<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 June 30, 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 .X.. No ....
At July 31, 1996 636,662,634 common shares were outstanding.
<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 For the Six
Months Ended Months Ended
June 30, June 30,
1996 1995 1996 1995
Revenues............................. $ 5,364 $ 5,083 $ 9,941 $ 9,242
Costs................................ 3,194 2,832 5,947 5,141
Gross margin......................... 2,170 2,251 3,994 4,101
Operating Expenses
Selling, general and
administrative expenses ........... 1,469 1,356 2,810 2,611
Research and development expenses ... 573 560 1,156 1,132
Total operating expenses............. 2,042 1,916 3,966 3,743
Operating income .................... 128 335 28 358
Other income - net .................. 52 - 59 21
Interest expense..................... 62 69 138 150
Income (loss) before income taxes.... 118 266 (51) 229
Provision (benefit)for income taxes.. 46 107 (20) 92
Net income(loss)..................... $ 72 $ 159 $ (31) $ 137
Weighted average common shares
outstanding (millions)............. 625.6 575.1
Net income(loss)
per common share (Note 1).......... $ .11 $ (.05)
Dividends declared
per common share................... $ .075 $ .075
See Notes to Consolidated Financial Statements.
<PAGE> 3 Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
June 30, December 31,
1996 1995
ASSETS
Cash and cash equivalents.............. $ 2,151 $ 448
Accounts receivable less
allowances of $259 in 1996 and
$248 in 1995 ........................ 4,707 5,354
Inventories (Notes 2 and 3)............ 3,431 2,851
Contracts in process (net of contract
billings of $518 in 1996 and
$355 in 1995) (Note 2)................ 533 371
Deferred income taxes - net............ 1,513 1,482
Other current assets................... 186 173
Total current assets................... 12,521 10,679
Property, plant and equipment, net
of accumulated depreciation of
$6,541 in 1996 and $6,699 in 1995.... 4,563 4,338
Prepaid pension costs.................. 2,723 2,522
Deferred income taxes - net............ 811 872
Capitalized software................... 352 387
Other assets........................... 962 924
TOTAL ASSETS........................... $21,932 $19,722
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE> 4 Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
June 30, December 31,
1996 1995
LIABILITIES
Accounts payable....................... $ 1,473 $ 1,229
Payroll and benefit-related
liabilities.......................... 2,514 3,026
Postretirement and postemployment
benefit liabilities.................. 200 227
Debt sharing amount in anticipation of
the assumption of the Commercial
Paper Program (Note 4)................ - 3,842
Debt maturing within one year (Note 4). 2,450 49
Other current liabilities.............. 3,554 2,690
Total current liabilities.............. 10,191 11,063
Postretirement and postemployment
benefit liabilities.................. 5,851 5,569
Long-term debt (Note 4)................ 1,594 123
Other liabilities...................... 1,885 1,533
Total liabilities ..................... 19,521 18,288
STOCKHOLDERS' EQUITY
Common stock - par value $.01 per share
Authorized shares: 3,000,000,000
Outstanding shares:
636,662,634 at June 30, 1996.......... 6 -
Additional paid-in capital............. 2,438 1,406
Foreign currency translation........... (33) 28
Retained earnings...................... - -
Total stockholders' equity
(Note 5 ).............................. 2,411 1,434
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.................. $21,932 $19,722
See Notes to Consolidated Financial Statements.
