The dramatic slowdown in the communications and
semiconductor markets defined Agilents second year as an independent
company. After very strong growth in 1999 and 2000, the decline
in demand in these markets was unprecedented in its speed and severity.
Our customers had manufacturing capacity and inventories far greater
than they needed, and consumers spent less on personal computers
and printers. The downturn worsened as we moved through 2001, and
our financial resultsorders down substantially, lower revenue
and a loss for the yearreflect the fact that well over half
our revenue comes from markets that contracted sharply in 2001.
During the year we worked to strike the right
balance between navigating the difficult short term
while continuing to build Agilent for long-term
success. First, we moved quickly to mitigate the
effects of the downturn. We cut back our discretionary
spending, implemented company-wide pay cuts,
canceled or delayed programs, and took many other
actions to lower spending and conserve cash. This
years annual report, which is much shorter and
includes far fewer graphic elements than in previous
years, is just one way were spending less.
At the same time, we took many actions to position
Agilent for long-term success, and here the 2001 story was much
better. We had our best year ever for new product introductions,
and we strengthened our presence in promising new markets. We also
made progress in our operational initiatives and the transformation
of Agilents culture. In this letter Ill review our results,
describe some of these accomplishments and touch on our priorities
for fiscal 2002.
A Very Difficult Year
Much lower demand in the communications and
semiconductor markets drove a 39 percent decline in
total orders in 2001 compared with fiscal 2000. In our
test and measurement and semiconductor products
businesses, which serve those markets, orders were
down 43 and 49 percent, respectively, compared with
2000. These declines include the impact of about
$1 billion of canceled orders, many of which had been
placed in 2000, when demand was very strong. Even
though we proactively canceled many of these orders
because our customers were not going to take delivery
within six months, this level of cancellations shows
the depth of weakness in our key markets.
A bright spot was our chemical analysis business,
where total net revenue increased 7 percent compared with 2000,
and we achieved a substantial profit improvement. Within chemical
analysis, net revenue in our pharmaceutical and life sciences business
grew 20 percent. Were steadily establishing Agilent as a key
provider of enabling tools and application solutions for customers
in the life sciences, such as the researchers who are expanding
our understanding of how diseases develop and creating advanced
therapies to treat them.
||We faced substantial challenges this year,
but our enduring strengths are intact."
President and Chief Executive Officer
At the beginning of fiscal 2001, based on customer inputs and external
market indicators, we believed the downturn would be relatively
short and not overly severe. So we cut back on contract and temporary
workers, reduced travel and lowered discretionary spending of all
kinds. In April, as the situation deteriorated, we accelerated our
actions to reduce costs, including a company-wide, 10-percent pay
By the end of July, it was clear that we had to
size the company for a much lower level of business
in the near- and mid-term. We announced plans to
reduce our workforce by about 4,000 people, the
continuation of the pay cuts, and a company-wide,
two-week shutdown in the first fiscal quarter of 2002.
In November it was apparent that an improvement in
demand would be slow and gradual, so we implemented
a second workforce reduction that will affect another
Our employees did a great job all year in reducing
discretionary spending. By the fourth quarter, total
selling, general and administrative spending was down
30 percent, on an earnings-before-goodwill basis, from
the fourth quarter of 2000. We expect the workforce
reduction of about 8,000 peoplealong with related
site consolidations, ongoing progress on operations
and other process improvementsto eliminate about
$1.2 billion in annualized costs starting in the second
half of fiscal 2002.
As a result of this cost cutting, our new product
strength and some reduction in order cancellations,
we believe we will begin operating profitably some
time in the second half of fiscal 2002, without any
major improvement in the business climate.
Appropriate Investments for Growth
During the year we built on our leadership
position in many markets and expanded our presence
in a number of areas, including optical and wireless
communications test, semiconductor components,
operations support systems for network and service
management, and life sciences. Outstanding new
products were crucial to these results. We had more
than 150 major introductions, and by the end of 2001,
these new products and our ability to compete in new
markets were helping slightly to offset sluggish demand.
Our investments in R&D are the key to a steady
stream of new products. In 2001 we increased our
R&D investment to about $1.3 billion. We did pare back
some R&D programs selectively to help lower costs
while preserving the broad and deep strengths of
Agilent Labs and our business-based R&D teams.
In 2001 we aggressively managed our business portfolio
to sharpen our focus and enhance our growth potential. We sold our
healthcare business to Philips after deciding that the investments
needed to reinvigorate this business would reduce our ability to
capitalize on other opportunities. We completed seven acquisitions
and invested in five companies through Agilent Ventures, our in-house,
venture capital group. Agilent Ventures is helping us gain access
to leading-edge technologies in communications and life sciences
at early stages of development.
