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Agilent Technologies, Inc. (NYSE:A)

Q2 2014 Earnings Conference Call

May 14, 2014 16:30 ET

Executives

Alicia Rodriguez - Vice President, Investor Relations

Bill Sullivan - President and Chief Executive Officer

Ron Nersesian - Chief Executive Officer, Keysight Technologies

Didier Hirsch - Senior Vice President and Chief Financial Officer

Mike McMullen - President, Chemical Analysis Group

Fred Strohmeier - President, Life Sciences and Diagnostics Group

Neil Dougherty - Chief Financial Officer, Keysight

Guy Séné - Senior Vice President, R&D and Sales

Analysts

Jon Groberg - Macquarie

Doug Schenkel - Cowen & Company

Richard Eastman - Robert W. Baird

Dan Leonard - Leerink

Tycho Peterson - JPMorgan

Bryan Kipp - Janney Capital Markets

Isaac Ro - Goldman Sachs

Brandon Couillard - Jefferies

Operator

Good day, ladies and gentlemen and welcome to the Agilent Technologies’ Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) Please note, today’s conference is being recorded.

I would like to hand the conference over to Alicia Rodriguez, Vice President of Investor Relations. Ma’am, please go ahead.

Alicia Rodriguez

Thank you, Karen, and welcome everyone to Agilent’s second quarter conference call for fiscal year 2014. With me are Bill Sullivan, Agilent’s President and CEO; Ron Nersesian, CEO of Keysight Technologies; and Didier Hirsch, Agilent Senior Vice President and CFO. Joining in the Q&A after Didier’s comments will be the presidents of our chemical analysis and life sciences and diagnostics groups, Mike McMullen and Fred Strohmeier. Also joining from Keysight will be Neil Dougherty, CFO; and Guy Séné, Senior Vice President of R&D and Sales.

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 under the Financial Information tab. There you will find an investor presentation along with revenue breakouts, business segment results, and historical financials for Agilent’s operations. We will also post a copy of the prepared remarks following this call. Today’s comments by Bill, Ron, and Didier will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website.

We will make forward-looking statements about the financial performance of the company and the separation of the electronic measurement business. 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.

Lastly, as we expect the third quarter to be the final quarter before Agilent’s Electronic Measurement Group begins operating as Keysight Technologies, comments today will also refer to the Electronic Measurement Group as Keysight.

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

Bill Sullivan

Thanks, Alicia, and hello everyone. Today, Agilent reported second quarter revenues and EPS in line with commitments, with solid growth in orders. Revenues of $1.73 billion were unchanged from a year ago. Q2 orders of $1.81 billion were up 7% over last year. Adjusted earnings of $0.72 per share were at the midpoint of our guidance. Operating margin was 18.2%.

Keysight revenues came in at the high end of expectations. LDA revenues were slightly below the low end of our guidance. Both businesses built backlog as orders accelerated late in the quarter. Book-to-bill for Agilent was 1.05 positioning us well as we move into Q3. Our work to split the company continues to proceed smoothly. By the beginning of August, we expect Keysight to operate independently as a wholly-owned subsidiary of Agilent. We continue to expect the separation to be completed by early November.

Today, I will share performance highlights for the life science, diagnostics and applied markets that will become the new Agilent. Following my remarks, Ron will discuss electronic measurement markets that will become Keysight. Finally, Didier will provide a more detailed discussion of Agilent’s overall financial results, as well as our guidance for fiscal Q3 and fiscal year.

Turning to LDA, second quarter revenue of $988 million grew 2% year-over-year on both a reported and core basis. We saw good growth across pharma, clinical and diagnostics, energy and food businesses tempered by the results in academic and government and environmental markets. Orders accelerated at the end of the quarter as we built backlog. Book-to-bill for LDA was 1.04, with orders of $1.03 billion, up 4% or 5% on a core basis over last year. Operating margins, adjusted to revenue, were in line with guidance.

Turning now to performance by end market, in life sciences, we saw strength in pharma/biotech, up 4% led by demand from midsized and specialized pharma customers. Diagnostics and clinical revenues were up 7% driven by record companion diagnostics growth and strong demand for CGH arrays and target enrichment solutions. Academic and government remained soft, down 6% year-over-year as government spending delays in the U.S. and China pressured results. In the applied markets Food Testing was up 10% with globalization of the food supply and brand protection continuing to drive strong demand. Energy grew 2% led by the U.S. and refinery projects in the Middle East conversely environmental and forensics were down 5% impacted by government funding.

On a regional basis LDA performance was mixed. Double digit growth in Europe was broad based across markets. In the Americas revenues were down 2% on delays in U.S. government spending and softness in Latin America. Asia-Pacific was down 3% affected by slower government funding and lengthened approval cycles in China. We saw improvement in China towards the end of the quarter. Within LDA our life science and diagnostic group had Q2 revenue of $577 million, up 1% from a year ago as recurring revenues offset softness in instrumentation. Orders of $598 million were up 3% year-over-year, operating margin was 13% for the quarter.