<PAGE> 5 Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended June 30,
1996 1995
Operating Activities
Net income(loss)......................... $ (31) $ 137
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization......... 602 730
Provision for uncollectibles.......... 34 36
Deferred income taxes................. 28 35
(Increase) decrease in
accounts receivable (Note 3)........ (1,248) 547
(Increase) in inventories............. (628) (760)
Increase (decrease) in
accounts payable.................... 164 (148)
Changes in other operating assets
and liabilities..................... 594 (468)
Other adjustments for noncash
items - net......................... (134) (119)
Net cash used in operating activities.... (619) (10)
Investing Activities
Capital expenditures .................... (562) (449)
Proceeds from the sale or disposal of
property, plant and equipment.......... 22 10
Purchases of equity investments.......... (36) (23)
Sales of equity investments.............. 79 -
Acquisitions, net of cash acquired....... (234) -
Other investing activities - net......... (91) 15
Net cash used in investing activities.... (822) (447)
Financing Activities
Repayments of long-term debt ............ (34) (37)
Issuance of long-term debt............... 22 8
Proceeds of Issuance of Common Stock..... 2,887 -
Proceeds of debt sharing
agreement - net........................ - 475
Transfers from (to) AT&T (Note 3)........ 232 (238)
Increase in short-term
borrowings - net....................... 47 57
Net cash provided by
financing activities................... 3,154 265
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE> 6 Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended
June 30,
1996 1995
Effect of exchange rate
changes on cash........................ (10) 13
Net increase (decrease) in cash and
cash equivalents....................... 1,703 (179)
Cash and cash equivalents
at beginning of year................... 448 580
Cash and cash equivalents
at end of period....................... $ 2,151 $ 401
See Notes to Consolidated Financial Statements.
<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"). Lucent was incorporated on November 29, 1995
with 1,000 shares of Lucent common stock ("Common Stock"), authorized and
outstanding, all of which were owned by AT&T. On April 2, 1996, AT&T obtained an
additional 524,623,894 shares of Common Stock, and on April 10, 1996, Lucent
issued 112,037,037 shares in the Initial Public Offering ("IPO") for $27 per
share less underwriting discounts and commissions of $1.05 per share. The
consolidated financial statements for 1996 reflect the assets and liabilities
related to Lucent's operations, including the IPO proceeds and the impact of
AT&T's retention of approximately $2,000 in customer accounts receivable. In
addition, employee benefit 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 of Lucent shares to AT&T
stockholders.
In July 1996, AT&T announced that on September 30, 1996, it will distribute the
Lucent shares it owns to AT&T stockholders of record as of September 17, 1996.
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 three and six month
periods ending June 30, 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
<PAGE> 8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
corporate headquarters assets, liabilities and expenses relating to the Lucent
businesses that were transferred to Lucent from AT&T. Management believes these
allocations are reasonable. All intercompany transactions and balances between
the Lucent businesses have been eliminated.
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 financial statement 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 included in the Company's Current Report
on Form 8-K dated April 4, 1996, and the unaudited consolidated financial
statements and notes thereto included in the Company's Quarterly Report on Form
10-Q for the period ending March 31, 1996.
EARNINGS(LOSS) PER COMMON SHARE
For the three and six month periods ending June 30, 1996, net earnings(loss) per
common share were calculated by dividing the three month net income of $72
million and six month net loss of $31 million by the weighted average shares
that were outstanding during the respective periods. Included in the calculation
of the weighted average shares outstanding is the retroactive recognition to
January 1, 1996 of the 524,623,894 shares obtained by AT&T on April 2, 1996.
Replacement stock options and awards will be effective as of October 1, 1996.
The number of replacement stock options and awards are unavailable at this time,
but their impact may be dilutive in calculating earnings per share in future
periods.
<PAGE> 9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
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 contract billings.
Estimated earnings are accumulated in contracts in process by using the
percentage of completion method of accounting (either using a units of delivery
or a cost to cost methodology) 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.
3. SUPPLEMENTARY BALANCE SHEET AND CASH FLOW INFORMATION
Inventories at June 30, 1996 and December 31, 1995 were as follows:
June 30, December 31,
1996 1995
Completed goods ............... $2,047 $1,673
Work in process and
raw materials................ 1,384 1,178
Total inventories ............. $3,431 $2,851
The statement of cash flows for the period ending June 30, 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/to AT&T.
<PAGE> 10 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
4. DEBT SHARING AGREEMENT
Lucent's 1995 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"). For 1995, an allocation methodology was used to reflect
the capital structure through each historic period presented based on cash flows
for those periods.
