<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
..X.. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
..... TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 001-11639
LUCENT TECHNOLOGIES INC.
A Delaware I.R.S. Employer
Corporation No. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone - Area Code 908-582-8500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes .... No .X...
At April 30, 1996 636,661,931 common shares were outstanding.
<PAGE>
<PAGE> 2 Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three
Months Ended
March 31,
1996 1995
Revenues............................. $ 4,577 $ 4,159
Costs................................ 2,753 2,309
Gross margin......................... 1,824 1,850
Operating Expenses
Selling, general and
administrative expenses ........... 1,341 1,255
Research and development expenses ... 583 572
Total operating expenses............. 1,924 1,827
Operating income (loss).............. (100) 23
Other income - net .................. 7 21
Interest expense..................... 76 81
Income (loss) before income taxes.... (169) ( 37)
Provision (benefit)for income taxes.. ( 66) ( 15)
Net Income (loss).................... $ (103) $ ( 22)
Pro Forma net income(loss)
per common share (Note 1).......... $ (.16)
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE> 3 Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amount)
(Unaudited)
March 31, December 31,
1996 1995
ASSETS
Cash and cash equivalents.............. $ 174 $ 448
Accounts receivable less
allowances of $251 in 1996 and
$248 in 1995 (Note 3)................ 4,789 5,354
Inventories (Notes 2 and 3)............ 3,497 2,851
Contracts in process (net of progress
payments of $385 in 1996 and
$355 in 1995) (Note 2 ).............. 460 371
Deferred income taxes - net............ 1,539 1,482
Other current assets................... 224 173
Total current assets................... 10,683 10,679
Property, plant and equipment, net
of accumulated depreciation of
$6,611 in 1996 and $6,699 in 1995.... 4,516 4,338
Prepaid pension costs.................. 2,622 2,522
Deferred income taxes - net............ 852 872
Capitalized software................... 360 387
Other assets........................... 914 924
TOTAL ASSETS........................... $19,947 $19,722
(CONT'D)
<PAGE>
<PAGE> 4 Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Per Share Amount)
(Unaudited)
March 31, December 31,
1996 1995
LIABILITIES
Accounts payable....................... $ 1,671 $ 1,229
Payroll and benefit-related
liabilities.......................... 2,425 3,026
Postretirement and postemployment
benefit liabilities.................. 221 227
Debt sharing amount in anticipation of
the assumption of the Commercial
Paper Program (Note 4)................ 3,842 3,842
Working capital facility............... 1,914 -
Debt maturing within one year.......... 72 49
Other current liabilities.............. 2,828 2,690
Total current liabilities.............. 12,973 11,063
Postretirement and postemployment
benefit liabilities.................. 5,831 5,569
Long-term debt......................... 132 123
Other liabilities...................... 1,574 1,533
Total liabilities ..................... 20,510 18,288
STOCKHOLDER'S EQUITY
Common stock - 1,000 shares, without
par value, authorized, issued and
outstanding at March 31,1996.......... - -
Additional paid-in capital............. (522) 1,406
Foreign currency translation........... ( 10) 28
Retained deficit....................... ( 31) -
Total stockholder's equity
(Notes 5 and 8)........................ (563) 1,434
TOTAL LIABILITIES/STOCKHOLDER'S EQUITY. $19,947 $19,722
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE> 5 Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
1996 1995
Operating Activities
Net income(loss)......................... $ (103) $ (22)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization......... 305 396
Provision for uncollectibles.......... 16 17
Deferred income taxes................. (37) (17)
(Increase) decrease in
accounts receivable (Note 3)........ (1,080) 780
Increase in inventories............... (520) (460)
Increase (decrease) in
accounts payable.................... 179 (104)
Changes in other operating assets
and liabilities..................... (539) (726)
Other adjustments for noncash
items - net......................... (91) (57)
Net cash used in operating activities.... (1,870) (193)
Investing Activities
Capital expenditures .................... (268) (179)
Proceeds from the sale or disposal of
property, plant and equipment.......... 6 4
Purchases of equity investments.......... (3) (20)
Sales of equity investments.............. 69 -
Acquisitions, net of cash acquired....... (234) -
Other investing activities - net......... (60) 59
Net cash used in investing activities.... (490) (136)
Financing Activities
Repayments of long-term debt ............ (13) (1)
Issuance of long-term debt............... 22 8
Proceeds of Working Capital Facility..... 1,914 -
Proceeds (repayments) of debt sharing
agreement - net........................ - 403
Transfers from (to) AT&T (Note 3)........ 144 (116)
Increase (decrease) in short-term
borrowings - net....................... 23 (2)
Net cash provided by
financing activities................... 2,090 292
(CONT'D)
<PAGE>
<PAGE> 6 Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31,
1996 1995
Effect of exchange rate
changes on cash........................ (4) 13
Net decrease in cash and
cash equivalents....................... (274) (24)
Cash and cash equivalents
at beginning of year................... 448 580
Cash and cash equivalents
at end of period....................... $ 174 $ 556
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE> 7 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On September 20, 1995, AT&T Corp. ("AT&T") announced its intention to
create a separate company comprised of the AT&T businesses and
operations that now comprise Lucent Technologies Inc. ("Lucent" or the
"Company") and the associated assets and liabilities of those
businesses and operations, including Bell Laboratories (the
"Separation"). AT&T also announced its intention to distribute to its
shareholders by December 31, 1996 (the "Distribution"), subject to
certain conditions, all of its interests in Lucent following the
Initial Public Offering ("IPO") of Lucent common stock ("Common
Stock"). Lucent was incorporated on November 29, 1995 with 1,000
shares of Common Stock, without par value, authorized and outstanding,
all of which were owned by AT&T at March 31, 1996. The consolidated
financial statements for the first quarter of 1996, reflect the assets
and liabilities related to Lucent's operations, including the impact
of AT&T's retention of approximately $2,000 in customer accounts
receivable. In addition, employee benefits assets are being held by
AT&T or employee benefit trusts subject to agreements to transfer
these assets to Lucent or trusts established by Lucent following the
Distribution.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Lucent pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of
management, include all adjustments, necessary for a fair presentation
of the results of operations, financial position and cash flows for
each period shown.
