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To Our Shareholders

The dramatic slowdown in the communications and semiconductor markets defined Agilent’s 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 results—orders down substantially, lower revenue and a loss for the year—reflect 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 year’s annual report, which is much shorter and includes far fewer graphic elements than in previous years, is just one way we’re 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 Agilent’s culture. In this letter I’ll 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. We’re 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."

Ned Barnholt
President and Chief Executive Officer
Agilent Technologies

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 reduction.

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 4,000 people.

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 people—along with related site consolidations, ongoing progress on operations and other process improvements—to 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 customer’s requested delivery date.

The industry recognition that we achieved this year shows that we didn’t make progress in cost reduction at the expense of customer satisfaction. We won the President’s Customer Satisfaction Award from Cisco—that company’s 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 Agilent’s culture. We’re building on the best of our heritage while instilling the values and behaviors—especially speed, focus and accountability—we 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 we’re building. We were No. 46 on Fortune magazine’s “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 France’s best employers in the high-tech industry conducted by Electronique International.

Senior Management Changes

During 2001 Randall Tobias left Agilent’s board of directors. In November 2000 we added A. Barry Rand to the board. We’ll miss Randy’s wise counsel, and we’re 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 “who’s 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 profitable again, and we’re 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 by our values—innovation, integrity, trust and respect for all our people as well as speed, focus and accountability. This was a very trying year for Agilent’s 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 demand—such as the growth of wireless and the need for network bandwidth—are 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, we’re well positioned to emerge from the downturn as a much more competitive and efficient company. We’re 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.

Ned Barnholt
President and Chief Executive Officer
Agilent Technologies


Year in Review
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* To Our Shareholders
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* Agilent in Life Sciences
* Agilent Laboratories
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* Agilent in Citizenship
* Agilent at a Glance
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