At December 31, 1995, there was $3,842 outstanding under the Debt Sharing
Agreement between Lucent and AT&T. This amount was classified as short-term
since Lucent replaced substantially all the outstanding amounts under such Debt
Sharing Agreements with commercial paper issued by AT&T and assumed by Lucent on
the IPO Closing Date. On July 22, 1996, Lucent issued $1,500 of long-term debt
to pay down a portion of its commercial paper which was reflected on the balance
sheet as of June 30, 1996. The amount of the commercial paper repaid with the
net proceeds from this issuance has been reflected as long-term debt. Lucent
expects that, over time, it may replace all or part of the outstanding
commercial paper with short-or long-term borrowings, as market conditions
permit. The amount, timing and pricing of such debt issues are uncertain.
5. STOCKHOLDERS' EQUITY
Changes in total stockholders' equity reflect the retention by AT&T of
$2,000 in customer accounts receivable, the IPO proceeds, Lucent's year-to-date
net loss, net transfers from AT&T, dividends declared and adjustments for
foreign currency translation.
6. TRANSACTIONS WITH AT&T
For the quarters ending June 30, 1996 and 1995, Lucent recorded $561 and $424,
respectively, of revenues from AT&T. For the six months ending June 30, 1996 and
1995, Lucent recorded $1,172 and $792, respectively, of revenues from AT&T.
At June 30, 1996 and December 31, 1995, receivables from AT&T amounted to $616
and $291, respectively.
At June 30, 1996 and December 31, 1995, payables to AT&T amounted to $358 and
$25, respectively.
<PAGE> 11 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
At June 30, 1996, other current liabilities included a prepayment by AT&T of
$500 million to be applied to AT&T's purchases that are due and payable on or
after January 1, 1997 for products, licensed materials and services from Lucent.
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 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 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
<PAGE> 12 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Lucent's consolidated financial statements in respect to 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 June 30, 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. In July 1996,
Lucent and Pacific Bell agreed to modify the terms of the contract so as to
resolve outstanding issues and potential claims which may have arisen due to
implementation difficulties and cost overruns under the contract. Lucent's
financial statements include reserves to reflect these agreed to modifications.
Lucent will continue to assess the adequacy of these reserves.
8. SUBSEQUENT EVENTS
On July 17, 1996, Lucent's board of directors voted to change the Company's
fiscal accounting year to begin October 1 and end September 30. As a result of
the action, Lucent's 1996 fiscal year will end on September 30, 1996.
<PAGE> 13 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 subject to
receipt of consents or approvals or satisfaction of other applicable foreign
requirements. Lucent's financial statements reflect the consummation of all such
transactions. In addition, employee benefit assets are being held by AT&T or
AT&T 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 owned approximately 82.4% of the outstanding shares
of Common Stock.
In July 1996, AT&T announced that on September 30, 1996, it will distribute the
Lucent shares it owns to AT&T stockholders of record as of September 17, 1996.
The 1995 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 1995 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 are reasonable.
<PAGE> 14 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 through
1995. The factors contributing to variability include seasonality, multi-year
contracts and associated revenue recognition. See also RESULTS OF OPERATIONS
below with respect to the three and six month periods ending June 30, 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 of the calendar year. 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 calendar
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.
On July 17, 1996, Lucent's board of directors voted to change the Company's
fiscal accounting year to begin October 1 and end September 30. As a result of
the action, Lucent's 1996 fiscal year will end on September 30, 1996. As noted
above, historically Lucent's business
<PAGE> 15 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
has been highly seasonal, with revenue and net income concentrated in the fourth
quarter of the calendar year. This change will position Lucent's traditionally
highest revenue quarter at the beginning of its fiscal year rather than the end.
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 second quarter net income of $72 million, or $0.11 per share.
The year-ago quarterly net income was $159 million, or $0.25 per share on a pro
forma basis. For the six-month period, Lucent reported a net loss of $31
million, or $0.05 per share compared with net income of $137 million, or $0.22
per share on a pro forma basis in 1995. The calculations of the earnings(loss)
per share on a pro forma basis assumed that all 636,661,931 of common shares
were outstanding since January 1, 1995.
Operating income decreased $207 million and 4.2% as a percent of revenues in the
quarter compared with the same quarter in 1995. For the six-month period,
operating income decreased $330 million and 3.6% as a percent of revenues
compared with the same period in 1995. The decreases were largely due to lower
gross margins and increases in operating expenses in the quarter and
year-to-date periods of 1996.