The consolidated financial statements presented for the first quarter
of 1995 reflect the results of operations and changes in cash flows of
the businesses transferred to Lucent in 1996 from AT&T as if Lucent
were a separate entity. The consolidated financial statements for
1995 have been prepared using the historical results of operations and
historical basis of the assets and liabilities of these businesses.
Additionally, the consolidated financial statements of Lucent include
the allocation of certain AT&T corporate headquarters assets,
liabilities and expenses relating to the Lucent businesses that were
transferred to Lucent from AT&T. Management believes the allocations
underlying Lucent's historical financial statements to be reasonable.
All intercompany transactions and balances between the Lucent
businesses have been eliminated.
<PAGE>
<PAGE> 8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Lucent began accumulating retained earnings on February 1, 1996, the
date on which AT&T began transferring to Lucent the assets and
liabilities relating to Lucent's operations.
The results for interim periods are not necessarily indicative of
financial results for the full year. These unaudited consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended
December 31, 1995 included in the Company's Form 8-K dated April 4,
1996 ("Form 8-K").
PRO FORMA LOSS PER COMMON SHARE
The pro forma net loss per common share was calculated by dividing the
March 31, 1996 net loss of $103 by the 636,661,931 shares of Common
Stock that were outstanding subsequent to the acquisition by AT&T on
April 2, 1996 of an additional 524,623,894 shares, resulting in the
ownership by AT&T of 524,624,894 shares and the issuance of
112,037,037 shares on April 10, 1996 in the IPO. (See also Note 8.)
Replacement stock options and awards have not been considered in
calculating the pro forma net loss per common share because their
effect would be anti-dilutive.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost or market (i.e. net
realizable value or replacement cost). Cost includes material, labor
and manufacturing overhead. Cost is determined principally on a
first-in, first-out ("FIFO") basis.
CONTRACTS IN PROCESS
Contracts in process is composed of unbilled costs and recognized
earnings and losses on long-term construction type contracts, net of
progress payments. Estimated earnings are accumulated in contracts in
process by using the percentage of completion method of accounting for
revenue recognition. Revisions of profit and loss estimates are
reflected in the period in which the facts that require the revision
to the estimate become known.
<PAGE>
<PAGE> 9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
3. SUPPLEMENTARY BALANCE SHEET AND CASH FLOW INFORMATION
Inventories at March 31, 1996 and December 31, 1995 were as follows:
March 31, December 31,
1996 1995
Completed goods ............... $2,031 $1,673
Work in process and
raw materials................ 1,466 1,178
Total inventories ............. $3,497 $2,851
The balance sheet at March 31, 1996 and the statement of cash flows
for the period ending March 31, 1996 excludes $2,000 of customer
accounts receivable retained by AT&T. This transaction has not been
reflected on the statement of cash flows because it was a noncash
event resulting in a reduction to both accounts receivable and
transfers from AT&T.
4. DEBT SHARING AGREEMENT
Lucent's consolidated financial statements include an allocation of
AT&T's consolidated debt and related interest expense. The allocation
was based on the capital structure of Lucent anticipated at the IPO
closing date of April 10, 1996 ("Closing Date"). An allocation
methodology was used to reflect the capital structure through each
historic period presented based on cash flows for those periods,
adjusted for interest expense.