In early May LDG recently announced the latest version of chromatography data systems CDS software called OpenLAB CDS. New features include flexible data capture, improved automation and faster data analysis. We also introduced a range of new LC products during this quarter’s HPLC 2014 in New Orleans. Announcements include a new next generation UHP-LC multi-sampler which sets a new benchmark in throughput, speed and carryover. We also introduced an updated two dimensional LC system for higher resolution applications. And we are launching a series of new LC/MS and GC/MS products at ASMS next month. These solutions are differentiated by higher performance and lower cost of ownership making them ideally suited for the applications in our core markets.

The chemical analysis group had Q2 revenues of $411 million, up 3% and led by strong demand for GC/MS and ICP-MS and services. Orders of $432 million grew 6% year-over-year. Operating margin was 22% for the quarter. The ultra high performance of 7200 GC/Q-TOF continues to exceed expectations with Europe leading all regions for the adaption of high-resolution, accurate GC/MS. CAG recently signed a major contract with a leading environmental company in Beijing. Agilent will supply GC/MS technology for online air monitoring systems, related to ozone and other air pollution – airborne pollutants.

Looking forward, LDA’s outlook remains positive, supported by our backlog build, a robust pipeline of new products and expectations for increased flows in government spending. We remain committed to creating shareholder value by increasing our organic growth rate, delivering complete workflow solutions for our customers and growing earnings faster than revenues.

Moving forward, our priorities are to continue our late-Q2 order momentum into Q3, launch a series of new products and continue to drive our manufacturing cost reduction programs. LDA revenues for the fiscal third quarter of FY ‘14 are expected to be between $1 billion and $1.02 billion, or nearly 5% core growth at the midpoint. We expect operating margins at the midpoint of 18.5%. For the full year, we now expect LDA revenues to range from $4.02 billion to $4.12 billion with operating margins at the midpoint of 19.3%. Didier will provide additional details in his commentary.

Thank you for being on the call. Now I will turn it over to Ron to talk about Keysight and the Electronic Measurement business.

Ron Nersesian

Thank you, Bill and hello everyone. I have three key headlines for you regarding Keysight’s performance in Q2. First, Keysight came in at the top end of its revenue and operating profit margin guidance. Second, Keysight orders returned to growth in Q2. And third, Keysight is on track with its plans to separate from Agilent.

Now, moving to the specifics, revenue of $743 million declined 2% or 1% on a core basis, while orders of $782 million were up 11% year-over-year. This resulted in a book to bill ratio of 1.05. Keysight continued to not only effectively manage gross margins and spending, but also had a favorable mix profile this quarter. Keysight generated operating profit of $148 million and an operating margin of 20% for the quarter.

Looking to our end market performance, aerospace and defense revenues declined 6% year-over-year. With U.S. budget approvals in place, direct government demand has improved, while prime contractor business in the U.S. remains soft. International aerospace and defense demand was mixed but steady. Industrial computers and semiconductors revenues increased 3% year-over-year, investments in next generation semiconductor process technologies continued in the second quarter, while computer markets remains soft.

Communications revenue declined 6% year-over-year. We continue to see strength in 4G base station infrastructure demand, while handset device manufacturing remains moderate. On a regional basis, we saw very good growth in Asia excluding Japan, which grew over 20% with strength across most market segments. The Americas region was down double-digits year-over-year versus the strong compare. Decline – Japan declined 12% or down 4% on a core basis, which excludes the impact of currency. Europe was essentially flat year-over-year.

As I discussed during our Analyst Day in March, Keysight is transforming its product portfolio with the goal of returning to market growth rates. This quarter, we began shipping both UXM wireless test set for R&D and the EXM wireless test set for manufacturing. The EXM wireless test set won 2013 Product of the Year award from the Electronic Products China. In April, Keysight expanded its performance network analyzer series with a low price model targeted at low cost RF components used in handsets and consumer products. Keysight also introduced two high performance portable oscilloscopes deploying next generation technology. One set a new standard for signal integrity and the other set a new standard for price performance.

We expect Keysight to begin operating as a subsidiary of Agilent on August 1, and to complete the spin-off in early November. As part of our journey, we are announcing today that we expect Keysight common stock to trade on the New York Stock Exchange under the ticker symbol KEYS. In addition, at the end of this quarter we will implement an operational cut over of our IT systems. This transition requires tight coordination of our shipment and delivery plans. We are working with customers on the cut over which could cause some revenue to ship between the quarters.