<PAGE> 16 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE
MONTHS ENDED JUNE 30, 1995
Total revenues increased to $5,364 million, or 5.5% in the second quarter of
1996 compared with the second quarter of 1995, primarily due to gains in sales
from Systems for Network Operators, Microelectronic Products and Business
Communications Systems. The overall revenue growth was partially offset by the
continued decline in revenue from Consumer Products. Revenue growth continued to
be 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 June 30,
1996 and 1995:
Three Months
Ended
June 30,
Dollars in Millions --------------------------------
1996 1995
------- -------
Systems for Network Operators........ $2,969 55% $2,565 50%
Business Communications Systems...... 1,340 25 1,245 25
Microelectronic Products............. 605 11 451 9
Consumer Products.................... 274 5 400 8
Other Systems and Products........... 176 4 422 8
Total................................ $5,364 100% $5,083 100%
Revenues from Systems for Network Operators increased $404 million, or 15.8% in
1996 compared with the same quarter in 1995. The increase was driven by higher
sales of switching, transmission, fiber-optic cable products and professional
services. Demand for those products was driven by second line subscriber growth
and customer demand for continued network upgrades. The revenue growth was
partially offset by decreased sales of traditional cellular infrastructure
systems. While shipments of personal communications service ("PCS")
infrastructure systems rose over the year-ago quarter, revenues from digital PCS
contracts often cannot be recognized until substantial completion of
installation and system turnup. Lucent expects to recognize revenue related to
its PCS contracts in subsequent quarters.
<PAGE> 17 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales from Systems for Network Operators in the United States increased by
approximately 9% and international revenues increased approximately 38% compared
with the same quarter in 1995. The revenue increase in the United States was led
by sales to AT&T and the Regional Bell Operating Companies, partially offset by
a revenue decrease of approximately $100 million as a result of Lucent's exit
from the copper cable business in 1995. The international revenue growth was
driven by increased sales of infrastructure systems and services in all
international regions. In addition, this revenue increase includes approximately
$140 million in revenue resulting from the acquisition of Philips Electronics NV
("Philips"). International revenues represented about 29% of revenues from
Systems for Network Operators in the second quarter of 1996 compared with 24% in
same quarter in 1995.
During the first quarter of 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 PCS 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 and SSLP are negotiating final terms
and conditions under which Lucent would provide (or guarantee) long-term
financing of up to approximately $1,800 million in principal amount available
over the five-year period, subject to a final contract with mutually
satisfactory terms.
Revenues from Business Communications Systems increased $95 million, or 7.6%
compared with the same quarter in 1995. This increase was 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 led by sales of DEFINITY(R) products, SYSTIMAX(R)structured wiring system
and INTUITY(TM) voice messaging products as well as higher revenue from Call
Centers and maintenance contracts. International revenues increased by 17.1%,
largely due to growth in the Europe/Middle East/Africa and Asia/Pacific regions.
- --------------------------------------
(R) Registered trademark of Lucent
(TM) Trademark of Lucent
<PAGE> 18 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales of Microelectronic Products increased $154 million, or 34.1% compared with
the same quarter in 1995 due to higher sales of digital signal processors
("DSPs") and application specific integrated circuits ("ASICs") to original
equipment manufacturers ("OEMs"), both internationally and in the United States.
Domestic revenues increased approximately 32% compared to the same quarter in
1995, led by sales to OEMs. International revenues increased approximately 36%.
The growth in international revenues was driven by continued strength of DSPs
and ASICs sales in the Asia/Pacific region. International revenues represented
approximately 48% of the Microelectronic Products sales in the second quarter of
1996.
Revenues from Consumer Products sales decreased $126 million, or 31.5% compared
with the same quarter in 1995. The decline in revenues was primarily due to the
decrease in product sales related to the closing of the Phone Center Stores, the
discontinuance of unprofitable product lines and the decrease in phone rentals.
Consumer Products will continue to distribute its products through retail
outlets of resellers.
Revenues from sales of Other Systems and Products decreased $246 million, or
58.3% compared with the same quarter in 1995. These revenues include sales from
the data communications unit as well as custom manufacturing systems.