The amount outstanding under Debt Sharing Agreements between Lucent
and AT&T was $3,842 at March 31, 1996 and December 31, 1995. These
amounts were classified as short-term given Lucent's plans to replace
substantially all the outstanding amounts under such Debt Sharing
Agreements with commercial paper to be issued by AT&T and assumed by
Lucent on the IPO Closing Date and other debt obligations to be
assumed by Lucent. Lucent expects that, over time, it may replace all
or part of such assumed commercial paper with short-or long-term
borrowings, as market conditions permit. The amount, timing and
pricing of such debt issues are uncertain.
<PAGE>
<PAGE> 10 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Interest expense of $58 and $65 to AT&T for the periods ending March
31, 1996 and 1995, respectively, was determined based on a blend of
AT&T's short-term and long-term weighted average interest rates.
5. STOCKHOLDER'S EQUITY
Changes in total stockholder's equity reflect the retention by AT&T of
$2,000 in customer accounts receivable, Lucent's year-to-date net
loss, net transfers from AT&T and adjustments for foreign
currency translation.
6. TRANSACTIONS WITH AT&T
For the quarter ending March 31, 1996 and 1995, Lucent recorded $611
and $368, respectively, of revenues from AT&T.
At March 31, 1996 and December 31, 1995, receivables from AT&T
amounted to $647 and $291, respectively.
At March 31, 1996 and December 31, 1995, payables to AT&T amounted to
$448 and $25, respectively.
7. COMMITMENTS AND CONTINGENCIES
Lucent's current and historical operations are subject to a wide range
of environmental protection laws. Lucent has remedial and
investigatory activities underway at 46 current and former facilities.
In addition, Lucent has succeeded to being named a potentially
responsible party ("PRP") at numerous "Superfund" sites pursuant to
the comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA") or comparable state statutes. Under the
Separation and Distribution Agreement, among AT&T, Lucent and NCR
Corporation dated as of February 1, 1996, and amended and restated as
of March 29, 1996, ("Separation and Distribution Agreement"), Lucent
is responsible for all liabilities primarily resulting from or related
to the operation of Lucent's business as conducted at any time prior
to or after the Separation including related businesses discontinued
or disposed of prior to the Separation, and Lucent's assets including,
without limitation, those associated with these sites. It is often
difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental
reserve when it is probable that a liability has been incurred and the
amount of the liability is reasonably estimable. This practice is
followed whether the claims are asserted or unasserted. Management
expects that the amounts reserved for will be paid out over the period
of remediation for the applicable site which ranges from 5 to 30
years. Reserves for estimated losses from environmental remediation
are, depending on the
<PAGE>
<PAGE> 11 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
site, based primarily upon internal or third party environmental
studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination
and the nature of required remedial actions. Accruals are adjusted as
further information develops or circumstances change. The amounts
provided for in Lucent's consolidated financial statements in respect
of environmental reserves are the gross undiscounted amount of such
reserves, without deductions for insurance or third party indemnity
claims. In those cases where insurance carriers or third party
indemnitors have agreed to pay any amounts and management believes
that collectibility of such amounts is probable, the amounts are
reflected as receivables in the financial statements. Although Lucent
believes that its reserves are adequate, there can be no assurance
that the amount of capital expenditures and other expenses which will
be required relating to remedial actions and compliance with
applicable environmental laws will not exceed the amounts reflected in
Lucent's reserves or will not have a material adverse effect on the
financial condition of Lucent or Lucent's results of operations or
cash flows. Any amounts of environmental costs that may be incurred
in excess of those provided for at March 31, 1996 cannot be
determined.
One of Lucent's multi-year contracts is with Pacific Bell for the
provision of a broadband network based on hybrid fiber-coaxial cable
technology. Implementation difficulties and cost overruns have arisen
under this contract, which may result in claims being made by parties
under the contract. Lucent and Pacific Bell are conducting
negotiations in an effort to resolve outstanding issues and potential
claims. Lucent's financial statements reflect a reserve relating to
this contract. Based on the future negotiations with Pacific Bell,
Lucent will continue to assess the adequacy of this reserve.
<PAGE>
<PAGE> 12 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
8. SUBSEQUENT EVENTS
On April 10, 1996, Lucent issued 112,037,037 shares in the IPO for $27
per share less underwriting discounts and commissions of $1.05 per
share. After the completion of the IPO, AT&T owned approximately
82.4% of the outstanding shares of Common Stock. The unaudited pro
forma condensed balance sheet below has been prepared assuming the IPO
and certain other transactions described below occurred on March 31,
1996. THE UNAUDITED PRO FORMA BALANCE SHEET PRESENTED BELOW PURPORT
TO REPRESENT THE COMPANY'S FINANCIAL POSITION HAD THE IPO AND CERTAIN
OTHER TRANSACTIONS OCCURRED ON THE DATE INDICATED. THE UNAUDITED PRO
FORMA BALANCE SHEET DOES NOT, HOWEVER, PURPORT TO PROJECT THE
COMPANY'S FINANCIAL POSITION FOR ANY FUTURE DATE. The unaudited pro
forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The
unaudited pro forma balance sheet should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the historical financial statements of the
Company and the notes thereto appearing in the Form 8-K and this
Form 10-Q.
