturing. We're not signing it up. It's following all the bottom line, because quite frankly, a lot of that work that Ron's team is focusing on is going to offset some of the pricing pressure that we're seeing.

And your next question comes from the line of Paul Knight with CLSA. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: Bill, I guess we're really trying to sort out what the earnings will be like this time around versus '08, '09 and the start of that. Within this pie chart showing industrial computers and semis is 20% of Agilent in the quarter, is most of that now industrial? And how do you think that industrial market will be this time around? Like what was it like in '09? Will industrial have a lower trough compared to your semiconductor computer that you saw in '09?

Yes. The difference between today and '09, I mean, are not the same. Because in '09, there was lack of liquidity, there was lack of cash and people just stopped spending capital equipment. Right now, people are starting to be conservative because, first of all, 2009 is very real in their memory. And two, all you have to do is read the newspaper every day, and the lack of progress in Europe, the lack of progress in Washington causes people to not want to spend. If you look at the consumer savings rate, it's gone up 1 point in the United States already. So if there is a euro crash of some sort, you will see, in my opinion, a replay of 2009. Right now, there is no evidence of a replay of 2009 at all. It's a very hard one to call because I think people are just waiting to see what happens because of the lack of clear government policy. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: And I guess that gets to the cyclicality issue. Again, is it more industrial that you see in that sector? Or is it also the computer semiconductors?

The industrial sector was where we had problems. The computer semiconductor business actually had a pretty decent growth. Paul R. Knight - Credit Agricole Securities (USA) Inc., Research Division: Okay. And last, I guess you're still shooting for a 20-plus percent off margin in a no-growth world.

Yes.

Your next question comes from the line of Amit Bhalla with Citi.

I wanted to understand the lab environment a little bit better and how the labs are thinking about the consumables that you're selling to them versus the capital equipment. Can you talk a little bit about the product lines that were hit the biggest and how consumables played out in the quarter?

Sure. Nick?

So first, I mean, for my comment, then I'll turn this over to Mike for his consumables comment, but for my comment, the LC business was pretty soft. We had a situation in LC where the overall growth in revenue was negative although the orders were positive, but that business was pretty soft quarter-over-quarter. Mass spec continues to be positive both on orders and revenue. So it is more that routine replacement subset that we're seeing some softness in. And the rest of the businesses where it's a technology upgrade, we're still seeing strength. And that's true, obviously more for pharma than academic. The academic problem was pretty regional. It was very much U.S. and Europe, not rest of world. And, Mike, if you want to talk about the consumable piece.

Yes, sure, Nick. And just to continue the similar dialogue here. As Nick pointed out, on the LC side, replacement cycle, we saw a similar phenomena on the Gas Chromatography side in terms of replacement. But as we pointed out, some of the new higher end products are really continuing to grow quite well. Relative to consumables, we're still seeing interest in the ongoing operations of funding those by our customers and saw growth in our consumables business in line with our peers.

And as a follow-up, when you talk about China LSG and CAG growing mid single digits, do you think that mid single digit gets worse going forward? How do you think that plays out in Life Sciences for China going forward?

Nick and Mike maybe can comment for each of your respective markets.

Yes,. I think the market in China for life science continues to be a market that's going to grow above their GDP rate, and that's because it's a place that they're investing in their 5-year plan, so I think the market macro looks pretty decent. And you just have to look at their GDP and add a bit. We obviously are seeing a lot of competitors and we're big in China, so we're adjusting our footprint and our behavior to make sure that we stay at or above the market rate, and that's a challenge for us. But the market itself looks pretty good.

So just to tease out that last piece, is it completion that had the bigger impact this quarter? Or is it macro? Which 1 of the 2 for China life sciences?

Life science comment would be competition.

Relative to the CAG side, as Bill pointed out in his comments, we had solid single digit revenue growth for the quarter. And we would not expect to see a slowing from that growth rate as we move forward. What we did see in the quarter was really some level of uncertainty in the customer base, obviously, from some of the economic concerns that we've been talking about today. But also, in the run up to the leadership changes that we'll be trying later this year. And our competitive position in terms of share remains very solid.

And your next question comes from the line of Richard Eastman with Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: A couple questions on the EMG piece of the business. The Communications piece is up 7%. Did we see any broadening of the strength there outside of the handset test business? Or was all of the strength kind of concentrated there? Have we see anything come back on the base station side or...

Guy?

So to answer this, we did not see changes on the base station in infrastructure compared to what we said last quarter, so this is staying at the low side. We have seen strength of our costs to overall wireless manufacturing segment and also the R&D part of the wireless handset.