As Bill had said, it takes a lot of work to create two great companies from one. Along with all of the excellent internal work, we continue to focus on our customers and all of their measurement solutions needs.

Turning to the outlook for Q3, we expect Keysight to return to revenue growth with revenues in the range of $720 million to $760 million. We project core growth at the midpoint to be 5% and operating margins at the midpoint to be 18.4%. For the full year, we expect revenues in the range of $2.86 billion to $3 billion, which represents 2% core growth at the midpoint. Operating margins for the full year are expected to be 18.9% at the midpoint.

I’ll now turn it over to Didier to provide the details of Agilent’s overall financial results.

Didier Hirsch

Thank you, Ron, and hello everyone. To recap the quarter, our revenue of $1,731 million, operating margin of 18.2% and earnings per share of $0.72 were all at the midpoint of our guidance. Orders exceeded our expectations, but the quarter end orders queue was also higher than usual. By business, most of the operating profit variance versus the midpoint of our guidance was due to volume and mix. Please note that Q2 core revenue growth by segment and by geography is reported on the slide deck posted on our website. This quarter, currency subtracted about 0.9 percentage points from our year-over-year revenue growth, and acquisitions had no material impact. Finally, we bought back $50 million of stock in Q2 and generated $272 million in free cash flow, slightly higher than last year.

I will now turn to the guidance for our third quarter. We expect Q3 revenues of $1.74 billion to $1.76 billion and EPS of $0.72 to $0.74. At midpoint, revenue will grow 5% on a core basis. Our 18.5% projected operating margin at midpoint will be 30 basis points higher than Q2 fiscal year ‘14 and 20 basis points higher than Q3 of last year. Now, remember that we initiated a drastic cut in discretionary expenses early February of last year that resulted in significant expense reductions in the ensuing months. So, we face a tough compare. While we are maintaining our spending discipline, we are also investing in key growth initiatives.

Now, to the guidance for fiscal year 2014, we are confirming the guidance we provided last quarter for both revenue and EPS. And as a reminder, we expect fiscal year ‘14 revenues to range from $6.9 billion to $7.1 billion and fiscal year ‘14 EPS to range from $2.96 to $3.16.

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

Alicia Rodriguez

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

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Our first question comes from the line of Jon Groberg from Macquarie.

Jon Groberg - Macquarie

Hey, good afternoon. Thanks for taking the questions. So maybe for both Bill and Ron, can you maybe talk a little bit more about the kind of the pacing in the quarter, I think you made some comments that orders picked up towards the end of the quarter, in particular in China that some of the delay you start to see materialize. I don’t know if that was more just an LDA comment or if that was also a Keysight comment? And then can you maybe talk a little bit about some of the other emerging markets and whether you are seeing any impact in countries like Russia or Eastern Europe given the environment over there?

Bill Sullivan

Yes, I will just make a couple of comments, Jon, regarding LDA and then turn it over to Ron, because the real start of the quarter in my mind is the fantastic order performance of Keysight will maintain their operational excellence. As Didier alluded to, the orders in LDA came in late in the quarter, which is atypical given that half the business is in consumables and parts that it tends to have a more uniform order pattern than you typically see in Keysight. So, we had a back end bias, that obviously affect our revenue. Our revenue was below our own internal expectations and external guidance moving forward. The good news is the orders were there. And as we guided going forward, I think we are in solid position moving into Q3, but we really did have a surge of orders at the end that was out of typical sequence moving forward. And I will rather turn it over to Ron and talk about Keysight. And Jon, if you have any other questions, I can have Mike and Fred talk specifically in terms of what they saw in their respective businesses. Ron?

Ron Nersesian

The story was a little bit different in Keysight where we saw orders that were a little bit more balanced throughout the quarter. Clearly with wireless manufacturing, the orders are lumpy. And the good news is that with the wireless manufacturing and semiconductor business that we had, we achieved more orders towards the first two-thirds of the quarter and that enabled us to exceed our revenue guidance. As far as the emerging markets, Russia is the biggest wildcard that we have given that everything of that is going on over there politically. We actually had a decent quarter, but we are cautiously watching what will happen as we look in Q3. We expect our performance in Q3 in Russia to be flat and all signs so far on a local level appear to be consistent with that.

Bill Sullivan

I will just follow up, Jon. And maybe Mike, you could make some comments with the order pattern on the applied side and then Fred on the life science and diagnostics side.

Mike McMullen

Yes, sure, Bill. Jon, it’s Mike McMullen. I just had some additional commentary on the quarter, very pleased with the overall order rate for the business. And I think you can see the backlog we have built and the difference between the growth rate of our segment orders versus revenue and particularly pleased by a return to really solid growth in our core instrumentation platforms. And as you know, that’s been an area of struggle in the last several quarters, where you have been looking for this churn on in the replacement market. So, what we are seeing is warming up of the replacement market and signs of return of spending on some of the government side, particularly in the U.S. and promises in China. So, very encouraged by the overall global results, in particular how we have finished the quarter in China.