Additionally, Lucent recorded higher second quarter 1995 revenues in Other
Systems and Products category due, in part, to a reclassification of first
quarter 1995 intellectual property revenue into the second quarter of 1995.
Previously, intellectual property revenue was classified as Other Income.
Total costs increased $362 million, or 12.8% in 1996 compared with the same
quarter in 1995 due, in part, to the integration and consolidation of the
Philips businesses acquired and changes in the mix of products sold. As a
percentage of revenue, gross margin declined to 40.5% from 44.3% 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
<PAGE> 19 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
proportion of revenues from contracts accounted for on a percentage of
completion basis ("POC"). Under POC accounting, direct contract expenditures,
including research and development, are accounted for as costs and not operating
expenses.
OPERATING EXPENSES - THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE
MONTHS ENDED JUNE 30, 1995
Selling, general and administrative expenses increased $113 million, or 8.3%
compared with the same quarter in 1995. The increase in the second quarter
includes approximately $55 million due to continued expenditures associated with
the start-up of a new company including advertising and creating a new
information systems infrastructure. In addition, a significant amount of the
remainder of the increase was associated with the acquisition of Philips.
Selling, general and administrative expenses were 27.4% as a percentage of
revenues in the second quarter of 1996 compared with 26.7% as a percentage of
revenues in the second quarter of 1995.
Research and development expenses increased $13 million, or 2.3% compared with
the same quarter in 1995. Research and development expenses represented 10.7% as
a percentage of revenues in the second quarter of 1996 compared with 11.0% as a
percentage of revenues in the second quarter of 1995.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995
Other income -- net increased $52 million in the second quarter of 1996 compared
with the same quarter in 1995.
Interest expense in the second quarter of 1996 decreased $7 million compared
with the same quarter in 1995, primarily as a result of lower interest rates due
to the change in debt structure.
The effective income tax rate of 39.0% in the second quarter of 1996 decreased
from 40.2% in the same quarter of 1995, primarily due to the tax impact
resulting from foreign earnings.
<PAGE> 20 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX
MONTHS ENDED JUNE 30, 1995
Total revenues increased to $9,941 million, or 7.6% in the six-month period of
1996 compared with the same period in 1995, primarily due to gains in sales from
Systems for Network Operators, Microelectronic Products and Business
Communications Systems. The overall revenue growth was partially offset by the
continued decline in revenue from Consumer Products. Revenue growth continued to
be 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 six months ended June 30, 1996
and 1995:
Six Months
Ended
June 30,
Dollars in Millions ------------------------------
1996 1995
--------- ----------
Systems for Network Operators........ $5,345 54% $4,597 50%
Business Communications Systems...... 2,486 25 2,373 26
Microelectronic Products............. 1,125 11 865 9
Consumer Products.................... 569 6 754 8
Other Systems and Products........... 416 4 653 7
Total................................ $9,941 100% $9,242 100%
Revenues from Systems for Network Operators increased $748 million, or 16.3% in
1996 compared with the same six-month period in 1995. The increase was driven by
higher sales of switching, transmission, fiber-optic cable products and
professional services. The revenue growth was partially offset by decreased
sales of traditional cellular infrastructure systems. While shipments of PCS
infrastructure systems rose over the year-ago period, revenues from digital PCS
contracts often cannot be recognized until substantial completion of
installation and system turnup.
Sales from Systems for Network Operators in the United States increased by
approximately 11% and international revenues increased approximately 35%
compared with the same six-month period in 1995. The revenue increase in the
United States was led by sales to AT&T and the Regional Bell Operating
Companies, partially offset by a revenue decrease of approximately $190 million
as a result of Lucent's exit from the copper cable business in 1995.
<PAGE> 21 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
International revenues represented about 26% of revenues from Systems for
Network Operators for the first six months of 1996 compared with about 23% in
same period of 1995. International revenue growth continues to be driven by
sales of infrastructure systems and services and the revenue resulting from the
acquisition of Philips.