But you also saw, Guy, negative growth on the optical test side, which was quite substantial. That was really the big news buried in the numbers, is a very substantial cutback in optical test.

That's correct, the overall infrastructure malaise. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just one maybe longer-term question, but there's been an announcement, big service provider here in the U.S. talking about kind of phasing out their legacy 2G network. This is out to the 2016, '17 timeframe. But I'm curious, does that suggest an accelerated spend then in LTE and -- or what would you expect to be the impact on phasing out the legacy 2G spend but then accelerating impact on the LTE? Is that generally speaking a positive for sales and margins acceleration or...

I don't know if Guy of Ron have a different opinion. My view on this, and we went through the whole change from analog to G2, G3, G4, that the market doesn't move that fast. And so at least based on the last 10 years data, one wouldn't see an abnormal change in overall investment. But, Guy, Ron?

Yes. I would really concur with what you said, Bill, is that the CapEx that we're going to invest is not really changing. It's just shifting, okay? Shifting. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: But it should be somewhat of a positive on the margin line.

It is more -- I would say the positive is at the R&D side, because obviously, more investment going into additional LTE investment in designing. And potentially for LTE-Advanced, so there's more and more need for what they call carrier aggregation to make the most of the network and the bandwidth they have, so that's where I would see the positive signs.

And your next question comes from the line of Mark Douglass with Longbow Research.

Again an EMG. So what are you seeing as far as comm orders going into 4Q? Did you see a hit there in 3Q? Or are you seeing kind of a steady-state continuation of the kind of mid high single-digit growth?

Guy?

Well, going forward, I would say there, the sequential, especially on the manufacturing side, we expect this to moderate slightly in Q4. As you know, there are cycles for some of this production and the time where some of these devices go to market. So that's probably the comment I could do for Q4.

Okay. And you're not expecting base station pickup either?

No, we're not. It's going to need a couple of more quarters at least.

Okay. It bounces along the bottom. And then can you comment on the -- you mentioned that there was weakness in the distribution channel. Do you have a view of sell-in versus sell-through, amount of de-stocking versus in demand there and where you think inventories are?

Yes. We are very rigorous on managing our distribution inventory. And we track that very well. And so, there's no evidence -- Ron, correct me if I'm wrong, of any build up in our distribution division channel. And, yes, we take credit when we ship to them in revenue, but we watch the sell-through very well just to ensure that we're not exposed.

So that's matching pretty closely, the sell-through versus your sell-in.

Yes.

And your next question comes from the line of Patrick Newton with Stifel Nicholas. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: I guess, first, for Didier, a question on gross margin. If we look at wireless manufacturing test tools kind of be at elevated levels as a portion of mix, and if we look at the $50 million in orders that haven't really shipped in the quarter and then we take into account inventory being somewhat elevated, should we expect inventory to be worked through in the coming quarter? And consequently, expect some margin pressure perhaps with gross margin declining sequentially?

No. You would expect we had a strong wireless manufacturing test business in Q3. And as you noted, it comes with a lower gross margin than the average. In Q4, you would expect a sequential increase in gross margin. And by the way, also a slight sequential increase in operating margin also.

And I do believe there's some opportunity to reduce inventory, but most of the inventory growth sequentially is the result of the inclusion of Dako. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: Okay. That's helpful. And I guess, you discussed aerospace and defense being a little bit weak. You discussed that you're seeing a little bit of, I guess, order softness you think because of the worry about a fiscal cliff. But as you guys sit here and you kind of do your roundtables and you look at the aerospace and defense business and you think about, I guess a range of expectations that could happen with sequestration, how do you look at that business playing out in 2013? I realize it could be a wide range but if you could kind of just give us a thought process of potential outcomes.

I have been very public about this that one of the big risk factors to Agilent is aerospace and defense segment of the business, which at that time, is 10% of the company. Now it's down to 8% of the company. We are coming off a record high investment over the last number of decades in aerospace and defense. With awards winding down, the desire to cut an additional $50 billion. The sequestering, as you said, is another $50 billion. If that happens, I believe that Agilent is going to be impacted. The only offsetting can be what type of programs are still funded. The issue is that once there's that magnitude of a cut, everything just comes to a screeching halt until people decide what programs they are going to fund moving forward. Guy and the team, of course, are trying to get more business outside of the United States. We're shipping into operational surveillance. We obviously continue to focus on radar systems and guidance. But if the financial cliff happens in January, I think that you're going to see a major impact to U.S. defense spending. And as we said in our notes, the government spending hasn't changed much, not too surprisingly. It's the prime contractors that are already cutting back in anticipation of a major cut in defense spending. That's what we saw and it happened faster than we had anticipated. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: And Bill, as you kind of look at the big picture, there any businesses outside of aerospace and defense, maybe getting into academia and government that you think could also see some of the negative impact of those potential outcomes?