Making Agilent Easier to Do Business With
In May 2000 we launched a company-wide effort
to make Agilent easier for customers to do business
with. We are radically simplifying hundreds of processes
and standardizing on best-in-class tools and systems.
This effort enabled us to improve our speed and responsiveness
while we reduced operating costs by several
hundred million dollars in fiscal 2001.
For example, we streamlined our information
technology (IT) systems and cut spending on legacy
IT systems by 50 percent as we implemented the first
phase of a major systems transformation. We reduced
our customer-services operations from 40 sites to
five and made it a lot easier for customers to reach
the right person at Agilent quickly. We consolidated
manufacturing from more than 40 sites and are driving
to lower this number by about half. We streamlined
dozens of human resource (HR) processes and systems
and were able to reduce total HR spending by half
compared with a year ago. We improved our ability
to deliver products and systems at the customers
requested delivery date.
The industry recognition that we achieved this
year shows that we didnt make progress in cost
reduction at the expense of customer satisfaction.
We won the Presidents Customer Satisfaction Award
from Ciscothat companys highest supplier honor.
Nortel Networks and Celestica also recognized Agilent
as an outstanding supplier this year.
Making Agilent a High-performance Company
This year we continued our work to transform Agilents
culture. Were building on the best of our heritage while instilling
the values and behaviorsespecially speed, focus and accountabilitywe
need for long-term success.
We worked to implement the pay cuts and workforce
reductions in ways that were consistent with our commitment to treat
people fairly and with dignity. We expanded our efforts to strengthen
workforce diversity and inclusiveness that are so crucial to our
ability to innovate. Again this year we won substantial industry
recognition for the culture were building. We were No. 46
on Fortune magazines 100 Best Companies to Work
for in America. Our Singapore operations were ranked No. 1,
and Malaysia No. 4, in the Best Employers in Asia survey
done by Hewitt Associates and Dow Jones Publications. Agilent was
No. 8 overall in a survey of Frances best employers in the
high-tech industry conducted by Electronique International.
Senior Management Changes
During 2001 Randall Tobias left Agilents
of directors. In November 2000 we added A. Barry
Rand to the board. Well miss Randys wise counsel,
and were grateful for his contributions to the company.
Barry was most recently chief executive officer
and chairman of the board of Avis Group. Prior to that,
he spent more than 20 years at Xerox Corporation in a
variety of senior management positions.
In November 2001 executive vice president and
chief financial officer (CFO) Bob Walker announced
his decision to leave the company. Bob made enormous
contributions to Agilent over the past two years. His
broad knowledge and passion for the company have
left an indelible legacy. Adrian Dillon, who joins Agilent
as our new executive vice president and CFO, has
compiled an impressive record in 22 years at the
Eaton Corporation, and he makes a great addition
to our executive team.
We also added two outstanding executives to the
senior management staff in 2001: Larry Holmberg as senior vice president,
Sales, Marketing and Customer Support, and Chris van Ingen as senior
vice president, Chemical Analysis Group. Larry and his team are
working to strengthen our long-standing relationships with a whos
who of industry leaders. In chemical analysis, Chris and his
team brought renewed energy and focus and achieved very good results.
Priorities for 2002
Our top priority for fiscal 2002 is to become
again, and were not counting on a significant
improvement in our markets to do so. Another key
priority is to continue the operational initiatives that
began to bear fruit in 2001. This year we will focus on
the major systems transformation that we started in
2000, as well as on continued improvements in manufacturing,
on-time delivery and procurement. We have
a major opportunity to achieve further progress on
customer satisfaction by becoming more focused,
faster and leaner.
Finally, we will be guided in everything we do
our valuesinnovation, integrity, trust and respect
for all our people as well as speed, focus and accountability.
This was a very trying year for Agilents customers
and employees. The challenges we faced were
substantial, but our enduring strengths are intact.
Agilent is a market leader in all its businesses. In
communications and semiconductors, the underlying
drivers of demandsuch as the growth of wireless
and the need for network bandwidthare still in
place, and they provide major opportunities for us.
We have the ability to innovate that is so crucial to
our long-term success, and we have long-standing
relationships with customers who lead their industries.
I believe the most important decisions we make
during tough economic times are those that get the
company ready for when conditions improve. As we
start 2002, were well positioned to emerge from the
downturn as a much more competitive and efficient
company. Were determined to strike the right balance
between navigating the short-term environment while
continuing to build on our substantial strengths for a
very exciting future.
President and Chief Executive Officer