Revenues from Business Communications Systems increased $113 million, or 4.8%
compared with the same six-month period 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 higher product sales and growth in
maintenance contracts. International revenues increased by about 15%, largely
due to growth in the Europe/Middle East/Africa and Asia/Pacific regions.
Sales of Microelectronic Products increased $260 million, or 30.1% compared with
the same six-month period in 1995 due to higher sales of DSPs and ASICs to
original equipment manufacturers both internationally and in the United States.
International revenues increased approximately 42%. The growth in international
revenues was driven by continued strength of sales in the Asia/Pacific market.
International revenues represented approximately 50% of the Microelectronic
Products sales in the first six months of 1996.
Revenues from Consumer Products sales decreased $185 million, or 24.5% compared
with the same six-month period 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 related to the closing of the Phone
Center Stores. Consumer Products will continue to distribute its products
through retail outlets of resellers.
Revenues from sales of Other Systems and Products decreased $237 million, or
36.3% compared with the same six-month period in 1995. The decrease was due in
part to lower revenues from the data communications unit as well as customer
manufacturing systems.
<PAGE> 22 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Total costs increased $806 million, or 15.7% in 1996 compared with the same
six-month period in 1995 due to higher sales volumes and in part to the
integration and consolidation of the Philips businesses acquired. As a
percentage of revenue, gross margin declined to 40.2% from 44.4% in the year-ago
period. 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 continued to reflect a higher proportion of hardware sales and a higher
proportion of revenues from contracts accounted for on a POC basis.
OPERATING EXPENSES - SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS
ENDED JUNE 30, 1995
Selling, general and administrative expenses increased $199 million, or 7.6%
compared with the same period in 1995. The increase for the first six months of
1996 includes approximately $95 million due to continued expenditures associated
with the start-up of a new company including advertising and creating a new
information systems infrastructure. In addition, a significant amount of the
remainder of the increase was associated with the acquisition of Philips.
Selling, general and administrative expenses were 28.3% as a percentage of
revenues in the first six months of 1996 and 1995.
Research and development expenses increased $24 million, or 2.1% compared with
the same six-month period in 1995. Research and development expenses represented
11.6% as a percentage of revenues in the first six months of 1996 compared with
12.2% as a percentage of revenues in the same year-ago period.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - SIX
MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995
Other income -- net increased $38 million compared with the same period in 1995.
Interest expense in the second quarter of 1996 decreased $12 million compared
with the same period in 1995, primarily as a result of lower interest rates
associated with the change in debt structure.
The effective income tax rate of 39.2% for the six-month period of 1996
decreased from 40.2% in the same period of 1995, primarily due to the tax impact
resulting from foreign earnings.
<PAGE> 23 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 $2,210 million, or 11.2%, from year-end 1995. The
increase was primarily due to the increase of cash and cash equivalents, largely
as a result from the cash generated from Lucent's initial public offering and
higher inventories. These increases were partially offset by a decline in
accounts receivable. In comparison, year-end accounts receivable are
historically at their highest levels and inventory levels are historically at
their lowest.
Working capital, defined as current assets less current liabilities, increased
$2,714 million from year-end primarily resulting from the cash generated from
the initial public offering and the repayment of commercial paper with the net
proceeds from the issuance of long-term debt. The increase was partially offset
by the retention of $2,000 million of customer accounts receivable by AT&T. (See
also Note 3.)
Prepaid pension costs are increasing as returns on pension plan assets exceed
pension benefits earned and the interest cost on the projected benefit
obligation during the period.
The decrease in payroll and benefit-related liabilities reflects the annual
payment of year-end bonuses in the first quarter of 1996.
The increase in stockholders' equity was primarily due to the receipt of
proceeds from the IPO offset by the retention by AT&T of $2,000 million of
customer accounts receivables. (See also Notes 3 and 5.)
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. On July 22, 1996, Lucent issued $1,500 million of long-term
debt to pay down a portion of its commercial paper. Lucent expects that, over
time, it may replace all or part of the outstanding commercial paper with
short-or long-term borrowings, as market conditions permit. Future financing is
contemplated to be arranged as necessary to meet Lucent's requirements with the
timing, amount and form of issue depending on Lucent's needs and prevailing
market and general economic conditions. Lucent anticipates that borrowings under
its working capital facility, the issuance of additional commercial paper, cash
generated from operations and short- and long-term debt financings will be
available to satisfy its future cash requirements, although there can be no
assurance.