Fred Strohmeier

Yes, let me just add also couple of comments. If you look to the different markets we saw strength in the pharmaceutical market as Bill has pointed out on the one side even so the consolidation puts some hold on it and the growth rate was predominantly coming from smaller pharma companies. I think if you look to the geographies, I think China was a little bit behind I think with a bit suffering in the U.S. I think Europe was doing quite well and specifically to the comment on Russia, even so there is impact, I think the size of the business from an LDG perspective is rather marginal, so minor impact from that perspective.

Jon Groberg - Macquarie

Okay. And maybe just kind of two quick follow-ups on, from the LDA side, just to be clear maybe what did you grow in China in the quarter and what’s your expectation for the year? And then for Ron, on the Keysight side, I think you guided to 5% core growth in the third quarter, I think in the – at your Analyst Day, you kind of commented on high single-digit growth for Keysight in the second half of the year. So, I am just curious if that guidance still stands as well? Thanks.

Bill Sullivan

They give you an indication in round numbers. China’s business was down mid single-digits. The flipside orders were up mid single-digits.

Ron Nersesian

And on the Keysight, our guidance from last quarter still stands and we had expected 5% in Q3 and then that accelerates in Q4.

Operator

Thank you. Our next question comes from the line of Doug Schenkel from Cowen & Company.

Doug Schenkel - Cowen & Company

Hi, good afternoon. So you essentially reiterated LDA revenue and you guided the July revenue quarter about in line with what we were expecting. So all-in-all, no real change in guidance or quarterly placing to revenue. However, your fiscal Q2 operating performance in LDA was much weaker than expected and you guided fiscal Q3 op margin for the group a bit below our expectations. So, this implies that fiscal Q4 operating margin I think gets up to somewhere between 21.5% and 22% assuming them doing the math right?

And if so this implies an incremental above 30%, so year-over-year, this doesn’t seem Herculean, but it does arguably represent a pretty material level of improvement over the last two quarters of the year relative to what was a weak quarter this quarter. So, can you talk about how confident you are in this guidance and more specifically what makes you so confident that you can get to those levels subsequent to this performance? And I think as you are talking about this, I think to be fair, you guys didn’t spend a lot of time explaining why the margins in LDA came in, in these levels in the quarter. So maybe you can talk a little bit more about that?

Didier Hirsch

So, hi Doug, this is Didier. I was talking about the numbers and then probably my colleagues will want to talk about their confidence to achieve the second half, but in terms of Q2 what happened is yes, LDA’s operating profit was below the guidance that is very much in line with our revenue mix, which again was due to orders being skewed towards the end of the quarter. And therefore, we will recover that mix into the second half. And that explains the second half patterns. So, basically nothing fundamental, nothing special in Q2, the only – the main reason by far for the operating margins performed below the guidance is volume and mix and as we are recovering because we have a high backlog go into Q3, obviously we will see that the offset in the second half. Now within the second half, there is no doubt that Q4 I mean even the second half even though there is an expectation of a significant improvement in operating margin between Q2 and Q3 for LDA, there is further improvement expected from Q3 to Q4 in line with the revenue growth.

Bill Sullivan

I will just add on to Didier and it goes back, (your think) is correct Q4 is our strongest quarter of the year, very typical and at companies like ours that last quarter tends to be strong. And if you go back in 2013 LG went from Q3 to Q4 from 60% operating profit to 19% and the chemical analysis went from 21.5% to 25%. So again we are not forecasting anything that is we have not seen in the past and obviously both Mike and Fred have committed to meet this guidance. Okay.

Didier Hirsch

Absolutely, Bill. I am very confident on our plans for the second half.

Doug Schenkel - Cowen & Company

Alright, thank you for that. That’s helpful and if I could ask one more, I think it’s interesting that you noted challenges for LDA in China within the academic government end market due to the release of budgets, over the course of the recent earnings season, we have really heard this only from Waters, I mean we heard a little bit from others, but they didn’t really call it out as notably as you and Waters have. And I am pointing the companies like Thermo, Danaher, PKI and Bruker to name a few, so on the surface the common denominator here seems to be maybe instrument mix as a percentage of sales and possibly more exposure to LC, I am just curious if you would speak to what specifically you are seeing in terms of what’s slowing down in China within the academic government end market and what isn’t, I think it would just be helpful to sort of contextualize what is going on and why this seems to be specifically impacting some more than others? Thank you.

Bill Sullivan

Yes. One of these – I will have both Fred and Mike comment on that and again the China FDA is in major reorganization and parts of the business they regulate we have very large market shares. And but I will have Fred start on the academic research and then also Mike can chime in on some of the applied and food areas where we have very strong positions.