<PAGE>
<PAGE> 13 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
PRO FORMA CONDENSED BALANCE SHEET
(Dollars in Millions)
At March 31, 1996
Historical Adjustments Pro Forma
ASSETS
Cash and cash equivalents.............. $ 174 $ 1,473 (a,b $ 1,647
Accounts receivable - net.............. 4,789 c) 4,789
Inventories ........................... 3,497 3,497
Contracts in process................... 460 460
Deferred income taxes - net............ 1,539 1,539
Other current assets................... 224 224
Total current assets................... 10,683 1,473 12,156
Property, plant and equipment - net.... 4,516 4,516
Prepaid pension costs.................. 2,622 2,622
Deferred income taxes - net............ 852 852
Capitalized software................... 360 360
Other assets........................... 914 914
TOTAL ASSETS........................... $19,947 $ 1,473 21,420
LIABILITIES
Accounts payable....................... $ 1,671 $ - $ 1,671
Payroll and benefit-related
liabilities.......................... 2,425 2,425
Postretirement and postemployment
benefit liabilities.................. 221 221
Debt sharing amount in anticipation of
the assumption of the Commercial
Paper Program........................ 3,842 (3,842)(d) - -
Commercial Paper Program............... - 3,701 (d) 3,701
Working Capital Facility............... 1,914 (1,914)(b) -
Debt maturing within one year.......... 72 72
Other current liabilities.............. 2,828 500 (c) 3,328
Total current liabilities.............. 12,973 (1,555) 11,418
Postretirement and postemployment
benefit liabilities.................. 5,831 5,831
Long-term debt......................... 132 141 (d) 273
Other liabilities...................... 1,574 1,574
Total liabilities ..................... 20,510 (1,414) 19,096
<PAGE>
<PAGE> 14 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
PRO FORMA CONDENSED BALANCE SHEET - (CONT'D)
(Dollars in Millions)
At March 31, 1996
Historical Adjustments Pro Forma
STOCKHOLDER'S EQUITY
Common stock........................... - 6 (a) 6
Additional paid-in capital............. (522) 2,881 (a) 2,359
Foreign currency translation........... ( 10) (10)
Retained deficit....................... ( 31) (31)
Total stockholder's equity............. (563) 2,887 2,324
TOTAL LIABILITIES/STOCKHOLDER'S EQUITY. $19,947 $ 1,473 $21,420
(a) Reflects the sale of the 112,037,037 shares at the IPO price of
$27 per share, less underwriting discounts and commissions of
$1.05 per share and net of expenses. In addition, reflects the
acquisition by AT&T on April 2, 1996 of an additional 524,624,894
common shares.
(b) Reflects the use of the proceeds of the IPO to repay the $1,914 of
indebtness outstanding under the Working Capital Facility.
(c) Gives effect to the prepayment by AT&T in April 1996 of $500 to be
applied to purchases by AT&T that are due and payable on
or after January 1, 1997 for products, licensed materials
and services from Lucent.
(d) As described in Note 4, amounts shown as outstanding under the Debt
Sharing Agreement at March 31, 1996 were replaced with commercial
paper issued by AT&T and assumed by Lucent on the IPO Closing Date
and other debt obligations to be assumed by Lucent.
<PAGE>
<PAGE> 15 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Prior to February 1, 1996, AT&T conducted the Company's businesses
through various divisions and subsidiaries. On February 1, 1996, AT&T
began effectuating the Separation by transferring to the Company the
assets and liabilities related to such businesses, except that AT&T
retained accounts receivable having a face amount of approximately
$2,000 million. The Separation was substantially completed, including
the transfer of substantially all the assets and liabilities, by the
IPO Closing Date. The transfer of certain international assets which
are not material to Lucent in the aggregate is pending receipt of
consents or approvals or satisfaction of other applicable foreign
requirements. Lucent's financial statements assume the consummation
of all such transactions. In addition, employee benefits assets are
being held by AT&T or employee benefit trusts subject to agreements to
transfer these assets to Lucent or trusts established by Lucent
following the Distribution. After the completion of the IPO, AT&T
will own approximately 82.4% of the outstanding shares of Common
Stock.
The consolidated financial statements of Lucent reflect the results of
operations, financial position and cash flows of the businesses
transferred to Lucent from AT&T in the Separation. As a result, the
consolidated financial statements of Lucent have been carved out from
the financial statements of AT&T using the historical results of
operations and historical basis of the assets and liabilities of such
businesses. Additionally, the consolidated financial statements of
Lucent include certain assets, liabilities, revenues and expenses
which were not historically recorded at the level of, but are
primarily associated with, such businesses. Management believes the
assumptions underlying Lucent's financial statements to be reasonable.
