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, 1997
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 August 1, 1997 641,699,282 common shares were outstanding.
<PAGE>
2 Form 10-Q - Part I
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
June 30, June 30,
1997 1996 1997 1996
Revenues ............................... $6,340 $5,364 $19,427 $ 17,368
Costs .................................. 3,740 3,194 11,017 11,049
Gross margin ........................... 2,600 2,170 8,410 6,319
Operating Expenses
Selling, general and
administrative expenses .............. 1,404 1,469 4,150 5,856
Research and development expenses ...... 816 573 2,267 1,869
Total operating expenses ............... 2,220 2,042 6,417 7,725
Operating income(loss) ................. 380 128 1,993 (1,406)
Other income - net ..................... 41 52 90 181
Interest expense ....................... 77 62 233 215
Income(loss) before income taxes ....... 344 118 1,850 (1,440)
Provision(benefit) for income taxes .... 131 46 712 (392)
Net income(loss) ....................... $ 213 $ 72 $ 1,138 $ (1,048)
Weighted average common shares
outstanding (millions) ............... 645.2 625.6 641.8 558.3
Earnings(loss)
per common share ..................... $ 0.33 $ 0.11 $ 1.77 $ (1.88)
Dividends declared
per common share ..................... $0.075 n/a $ 0.225 n/a
See Notes to Consolidated Financial Statements.
<PAGE>
3 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
June 30, September 30,
1997 1996
ASSETS
Cash and cash equivalents.............. $ 1,467 $ 2,241
Accounts receivable less
allowances of $334 at
June 30, 1997 and $273 at
September 30, 1996 ................... 5,011 4,914
Inventories............................ 2,969 3,288
Contracts in process (net of contract
billings of $1,606 at
June 30, 1997 and $708 at
September 30, 1996.................... 864 505
Deferred income taxes - net............ 1,627 1,617
Other current assets................... 424 216
Total current assets................... 12,362 12,781
Property, plant and equipment, net
of accumulated depreciation of
$6,418 at June 30, 1997 and
$6,333 at September 30, 1996......... 4,885 4,687
Prepaid pension costs.................. 3,071 2,828
Deferred income taxes - net............ 1,115 979
Capitalized software development costs. 339 362
Other assets........................... 1,101 989
TOTAL ASSETS........................... $22,873 $22,626
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE>
4 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
June 30, September 30,
1997 1996
LIABILITIES
Accounts payable....................... $ 1,387 $ 1,900
Payroll and benefit-related
liabilities.......................... 2,110 2,492
Postretirement and postemployment
benefit liabilities.................. 210 220
Debt maturing within one year.......... 1,758 2,363
Other current liabilities.............. 3,800 3,738
Total current liabilities.............. 9,265 10,713
Postretirement and postemployment
benefit liabilities.................. 6,048 5,642
Long-term debt ........................ 1,682 1,634
Other liabilities...................... 2,035 1,951
Total liabilities ..................... 19,030 19,940
SHAREOWNERS' EQUITY
Preferred stock-par value $1.00 per share
Authorized shares: 250,000,000
Issued and outstanding shares: none... -- --
Common stock-par value $.01 per share
Authorized shares: 3,000,000,000
Issued and outstanding shares:
640,872,761 at June 30, 1997
636,662,634 at September 30, 1996..... 6 6
Additional paid-in capital............. 2,796 2,595
Guaranteed ESOP obligation............. (92) (106)
Foreign currency translation........... (115) (16)
Retained earnings...................... 1,248 207
Total shareowners' equity............... 3,843 2,686
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY................... $22,873 $22,626
See Notes to Consolidated Financial Statements.