Fred Strohmeier

Yes. Thank you, Bill. Let me make one statement about the growth in China overall. If you look to the second quarter and compare that to this year’s second quarter and you compare that to the second quarter last year, I think the growth in general has slowed as such, so that’s the general observation. Secondly, I think if you look to the pharmaceutical industry, there has been quality regulation imposed to the pharmaceutical industry in the GMP space, good manufacturing practices. And this why is the part of the consolidation in India, China – in the China pharmaceutical industry which means another investment is retarded quite a bit. So China academic spending as Bill already pointed out I think this has been also a temporary slow down due to some regulations, which have been put in place in terms of anticorruption, which is also something which probably will go away over time once the process has been installed. And finally, as Bill also pointed out, China FDA is at the moment restructuring the food testing labs. And until this restructuring has been completed, I think we will see a shorter investment pattern of the food labs which probably is in the order of a couple of $10 million a quarter. And I think this will – as soon as this has been removed although it will stimulate the orders again.

Mike McMullen

I am just building on Fred’s comments specific to the food market, it’s a heavy platform usage of LC in the food market where Agilent as you know has a leadership position. So where the double-edged sword where we really are affected when see budgets shift to latter part of the year, I think there is a heavy concentration of liquids base used in that market segment. And again that’s why in the early part of the call I indicated I was very delighted by our performance in Q2 from the order perspective because despite the challenges that were highlighting here in terms of timing of the food orders in China. We saw a very strong growth in the environmental side as well as expanding in the petrochemical and chemical side, in the private sector side of the marketplace. So that’s why we’re looking ahead to second half 2014 you’re getting a positive view overall about the business.

Bill Sullivan

Just one final comment with regards to China I mean it’s slightly different in this space of genomics and diagnostic, this is where we saw a different pattern and we saw pronounced close beyond the instrumentation Mike and I were talking before.

Operator

Thank you. Our next question comes from the line of Richard Eastman from Robert W. Baird.

Richard Eastman - Robert W. Baird

Yes. Just Bill could you just kind of address I think when you were talking about LDA in total you commented about revenue out of Europe being plus double-digits with pretty much Americas and Asia-Pac softer. Could you just be a little bit more specific, is that end-markets are – what was as strong in Europe?

Bill Sullivan

Well Europe is as strong as I had noted across all markets and again Fred having – living in Europe talk a little bit about it and then Mike chime in. But our Europe team just did an outstanding job across all of our products to be able to grow in the low teens growth rate in orders. Fred.

Fred Strohmeier

Yes. I think Europe is as we see the recovery particularly in the academia and government royalty we’re seeing a stimulus of the autos. And if you look to the different industries and then Mike can comment on the chemical analysis side. We saw a significant pickup in the pharmaceutical industry, these are pretty successful particularly that was the LC/MS and I believe this will continue in the second half.

Mike McMullen

And just to build on Fred’s comments what a difference a year makes. So Europe was a real area of strength for us in the quarter. As Bill mentioned our team is doing an outstanding job driving share in what is now a growing market for us and we started to see an uptake in the chemical energy space in terms of replacement side of the business, investments in the food area continue to be very strong in Europe as well as in the forensic area.

Richard Eastman - Robert W. Baird

Okay. And then just a quick question on Keysight, when we look at the order growth the 12% order growth year-over-year, I’m curious if – Ron can you give a picture of is that order growth strengthened significantly in either any of these three pieces in particular comps or A&D and is there some recapture of market share that you could – that you can identify?

Ron Nersesian

First of all, 11% order growth was driven with two main areas. As you know the wireless manufacturing business is a lumpy business and we’re very successful in that area in the base station growth as we mentioned. The second thing we talked about last quarter as well as today is in the semiconductor expansion as they move to new technologies and again that was something that also drove our business. I was pleased to see double-digit order growth in all of our major regions except Japan which is having some problems, so that is a nice point that led to our 11% growth.

Richard Eastman - Robert W. Baird

Ron, one of the things that we kind of picked up in the channel in the A&D business in particular on the defense side, the Department of Defense, U.S. they I believe they’ve changed the way they are purchasing and previously they had purchased test equipment and pushed that test equipment down to the vendors stating the protocol and providing the test equipment. And our understanding is that, that has switched around now the DoD is asking the vendors to purchase the equipment and I’m curious is that changed anything in the channel for instance lease verse purchase or..

Ron Nersesian

No, we’ve always seen a mix between direct government purchases and purchases by the prime contractors. As I mentioned earlier the direct government purchases has picked up but the prime purchasing has not. And if you look at the financial results of the prime contractors in the U.S. that would sort of explain it. Internationally there was no significant change there that business was roughly consistent with where it was before.