The financial information included herein, however, may not
necessarily reflect the results of operations, financial position and
cash flows of Lucent in the future or what the results of operations,
financial position and cash flows would have been had the Company been
a separate, stand-alone entity during the periods presented. This is
due to the historical operation of Lucent as part of the larger AT&T
enterprise. The financial information included herein does not reflect
the many significant changes that will occur in the funding and
operations of Lucent as a result of the Separation and the IPO.
<PAGE>
<PAGE> 16 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
There are a number of factors that contribute to variability in
Lucent's business. This variability can produce wide fluctuations in
revenues and earnings quarter to quarter, and in some cases year to
year. Variability is not a new trend and Lucent expects it to
continue, and possibly intensify. Notwithstanding this variability,
Lucent has increased both revenues and earnings (absent restructuring
and other charges) on an annual basis. The factors contributing to
variability include seasonality, multi-year contracts and associated
revenue recognition. See also RESULTS OF OPERATIONS below with
respect to the quarter ending March 31, 1996.
Lucent's sales are highly seasonal. Most of Lucent's large customers
delay a large and growing percentage of their capital expenditures
until the fourth quarter. Lucent has placed an increased focus on the
completion of software releases by mid-year to allow for commercial
availability and delivery in the fourth quarter. These software
releases require significant research and development expenditures
early in the year, with minimal offsetting revenues, but are key
contributors to Lucent's profits during the fourth quarter.
Additionally, sales of consumer products in the retail markets are
generally stronger in the fourth quarter, corresponding to holiday
buying.
As a result of growing competitive pressures among network operators
(which have led to an increasing emphasis on return on investment and
the budgeting process), along with the increasing prominence of
software as a percentage of Lucent's revenues, the trend toward
seasonality has been increasing.
Lucent's revenues and net income have been strongest in the fourth
quarter of each year, representing 34.7% and 31.7% of consolidated
revenues and 84.7% (before restructuring and other charges) and 83.6%
of net income in 1995 and 1994, respectively. Consequently, Lucent's
results of operations for the first three quarters of each year have
in the aggregate been significantly less profitable than the fourth
quarter and Lucent has frequently experienced net losses in the first
quarter.
<PAGE>
<PAGE> 17 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In recent years, the purchasing behavior of Lucent's large customers
has increasingly been characterized by the use of fewer, larger
contracts. This trend is expected to intensify, and contributes to
the variability of Lucent's results. Such larger purchase contracts
typically involve longer negotiating cycles, require the dedication of
substantial amounts of working capital and other Lucent resources, and
in general require investments which may substantially precede
recognition of associated revenues. Moreover, in return for larger,
longer-term purchase commitments, customers often demand more
stringent acceptance criteria, which can also cause revenue
recognition delays. Certain multi-year contracts may relate to new
technologies which may not have been previously deployed on a large-scale
commercial basis. Lucent may incur significant initial cost
overruns and losses on such contracts which would be recognized in the
quarter in which they became ascertainable. Further profit estimates
on such contracts are revised periodically over the lives of the
contracts, and such revisions can have a significant impact on
reported earnings in any one quarter.
Revenue recognition for work on multi-year contracts is based upon the
specific terms and conditions of each contract which may vary
markedly. Therefore, the amount of purchases actually contracted for
or deployed in a period may differ substantially from the revenues
realized for the same period.
Lucent reported a quarterly net loss of $103 million, or $0.16 per
share on a pro forma basis. The year-ago quarterly net loss was $22
million, or $0.03 per share on a pro forma basis. Historically,
Lucent's business has been highly seasonal, with revenue and net
income concentrated in the fourth quarter.
Operating income decreased $123 million and 2.8% as a percent of
revenues compared with the same quarter in 1995.
<PAGE>
<PAGE> 18 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED
MARCH 31, 1995
Total revenues increased to $4,577 million, or 10.1% in the first
quarter of 1996 compared with the first quarter of 1995, primarily due
to gains in sales from Systems for Network Operators and
Microelectronic Products. Revenue growth was generated both from
sales in the United States and internationally (including exports).
The following table presents Lucent's revenues by product line, and
the approximate percentage of total revenues for the three months
ended March 31, 1996 and 1995:
Three Months
Ended
March 31,
Dollars in Millions --------------------------------
1996 1995
-------- --------
Systems for Network Operators........ $2,376 52% $2,032 49%
Business Communications Systems...... 1,146 25 1,128 27
Microelectronic Products............. 520 11 414 10
Consumer Products.................... 295 7 354 8
Other Systems and Products........... 240 5 231 6
Total................................ $4,577 100% $4,159 100%
Revenues from Systems for Network Operators increased $344 million, or
16.9% in 1996 compared with the same quarter in 1995. The increase was
driven by higher sales of switching and transmission equipment. Sales
in the United States increased by approximately 12% and international
revenues increased approximately 34% compared with the same quarter in
1995. Approximately 43% of the growth in international revenues was
the result of the Philips Electronics NV ("Philips") acquisition in
the first quarter of 1996. In addition, the international revenue
growth resulted from sales of switching and transmission systems,
primarily to Europe, the Middle East and Africa.