Every one of our segments that have high government spending are at risk of having pressure. Start with the local governments, no money, go to state level, state-by-state, go to countries, anything that we touch. And we saw it in this last quarter. aerospace and defense and environmental testing was below expectation. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: And have you ever quantified local plus state plus national government exposure?

We know what the number is overall. I mean we've never provided that level of detail. But I think Mike and the team, and Guy's team know exactly where the opportunities are in each -- by country, by region, province and by state.

Absolutely. Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division: Okay. That's helpful. And I guess just one more, maybe for Didier. As you kind of move into this sluggish macro environment and you kind of are in the process of digesting Dako, how should we think about your willingness to lever your balance sheet? Are we in kind of a cash replenishment cycle? Are you guys still actively looking for the right opportunity? Or do you think that your product portfolio is in essence where you need it to be at this point?

Well, we're always looking at opportunities for either bolt-on acquisitions or something. Or obviously, there's no way we're going to do anything in the short term considering we want to declare a victory on Dako before we become more aggressive, the same way as we've done with Varian. But certainly, the driver is not the availability of cash or how cheap interest rates would be if we do a bond offering. It's just what opportunities are we seeing to create shareholder value. And right now, we are entirely focused on making sure we create the committed shareholder value in Dako. In the meantime, there could be small bolt-on acquisitions, but nothing big in the short term.

The next question comes from the line of Isaac Ro from Goldman Sachs.

First off would be on book-to-bill this quarter, can you maybe give us a sense of how that looks in the aggregate? And then also split it out between the EMG side and maybe the rest of the business?

Book-to-bill I think is 0.97 [ph].

Yes. You have the information on our vital -- on all our documents. You have the order and revenue in all the schedules that we provided. Jon Davis Wood - Jefferies & Company, Inc., Research Division: I'm just trying to get a sense of the pacing between EMG versus the rest.

This is the message. I mean this is again, at this point in time, the softness we saw was in EMG and in Chemical Analysis. Chemical Analysis related to government spending. Life Science actually did overall did reasonably well even with the pressure in academic and research. And obviously, Dako was a huge benefit to the company. But it is not a massive change in one segment versus the other at this point in time.

Sure, okay. That's helpful. And then, Nick, maybe, if I could ask a question about China to follow up on the earlier one regarding the government funding there. I think a lot of the other companies in the industry have been talking about waiting on a lot of the new government officials get into place, start releasing budgets. Some of that has been expected to show up in the back half of this calendar year. I'm just wondering if you could maybe comment on your expectations for those government dollars to start flowing at some point later this year.

Yes, we think the comment is -- let me just say, I can pretty much validate the comment. They are putting a lot of new officials in place. There's a question on government hand over. But in terms of when you get down into the bioanalytical sector and certainly Life Science, there's a lot of money that is in principle committed and is yet to be committed by the actual end researcher at the National Academy. And we expect that to occur in the next few months.

Great. And maybe a last question if I could on the long-term picture. Didier and Bill, can you maybe remind us what kind of a global GDP growth assumption you guys bake into your views? Because you guys obviously have your sort of foundation call for 8% core growth. I'm just wondering what kind of underlying GDP growth you think you need to hit that number on a multiyear base.

That would be about 4.5%.

Okay. And so just last there, is it fair to say if we look into a multiyear period where 4.5% looks difficult, would you guys maybe revisit the long-term guidance number?

Absolutely. If we don't believe in the 4.5%, absolutely. Right now, it is the consensus estimate. And I can tell you there's a lot of debates in-house whether are economists smoking something or what are the downside risks. But right now, it is the consensus estimate. It's the ISM number. It's all the various bankers, economists are still going for this kind of ongoing secular growth rate for the worldwide GDP, with obviously emerging economies being growth engine.

If you're interested, I'll go back and check with my guys on that. Hang in there. Thank you.

The message is, if in fact as predicted that the worldwide economy grows next year at 3.8%, we're going to do fine. I mean Agilent has done a great job to be able to respond to market opportunities anywhere in the world. The big issue is nobody really knows what is going to happen. I would submit the fundamental issue is the issues in Europe and the United States.

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

So the Life Sciences and Chemical Analysis gross margin -- not gross margin, operating margins improved nicely sequentially and -- which is impressive, certainly, in Chemical Analysis, given that the organic revenue growth is weaker. What happened quarter-to-quarter on that?