Richard Eastman - Robert W. Baird

Okay, okay, very good. Thank you.

Ron Nersesian

You’re welcome.

Operator

Thank you. Our next question comes from the line of Dan Leonard from Leerink.

Dan Leonard - Leerink

Great. Thank you. Could you speak to the order trends in large pharma, I know you mentioned mid-size and I think specialty pharma was strong, but I’m asking because there was an increase in M&A chatter towards the end of the quarter. And I’m wondering if it has put any freeze on ordering?

Bill Sullivan

Look we’re seeing in the pharmaceutical market at this point in time that the consolidation talks between the big pharmas like Pfizer and AstraZeneca is certainly putting some hold on the whole investment pattern in the pharmaceutical industry. I think as I said before the smaller pharma companies are driving the growth at this point in time and I think over time as soon as this situation has speed up I think we will see that those big companies will go to single vendor their concepts and I think our opportunity there is to be a systems provider for those big pharmaceutical companies.

Dan Leonard - Leerink

That’s helpful. And Didier a follow-up on Doug’s question from earlier. Can you elaborate a bit more on the negative mix component in LDG and still trying to get my arms around since it was the lowest performance in a couple of years?

Didier Hirsch

Yes, I mean I won’t go into the detail but when you do the math we have about you would expect 65% contribution margin versus the variable cost of sales. So if you do the math on the reduction in revenue versus the guidance that we provided and you still get 65% of the reduction in revenue will fold to the bottom line basically it was flat it’s like $4 million to $5 million and doing the analysis and again we have plenty, plenty of products and the markets and the product lines like that. Whatever it is not explained by peer volume which is about $4 million we could explain it mostly by mix factor.

Dan Leonard - Leerink

Thank you. And then finally a really quick one. Did you notice anything in the Life Science and Diagnostic and Chemical Analysis businesses? Did you notice anything unusual about the revenue or ordering patterns from Japan in the quarter, and I ask because there has been some discussion that a tax change for one might have shipped it around some purchasing and you guys with in April and quarters should have – could have some insight into that?

Fred Strohmeier

I think the one – I think it was in March, I think we saw a pretty good month because this was just before the tax rate and I think this good all the way got partially compensated by the April, by the fact that there was a higher sales tax. And but in general if you look to LDG I think you have exhibited some overall growth in Japan.

Dan Leonard - Leerink

Great. That’s helpful. Thank you, Fred.

Operator

Thank you. Our next question comes from the line of Tycho Peterson from JPMorgan.

Tycho Peterson - JPMorgan

Hi, thanks for taking the question. EMG came in at the high end of guidance. Can you talk to maybe where you’re most surprised to the upside? And then looking ahead you did have a competitor that’s talking about in handset testing another $300 million or so coming out of that market, you maybe just talk us whether you still think flat growth to that market is the right assumption?

Bill Sullivan

Sure. The semiconductor market or the semiconductor test equipment market was very hot and we have very high margins in that business and accordingly that helped us and that’s why we had such outstanding incremental above the midpoint of the guidance over 80%, but that’s not something that we expect to repeat. We had been seeing a lot of price pressure in the handset wireless manufacturing segment, that is why our strategy continues to be to move more and more to R&D, but that pressure that is there on the pricing continues to accelerate. So if you take a mix of high let’s just call it a lot of semiconductor shipments and very little or less handset manufacturing shipments you get the very, very strong incrementals. As we go to next quarter we expect to have a much more normal balance as we move from Q2 to Q3.

Tycho Peterson - JPMorgan

And your view on just kind of the overall handset testing market I mean do you think that, that market remains flat or or do you see it consolidating in fact?

Bill Sullivan

I think there is enough – there is significant price pressure as that market has become crowded and manufactures continue to look for simpler ways to test their products. It’s all about cost per test. The market is very competitive and it’s one of the lower margin areas or one of the lower margin businesses that are there. We are seeing competitors will be acting more desperate ways on the pricing side and we are doing the right thing for the shareholder and making sure we are going to return in everything that we invest in and where we put our effort.

Tycho Peterson - JPMorgan

And then for LDA it sounds like environmental front (excludes) kind of the delta relative to the expectation, can you maybe just talk to it, it sounds like you are expecting a recovery in that business for the back half of the calendar year, is that driving the potential upside. And then you had previously called out some delays I think in pathology did those come through this quarter?

Ron Nersesian

I will jump right in and my perspective here. So the environmental and forensic business was down in Q2. The story here remains the weakness in government spending particularly in the more developed countries and economies. When I look to the second half, we are expecting to see improvement in the area as some of the government budgets are released let’s say in the U.S. So we are expecting some uptick in the second half in those areas, both at the federal and state level. But I also think the bigger driver is China as the overall global food market and the growth in the chemical energy space, our major customers are now talking about and in investing in capacity in the U.S. because of the lower feedstocks making their overall operations much more profitable. So clearly there is an element of recovery building around the environmental forensics market, but I also expect strong growth in other two larger markets.