<PAGE>
<PAGE> 19 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
International revenues represented about 23% of revenues from Systems
for Network Operators in the first quarter of 1996 compared with 20%
in same quarter in 1995.
During the quarter ended March 31, 1996, Lucent was awarded a contract
from Sprint Spectrum Holdings LP ("SSLP") to supply equipment and
services for approximately 60% of SSLP's market areas for its
nationwide personal communications services wireless network over a
five-year period. This contract is subject to, among other things,
Lucent providing (or guaranteeing) long-term financing to SSLP for its
purchase of equipment and services from Lucent. Lucent has entered
into discussions with respect to such financing and in May 1996
proposed providing (or guaranteeing) long-term financing of up to
approximately $1,800 million in principal amount available over the
five-year period, subject to certain conditions including completion
of a final contract with mutually satisfactory terms. These
discussions are ongoing.
Revenues from Business Communications Systems increased $18 million,
or 1.6% compared with the same quarter in 1995, primarily due to
higher sales in the United States and internationally, partially
offset by the continued erosion of the rental base. The revenue
growth in the United States was driven by increased service revenue
due to the growth in maintenance contracts as well as higher product
sales, including sales of SYSTIMAX(R)structured wiring system and
INTUITY(TM) voice messaging products. International revenues increased
by 7%, largely due to sales of DEFINITY(R) products and call center
sales to the Europe/Middle East/Africa region.
Sales of Microelectronic Products increased $106 million, or 25.6%
compared with the same quarter in 1995 due to higher sales of
integrated circuits to original equipment manufacturers both
internationally and in the United States. International revenues
increased approximately 49%. These revenues represented approximately
52% of the microelectronic product sales in the first quarter of 1996
compared with approximately 44% for the same quarter in 1995. The
growth in international revenues was led by sales in the Asia/Pacific
market.
Revenues from Consumer Product sales decreased $59 million, or 16.7%
compared with the same quarter in 1995. The decline in revenues was
primarily due to the expected continuing decline in the customer base
for rental revenues for telephones and declines in product sales
- --------------------------------------
(R) Registered trademark of Lucent
(TM) Trademark of Lucent
<PAGE>
<PAGE> 20 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
related to the closing of the Phone Center Stores. At the end of the
quarter, over 50% of the 338 Phone Center Stores were closed, with the
remainder having closed by the end of April 1996. Consumer Products
will continue to distribute its products through retail outlets of
resellers.
Revenues from sales of Other Systems and Products increased $9
million, or 3.9% compared with the same quarter in 1995. These
revenues include sales from the data communications unit as well as
custom manufacturing systems, both of which Lucent plans to exit.
Total costs increased $444 million, or 19.2% in 1996 compared with the
same quarter in 1995 due to higher sales volumes. As a percentage of
revenue, gross margin declined to 39.9% from 44.5% in the year-ago
quarter. This gross margin decline was due to changes in the mix of
revenues, erosion of high margin rental revenues and the Philips
acquisition. The revenue mix reflected a higher proportion of
hardware sales and a higher proportion of revenues from contracts
accounted for on a percentage of completion basis ("POC"). Under POC
accounting, research and development and other direct expenditures are
accounted for as costs and not operating expenses.
OPERATING EXPENSES
Selling, general and administrative expenses increased $86 million, or
6.9% compared with the same quarter in 1995, partly due to expenses
associated with the start-up of the new Company. Selling, general and
administrative expenses were 29.3% of revenues in the first quarter of
1996 compared with 30.2% of revenues in the first quarter of 1995.
Research and development expenses increased $11 million, or 1.9%
compared with the same quarter in 1995. Research and development
expenses represented 12.7% of revenues in the first quarter of 1996
compared with 13.8% of revenues in the first quarter of 1995.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES
Other income -- net decreased $14 million to $7 million in the first
quarter of 1996 compared with the same quarter in 1995.
Interest expense in the first quarter of 1996 decreased $5 million
compared with the same quarter in 1995 largely due to lower interest
rates.
The effective income tax rate of 39.1% in the first quarter of 1996
decreased from 40.5% in the same quarter of 1995, primarily due to the
tax impact resulting from foreign earnings.