<PAGE> 24 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 June 30, 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 does Lucent have any major
concentration of credit risk related to any financial instrument.
CASH FLOWS
Cash flows used in operating activities increased compared with the same period
in 1995 due to AT&T's retention of customer accounts receivable partially offset
by the effect of a prepayment by AT&T.
(See also Note 3.)
Cash payments of $312 million were made for the first six months 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 $312 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 6,000 people have left the payroll as of June 30, 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 $562 million
and $449 million for the six-month periods ending June 30, 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> 25 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 the
proceeds from the IPO in 1996 compared with the same period in 1995.
In 1995, Lucent relied on AT&T to provide financing for its operations. 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 ratio of total debt to total capital (debt plus equity) was 62.7% at June
30, 1996 compared to 63.3% on a pro forma basis at December 31, 1995.
OTHER
On July 26, 1996, Lucent signed a long-term contract turning over a significant
portion of the day-to-day operations and management of its information
technology and production application work to ISSC, an IBM subsidiary.
Implementation of the multi-year contract became financially effective July 1,
1996. This outsourcing contract covers work such as operation of Lucent's
mainframe data centers, computer maintenance and installation, desktop computer
support (including help desk functions), most production system applications
maintenance and some applications development.
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
<PAGE> 26 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
RECENT PRONOUNCEMENTS
In 1996, Lucent adopted Statement of Financial Accounting Standard ("SFAS") 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 fiscal year
ending September 30, 1996, the pro forma net income and earnings per share
amounts assuming the fair value method was effective. The adoption of this
standard will not impact Lucent's consolidated results of operations, financial
position or cash flows.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". This standard provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. This standard is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996. For
Lucent, this standard will be effective in the second quarter of the new fiscal
year 1997. The adoption of this standard will not impact Lucent's consolidated
results of operations, financial position or cash flows.
<PAGE> 27 Form 10-Q - Part II
Part II - Other Information
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 July 18, 1996 was filed pursuant to Item 5 (Other Events),
Item 7 (Financial Statements and Exhibits) and Item 8 (Change in Fiscal
Year).
<PAGE> 28 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 August 8, 1996 James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
<PAGE> 29 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 Six
Months Ended
June 30, 1996
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended
June 30, 1996
Loss Before Income Taxes............................... $ (51)
Less Interest Capitalized during
the Period........................................... 11
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... 1
Add Fixed Charges...................................... 197
Total Earnings ........................................ $ 134
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 163
Interest Portion of Rental Expense..................... 34
Total Fixed Charges................................ $ 197
Ratio of Earnings to Fixed Charges..................... *
* For the six month period ending June 30, 1996, the ratio computation
indicates that the earnings were inadequate to cover fixed charges by $63.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
LUCENT TECHNOLOGIES, INC.
FINANCIAL DATA SCHEDULE
(Dollars in Millions)
This schedule contains summary financial information extracted from the
unaudited balance sheet of Lucent at June 30, 1996, and the unaudited
consolidated statement of operations for the six-month period ending June 30,
1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,151
<SECURITIES> 66
<RECEIVABLES> 4,966
<ALLOWANCES> 259
<INVENTORY> 3,431
<CURRENT-ASSETS> 12,521
<PP&E> 11,104
<DEPRECIATION> 6,541
<TOTAL-ASSETS> 21,932
<CURRENT-LIABILITIES> 10,191
<BONDS> 1,594
0
0
<COMMON> 6
<OTHER-SE> 2,405
<TOTAL-LIABILITY-AND-EQUITY> 21,932
<SALES> 9,941
<TOTAL-REVENUES> 9,941
<CGS> 5,947
<TOTAL-COSTS> 5,947
<OTHER-EXPENSES> 3,966
<LOSS-PROVISION> 34
<INTEREST-EXPENSE> 138
<INCOME-PRETAX> (51)
<INCOME-TAX> (20)
<INCOME-CONTINUING> (31)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>