Tycho Peterson - JPMorgan

And then Bill, can you just comment on that, did you have some policy orders that came through from the prior quarter?

Bill Sullivan

I will let Fred, give a response again our clinical and diagnostic business grew 7% in the quarter.

Fred Strohmeier

Yes. This is – it looks like you are right I think we had a really strong quarter for diagnostics and genomics. And particular the diagnostics piece was growing mid-single digits and it’s driven by the pathology business and even more so by the companion diagnostics which we believe was outstanding as Bill mentioned at his initial comments, I think genomics we see a pronounced need in the market at the moment I think its growing about mid-digit to high-mid digit range. And it’s predominantly driven by cytogenetics and the CGH race. And secondly the target enrichment business, which is going very nicely were also relative to our competitors.

Tycho Peterson - JPMorgan

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Paul Knight from Janney Capital Markets.

Bryan Kipp - Janney Capital Markets

Thanks for taking the question, actually, Bryan Kipp on behalf of Paul. Ron, I just wanted to start on EMG. I know its kind have been discussed throughout some additional question here you talked about wireless manufacturing orders and semiconductor orders starting off pretty strong and then pull through in the quarter. Where it’s some of those orders stuff you expected in the second – I guess in the third quarter. I know you said that 5% expect progress anyway and then in addition to that first quarter growth obviously has to be in that high end of prior guidance the second half alluded to 8%. What’s really driving that for I know you mentioned strength in the wireless or semiconductor demand but is it new products some existing products legacy products. Just to give more clarity on that?

Ron Nersesian

Sure. First of all, there was nothing pulled up to when we look at the 5% nothing was pulled into Q3 that would make that Q3 looked weaker that’s probably this components with the 5%. We’ve always assumed an economic outlook that would pick-up towards the end of the year that’s where as a low level base line and top of that’s a government which has not been purchasing very much obviously during sequestration, they finally are getting their act together on getting money out to the people that make to decisions. So we expect the government business to accelerate towards the end of the fiscal year for the government in September in the U.S. On top that our seasonally high quarter is always Q4 so Q4 is our strongest quarter and if you look at what we did last year $705 million in Q4 was a relatively low compare. So if you take a look at the low compare you look at your 780 ish million dollars in orders in Q2 we typically see Q2 and Q4 be strong against a compare of $705 million you can do the math and get there pretty quickly with any type of economic strength or slow recovery and with some new products that are coming out. I mentioned the UXM and EXM where our competitive position is very strong, it’s as strong as it has been in years in those areas but will continue to build on those.

Bryan Kipp - Janney Capital Markets

Appreciate it. And…

Bill Sullivan

Sure.

Bryan Kipp - Janney Capital Markets

And on the – go ahead.

Bill Sullivan

No, I was just wondering if that was suitable to your – to answer your question.

Bryan Kipp - Janney Capital Markets

Yes. I appreciate it. And then I guess just an additional follow-up on the chemical side. You cited (indiscernible) office a strong adoption in Europe, I think it since consecutive quarters of strong refinery demand in the Middle East. The order bookings were plus 7% on a core basis is to be driven by broader QC adoption and demand or what’s really driving that core order growth there?

Bill Sullivan

Great question. So thanks for that. So, on the mass spectrometry side there continued to be demand particularly for technologies that allow you look for unknown. This has become an increasingly desired capability both in the food but also in the forensics area and that’s why I spoke earlier to some bright spots in terms of forensics coming up. So the demand from mass spectrometry is really been driven by – continuing to driven by the food market but also there is emerging requirement to identify unknown both in the food supply as well as in designer drugs for forensics. And then you hit the nail really in the head in terms of what’s going out in terms of Middle East we’re seeing infrastructure build-out, major projects coming to fruition and Agilent is very strong in this space and we’re getting the business.

Bryan Kipp - Janney Capital Markets

Thanks.

Bill Sullivan

I hope that answered your question.

Bryan Kipp - Janney Capital Markets

Yes. Thank you.

Bill Sullivan

Thanks.

Operator

Thank you. Our next question comes from the line of Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs

Good afternoon. Thanks for taking the question. Wondering if on the LDA side just wanted to talk a little bit more into the weakness this quarter on revenue. Was there any meaningful impact from your exit last year from the high end NMR markets? I’m just trying to get a sense of whether that was a factor and just as we move to the balance of the year maybe you could put some color around that wakened your expectations just given we’ll be lapping through the exit on that business but at the same time you had a pretty healthy order dynamic this quarter?