<PAGE>
<PAGE> 21 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY
Total assets increased $225 million, or 1.1%, from year-end 1995. The
increase was primarily due to higher inventories levels offset by a
decline in accounts receivable. Inventory levels at year-end are
historically at their lowest. In comparison to year-end, the rise in
inventory reflects the Company's normal first quarter increase.
Working capital, defined as current assets less current liabilities,
decreased $1,906 million from year-end primarily resulting from the
increase in short-term debt required to fund ongoing operations for
the period prior to the receipt of proceeds from the IPO.
The decrease in accounts receivable is primarily due to the retention
by AT&T of $2,000 million of customer accounts receivable.
(See also Notes 3 and 8.)
Prepaid pension costs are increasing as returns on pension plan assets
exceed pension benefits earned during the period and the interest cost
on the projected benefit obligation.
The increase in total debt outstanding reflects the Working Capital
Facility entered into by Lucent to fund working capital subsequent to
February 1, 1996 until the proceeds from the IPO were received at the
beginning of April 1996. (See also Note 8.)
The decrease in payroll and benefit-related liabilities reflects the
annual payment of year-end bonuses in the first quarter of 1996.
The decrease in stockholder's equity reflects the retention by AT&T of
$2,000 million of customer accounts receivables.
(See also Notes 3 and 8.)
Lucent entered into the Working Capital Facility with Chemical Bank,
as Agent, which provides that, subject to the terms and conditions
thereof, Lucent may borrow on a revolving credit basis at any time and
from time to time prior to March 3, 1997 a principal amount not in
excess of $4,000 million outstanding. In April 1996 Lucent reduced
the amount of the Working Capital Facility to $2,000 million. Lucent
expects that, over time, it may refinance all or part of the $3,701
million of commercial paper issued by AT&T and assumed by Lucent on
the IPO Closing Date with short- or long-term borrowings. Lucent
filed a registration statement on Form S-3, which became effective on
April 3, 1996 to register the offering from time to time of up to
$3,500 million of long-term debt. Future financing is contemplated to
be arranged as necessary to meet Lucent's requirements with the timing
<PAGE>
<PAGE> 22 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
of issue, amount and form depending on Lucent's needs and prevailing
market and general economic conditions. Lucent anticipates that
borrowings under the Working Capital Facility, the issuance of
additional commercial paper, cash flow from operations and short- and
long-term debt financings, will be available to satisfy its future
cash requirements, although there can be no assurance.
In the normal course of business, Lucent uses various financial
instruments, including derivative financial instruments, for purposes
other than trading. Derivative financial instruments are not entered
into for speculative purposes. These instruments include commitments
to extend credit, letters of credit, guarantees of debt, and foreign
currency exchange contracts. Unless otherwise noted, Lucent generally
does not require collateral to support these financial instruments.
By their nature all such instruments involve risk including the credit
risk of nonperformance by counterparties, and Lucent's maximum
potential loss may exceed the amount recognized in Lucent's balance
sheet. However, at March 31, 1996, in management's opinion there was
no significant risk of loss in the event of nonperformance of the
counterparties to these financial instruments. Lucent controls its
exposure to credit risk through credit approvals, credit limits and
monitoring procedures. Lucent does not have any significant exposure
to any individual customer or counterparty, nor have any major
concentration of credit risk related to any financial instruments.
CASH FLOWS
Cash flows used in operating activities increased compared with the
same period in 1995 due to the retention of customer accounts
receivable by AT&T and a higher inventory level.
Cash payments of $196 million in the first quarter of 1996 related to
the fourth quarter of 1995 restructuring and other charges of $2,801
before taxes. Of such total charges, $1,788 million (less the $196
million) will result in future cash payments. Of the 23,000 positions
that Lucent announced it would downsize and that are included in the
fourth quarter of 1995 restructuring charges, approximately 4,000
people have left the payroll as of March 31, 1996.
The growth in cash flow used in investing activities was largely the
result of the Philips acquisition and higher capital expenditures
compared with the same period in 1995. Capital expenditures, the
largest component, were $268 million and $179 million for the first
quarter of 1996 and 1995, respectively. Capital expenditures
generally relate to expenditures for equipment and facilities used in
manufacturing and research and development, including expansion of
manufacturing capacity, and expenditures for cost reduction efforts
and international growth.
<PAGE>
<PAGE> 23 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Cash flows provided by financing activities increased primarily due to
borrowings under the Working Capital Facility entered into by Lucent
in the first quarter of 1996 compared with the same quarter in 1995.
(See also Note 8.)
Lucent historically has relied on AT&T to provide financing for its
operations in 1995. The cash flows from financing activities in 1995
principally reflect changes in the Company's assumed capital
structure. These cash flows are not necessarily indicative of the cash
flows that would have resulted if the Company were a stand-alone
entity.
The ratios of total debt to total capital (debt plus equity)on a pro
forma basis were 63.5% at March 31, 1996, compared to 63.3% at
December 31, 1995.
