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Corporate Report 2004
 
introduction

Financial performance

Outstanding financial performance in 2004

In 2004 Agilent’s orders rose 15 percent over 2003 to $7 billion, while revenue increased 19 percent to $7.2 billion. During the first half of the year, strong demand in the semiconductor and related industries, especially wireless communications, was a key driver of this growth.
In 2004 we also did an excellent job of managing operating expenses which were $294 million lower than in 2003. This improvement reflects the work we have done during the past three years to bring Agilent’s costs in line with the competitive realities of our markets; to date we have taken about $800 million out of our quarterly cost structure. (1) In 2004 we earned $349 million, or 71 cents per share on a GAAP basis, compared with a loss of $2.058 billion, or $4.35 per share, in 2003. (2) On a non-GAAP basis, earnings were $529 million, or $1.05 per share, compared with a loss of $121 million, or 26 cents per share, in 2003.

Inventories were only $31 million higher at the end of 2004 than a year ago, a great result given our revenue increase for the year of more than $1.1 billion. In 2004, investments in property, plant and equipment declined by $87 million from 2003. These improvements, along with our strong profitability, enabled outstanding cash generation, and we began 2005 with about $2.3 billion in cash and cash equivalents.

In 2004, two of our businesses did very well all year and two others were stronger in the first half. While we saw a decline in orders in wireless handset manufacturing test markets in the fourth quarter of 2004, our Test and Measurement (T&M) business achieved an 18 percent increase in overall orders and 15 percent growth in revenue in 2004. Driving T&M’s comeback were improved conditions in many of its markets, strong new products, outstanding expense control and the benefits of its restructuring during the past three years. Our Life Sciences and Chemical Analysis (LSCA) business had a consistently strong year, with healthy growth in orders and revenue, a 30 percent improvement in operating profit, and record orders and revenue in the fourth quarter. LSCA enhanced its leadership in its core chemical analysis business, which serves the petrochemical and environmental markets, while strengthening its position in the life sciences business, where Agilent products and solutions are helping researchers understand the genetic basis of disease and develop new drugs.

After a strong first half, demand from the semiconductor and related industries slowed significantly as the industry worked through excess inventory and capacity. This affected second-half results in our Semiconductor Products Group (SPG) and Automated Test Group (ATG). For the full year, orders in SPG were up 20 percent while revenue rose by 27 percent. In the fourth quarter we announced plans to sell SPG’s camera module business to Flextronics after we determined that this business would not achieve acceptable profit levels as part of Agilent. In ATG, orders fell 2 percent for the full year while revenue increased by 22 percent over fiscal 2003. In 2004 we acquired IBM’s flat-panel test business, which we believe complements our existing automated test businesses and offers excellent opportunities for profitable growth.

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(1) Operational cost reduction: restructuring, $600 million; IT costs, $100 million; other, $100 million. Agilent’s operating breakeven cost structure can be reconciled to GAAP breakeven cost structure as follows: Total GAAP costs and expenses: less restructuring, less cost of sales decrement, less unusual IT projects such as ERP and CRM.
(2) $1.4 billion of the net loss in 2003 was the result of a non-cash charge to establish a tax valuation allowance

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