Bill Sullivan

Yes. Our shortfall in revenue in the quarter as we have said is really directed to the late orders that came in they were atypical. The NMR business was non-material to that issue at all. And as you can hear from the comments for every place that we had some good news we had some offsetting bad news. And so quite frankly it was the mixed quarter and I think the message is the orders ended up being strong and we feel comfortable with the guidance that we’ve given as we move into the second half of the year.

Isaac Ro - Goldman Sachs

Got it. And I apologize if you guys gave the number, but just hoping for the overall growth rate in China, if you could speak to that, I know you guys gave a consolidated Asia Japan number, but maybe try to tease out China on the growth rate and looking what you’re expecting for the balance of the year there? Thank you.

Bill Sullivan

On the LDA side the business was down mid single digits, orders were up mid single digits moving forward. And for us to be able to grow 5% in the second half we have to continue to see the order momentum in China as we move forward I think both Mike and Fred talked about where we think that there will be opportunity as the government reorganizations and focus are completed. And that was indicative of stronger orders in China at the end of the quarter.

Isaac Ro - Goldman Sachs

Got it. Thanks so much.

Operator

Thank you. Our next question comes from the line of Brandon Couillard from Jefferies.

Brandon Couillard - Jefferies

Thanks. Good afternoon. Bill, in terms of the late 2Q order surge, was it attributable to any particular end market customer or geography or would you characterize it as more broad-based?

Bill Sullivan

Mike and Fred make a comment from an aggregate it was broad-base, but Mike and Fred probably a little more insight, if there is any nuances, I am not sure statistically there is a lot of variation. We do tend to have a surge of orders at the end of every year on the LDA side as I had mentioned, it’s because only half the business at capital equipment, it tends not be as high as you typically see in Keysight, but Mike if you have some thoughts and then Fred.

Mike McMullen

Yes. Just to build on Bill’s comments, geographically I think the story we have already talked about China and the strong close there. We also saw in the United States and in Europe. And I think those three geographies really drove the results for the quarter. And just to repeat some of the earlier commentary in terms of strength in the food market, which continues to globally very strong market for us, even with the government push-up in China in terms of major projects. And I said earlier, the return to growth in the chemical and energy space is really promising to see.

Fred Strohmeier

Yes. Also building on the Mike’s comments, I think we talked about the pharmaceutical industry and I think you will see a slight uptick in the second half. I mean, we talked about the academia and government market, we believe there will be some relief of the budgets that we can participate. And I think Europe in general as Mike said was going quite well. So, from that perspective, I think we are positive that we can deliver the results Didier was referring to.

Brandon Couillard - Jefferies

Thanks. And then Didier, I didn’t hear you mentioned our expected share count for end of the year. Should we still expect about 100 million of share repurchase activity in the back half?

Didier Hirsch

We have – last time at the analyst meeting we talked about spending $400 million over the next, I mean this year – over this year and next. So far, we have got $115 million this fiscal year and we will see. In terms of the share count, you can assume for the projections 338 million shares in Q3 and 339 million shares in Q4.

Brandon Couillard - Jefferies

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Patrick Newton from Stifel.

Unidentified Analyst

Great, thank you. Good afternoon. Thanks for taking my call. This is Robert for Patrick this afternoon. Couple of questions. We talked a lot about China and LDA. I am just wondering, Ron, if you could perhaps decide on how EMG fared in China, any impacts from the LTE rollout?

Ron Nersesian

We, as I mentioned earlier on a broad basis that we did very well in base station infrastructure build. There is a lot of manufacturing that goes on in that area, but nothing unique in China this quarter. So, we continue to be very competitive in that space, but nothing significant to report.

Unidentified Analyst

Great, thank you for that. And sort of staying on the kind of EMG tales, I am wondering if you can provide any update on UXM and how – has that led to an improvement in your position in wireless or have you see any gain in share of the customers you had previously lost share in?

Bill Sullivan

Yes. By adding the UXM, which is the R&D wireless test set, we have actually been involved in much more direct conversations, more bids in winning more business than we have done previously. The way it’s typically done is someone will test out the box, figure out if it has the right type of coverage or testing capability. And then it’s a like it enough with one product, they will start using it and then that gets replicated. The response on UXM has been excellent, but the R&D market is not like the manufacturing market, where someone likes it, they will go buy 2,000 of them at once that will rollout in a much slower area. So, R&D, we see a much steadier pace not as volatile, not as fast up, not as fast down, but we are very pleased with both the UXM and the EXM in their competitiveness.

Unidentified Analyst

Great. Thanks for taking my questions.

Bill Sullivan

Sure.

Operator

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to Alicia Rodriguez for any closing comments.

Alicia Rodriguez

Thank you, Karen. And I just wanted to thank everybody for joining us today and wish you all a good day. If you have any questions, please call us at IR and we will be happy to give them an answer. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a good day.

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