Ron, why don't you talk about some of the things that we're doing from an order fulfillment standpoint to, again, meet our commitment to improve the gross margins by 5 percentage points?

You may remember that back in November, we announced that we created an Agilent order fulfillment organization, and that's to leverage $1.7 billion OF organization. They're focusing on 3 particular areas. The first one is our overall manufacturing cost of actually putting together products and where products are made, and there's some minor consolidations that are going on of locations for that piece. The second piece is to use one integrated supply chain, which can get the best sourcing possible. And that is located in Asia, where we had the EMG supply chain in the past. And the third is to lower our logistics costs. And all 3 of those areas are being used to leverage our capability across all of the businesses. And again, that is what's driving the gross margin improvements in Life Sciences and Chemical Analysis. As Bill had mentioned, there is some pricing pressure that shows up in the gross margin line less than it shows up in actual COGS dollars or a little bit more slowly, but the progress has been exceptional.

So if you kind of look at a scenario where you've got sort of these improvement programs in place and the economy kind of muddles along for the foreseeable future, did I hear you correctly in that scenario that a flat year-over-year operating margin or an operating margins, say, in the 20% range is what you think is achievable?

Yes.

And then just one final throwaway question on this. On the CAG business, how did vacuum -- I would assume you got a bigger hit from the vacuum business, the old Varian vacuum businesses in there. Was that disproportionately down relative to some of the analytical and instrumentation businesses?

Mike?

Yes. The vacuum business was in the same range as the industrial segment, so down.

The next question comes from the line of Daniel Brennan from Morgan Stanley.

In the current environment, I know Bill and Didier, you addressed this in a couple of points in the call, but I'm itching to get your take kind of overall. But how is management balancing making strategic investments versus being more aggressive on the variable cost side to protect earnings? Given, I think, the experience in '08 and '09, you certainly have taken a lot of fixed costs out. But just kind of looking ahead, like how hard are you pressing on that variable cost line today in order to kind of get to those fourth quarter numbers?

This is the power of the operating margin or operating model that we have. I mean, a lot of the variable costs that you've already seen are automatically built into the system moving forward. Ron and the team of course are looking at all this discretionary spending, focusing the investment on where we can drive shorter-term opportunities. But in a muddle forward scenario of low growth, I have the highest confidence that we can continue to invest in technology that the market demands and not exercise the organization such a way that we're distracting people from being the best company to do business with in our market segment. And so, again, we have a lot of flexibility. Obviously, the Dako inclusion and the continued growth in this is obviously very, very helpful for us in this environment. And barring a major economic reset, I think that within our framework, we can in fact deliver this 20% operating profit on essentially flat growth.

And then kind of following up on the question earlier, but in terms of more near term, saying you're looking at the fourth quarter, does your guidance imply, like can you give us some guideposts there? Just kind of broadly speaking, say PMI is the number that Didier focused on early on in the call, but is there something where -- is there kind of a range of estimates that you've looked at, that you feel comfortable with maybe on some of the macro indicators in terms of reaching your fourth quarter guidance?

How we do it, it's more mundane than that. We know what the backlog is, we know what the order pattern was in Q3. Historically, Q4, the orders are the highest for the year. In our guidance, we assume that was not going to happen, that we would see a replay of Q3 in Q4, so that's the baseline revenue. So we know what the order turns are, we know the forecasts are, we know what the funnel is, but we took a position saying we have a backlog, we assume that the pushouts and deliveries weren't going to show up in Q4, that, that phenomenon would continue. And that -- as a result of that, you're seeing a flat organic growth rate from Q3 to Q4, then we get the benefit of Dako on top of that. That's how we determined our guidance.

Great. And then maybe one more. Just Asia x Japan, since -- sorry, Asia x China, sorry. But China certainly had some strong growth in the quarter, although the base decelerated, as you mentioned. But outside of China, can you just comment, were there any particular big countries that experienced more significant weakness are not? Just any color on kind of what you're seeing there would be helpful.

I'll have Ron talk. Japan as a province is minus 10% but...

Japan minus 10%. And India, with all the currency fluctuations, we saw some purchasing folks that were delaying, trying to play the currency better. But other than that, it was relatively consistent.

And at this time, there are no further questions in queue. And I would now like to hand the call back over to Alicia Rodriguez for closing remarks.

Thank you, Caris. And this concludes our call for today. I'd like to thank everybody for joining us. And if you have any questions, please give us a call in IR. Thanks, again.

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.