Lucent's current and historical operations are subject to a wide range
of environmental protection laws. Lucent has remedial and
investigatory activities underway at 46 current and former facilities.
In addition, Lucent has succeeded to being named a PRP at numerous
"Superfund" sites pursuant to CERCLA or comparable state statutes.
The amounts provided for in Lucent's consolidated financial statements
in respect of environmental reserves are the gross undiscounted amount
of such reserves, without deductions for insurance or third party
indemnity claims. In those cases where insurance carriers or third
party indemnitors have agreed to pay any amounts and management
believes that collectibility of such amounts is probable, the amounts
are reflected as receivables in the financial statements. Although
Lucent believes that its reserves are adequate, there can be no
assurance that the amount of capital expenditures and other expenses
which will be required relating to remedial actions and compliance
with applicable environmental laws will not exceed the amounts
reflected in Lucent's reserves or will not have a material adverse
effect on the financial condition of Lucent or Lucent's results of
operations or cash flows.
<PAGE>
<PAGE> 24 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RECENT PRONOUNCEMENTS
In 1996, Lucent adopted Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation". This standard
establishes a fair value method for accounting for stock-based
compensation plans either through recognition or disclosure. The
standard is effective for financial statements for fiscal years
beginning after December 15, 1995. For Lucent, this means the
standard is effective for 1996. Lucent adopted the disclosure method
under this standard and will disclose in its financial statements for
the full year 1996 the pro forma net income and earnings per share
amounts assuming the fair value method was effective on January 1,
1995. The adoption of this standard will not impact Lucent's
consolidated results of operations, financial position or cash flows.
<PAGE>
<PAGE> 25 Form 10-Q - Part II
Part II - Other Information
Item 1. Legal Proceedings
At December 31, 1995, Lucent employed approximately 131,000 persons,
of whom 82% were located in the United States. Of these domestic
employees, 47% are represented by unions, primarily the Communications
Workers of America and the International Brotherhood of Electrical
Workers. As previously reported in the Form 8-K, such unions have
made claims against AT&T on behalf of Lucent employees they represent
for severance pay as a result of the Distribution and related
transactions. The procedure under the labor contracts that these
unions have initiated is for the unions to file grievances to be
followed by arbitration under the contracts if the matter is not
resolved. Under the Separation and Distribution Agreement among AT&T,
Lucent and NCR Corporation dated as of February 1, 1996, and amended
and restated as of March 29, 1996, Lucent assumed responsibility for
liabilities for severance pay which might result from such claims,
subject to sharing arrangements described in the Form 8-K. Lucent has
continued to honor its labor agreements with these unions. Although
these claims could be material, if upheld, Lucent continues to believe
that such claims are without merit and intends to defend against the
claims vigorously.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated April 4, 1996 was filed pursuant to Item 5
(Other Events) and Item 7 (Financial Statements, Pro Forma
Financial Information and Exhibits)
<PAGE>
<PAGE> 26 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Lucent Technologies Inc.
Date May 16, 1996
James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
<PAGE> 27 Form 10-Q
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
<PAGE> 1
Exhibit 12
Form 10-Q
For the Three
Months Ended
March 31, 1996
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
March 31, 1996
Earnings (Loss) Before Income Taxes.................... $(169)
Less Interest Capitalized during
the Period........................................... 7
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... -
Add Fixed Charges...................................... 105
Total Earnings (Loss).................................. $(71)
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 89
Interest Portion of Rental Expense..................... 16
Total Fixed Charges................................ $105
Ratio of Earnings (Loss)to Fixed Charges............... *
* For the quarter ended March 31, 1996, the ratio computation
indicates that earnings were inadequate to cover fixed
charges by $176.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of Lucent at March 31, 1996 and the unaudited
consolidated statement of operations for the three-month period ended March
31, 1996 and is qualified in its entirety by reference to such financial
statments.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 174
<SECURITIES> 63
<RECEIVABLES> 5,040
<ALLOWANCES> 251
<INVENTORY> 3,497
<CURRENT-ASSETS> 10,683
<PP&E> 11,127
<DEPRECIATION> 6,611
<TOTAL-ASSETS> 19,947
<CURRENT-LIABILITIES> 12,973
<BONDS> 132
0
0
<COMMON> 0
<OTHER-SE> (563)
<TOTAL-LIABILITY-AND-EQUITY> 19,947
<SALES> 4,577
<TOTAL-REVENUES> 4,577
<CGS> 2,753
<TOTAL-COSTS> 2,753
<OTHER-EXPENSES> 1,924
<LOSS-PROVISION> 16
<INTEREST-EXPENSE> 76
<INCOME-PRETAX> (169)
<INCOME-TAX> (66)
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<NET-INCOME> (103)
<EPS-PRIMARY> (0.16)
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</TABLE>