<PAGE>
5 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Nine
Months Ended June 30,
1997 1996
Operating Activities
Net income(loss)......................... $ 1,138 $ (1,048)
Adjustments to reconcile net income(loss)
to net cash provided by(used in)
operating activities:
Business restructuring charge......... (69) 2,613
Asset impairment and other charges.... (46) 188
Depreciation and amortization......... 1,042 991
Provision for uncollectibles.......... 95 53
Deferred income taxes................. (146) (717)
Increase in accounts receivable ...... (142) (2,856)
Increase in inventories
and contracts in process............ (107) (413)
(Decrease)increase in
accounts payable.................... (567) 556
Changes in other operating assets
and liabilities..................... (378) 1,251
Other adjustments for noncash
items - net......................... 47 (100)
Net cash provided by
operating activities.................... 867 518
Investing Activities
Capital expenditures .................... (1,088) (1,055)
Proceeds from the sale or disposal of
property, plant and equipment.......... 42 126
Purchases of equity investments.......... (117) (69)
Sales of equity investments.............. 12 79
Acquisitions, net of cash acquired....... (144) (234)
Dispositions............................. 181 -
Other investing activities - net......... (11) (185)
Net cash used in investing activities.... (1,125) (1,338)
Financing Activities
Repayments of long-term debt ............ (13) (48)
Issuance of long-term debt............... 52 22
Proceeds of issuance of common stock..... 197 2,887
Dividends paid........................... (144) --
Repayments of debt sharing
agreement - net........................ -- (67)
Transfers to AT&T........ ............... -- (190)
Decrease in short-term
borrowings - net....................... (590) (33)
Net cash provided by
(used in) financing activities.......... (498) 2,571
See Notes to Consolidated Financial Statements.
(CONT'D)
<PAGE>
6 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Nine
Months Ended June 30,
1997 1996
Effect of exchange rate changes
on cash and cash equivalents........... (18) (13)
Net (decrease)increase in cash and
cash equivalents....................... (774) 1,738
Cash and cash equivalents
at beginning of period................. 2,241 413
Cash and cash equivalents
at end of period....................... $ 1,467 $ 2,151
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 operations that now comprise Lucent
Technologies Inc. ("Lucent" or the "Company") and the associated assets and
liabilities of those 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. On September 30, 1996, AT&T distributed to its
shareowners all its remaining interests in Lucent ("Distribution").
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 and a pre-tax charge of $2,801 ($1,847 after taxes), to cover
restructuring costs of $2,613 and asset impairment and other charges of $188
(See Note 3).
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 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 nine month period ended
June 30, 1996 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 this period 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 these allocations
are reasonable. All intercompany transactions and balances between the Lucent
businesses have been eliminated.
The financial 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 Transition Report on Form
10-K for the period ended September 30, 1996 and the current fiscal year's
previously issued Forms 10-Q.
<PAGE>
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
EARNINGS(LOSS) PER COMMON SHARE
For the three and nine month periods ended June 30, 1997, earnings per common
share was calculated by dividing the three month net income of $213 and the nine
month net income of $1,138 by the weighted average shares that were outstanding
during the respective periods. For the three and nine month periods ended June
30, 1996, earnings(loss) per common share was calculated by dividing the three
month net income of $72 and the nine month net loss of $1,048 by the weighted
average shares that were outstanding during the respective periods. The
earnings(loss) per common share for the three and nine month periods ended June
30, 1996 assumes that all shares issued to AT&T prior to the IPO were considered
outstanding since January 1, 1995. For the fiscal year 1997, determination of
the weighted average shares includes the impact of common stock equivalents.
2. SUPPLEMENTARY BALANCE SHEET AND CASH FLOW INFORMATION
Inventories at June 30, 1997 and September 30, 1996 were as follows:
June 30, September 30,
1997 1996
Completed goods ............... $ 1,720 $ 1,837
Work in process and
raw materials................ 1,249 1,451
Total inventories ............. $ 2,969 $ 3,288
The statement of cash flows for the nine month period ended June 30, 1996
excludes $2,000 of customer accounts receivable retained by AT&T as well as net
asset transfers of $219 received from AT&T. These transactions have not been
reflected on the consolidated statement of cash flows because they were noncash
events accounted for as changes in paid-in capital.
3. BUSINESS RESTRUCTURING AND OTHER CHARGES
The pre-tax charge in the quarter ended December 31, 1995 for restructuring,
impairments and other charges of $2,801 was recorded as $892 of costs, $1,645 of
selling, general and administrative expenses, and $264 of research and
development expenses. The charges included $1,509 for employee separations; $627
for asset write-downs; $202 for closing, selling and consolidating facilities;
and $463 for other items. The total charges reduced net income by $1,847.
For the three and nine month periods ended June 30, 1997, Lucent reversed $15
and $69 of business restructuring reserves, respectively, primarily related to
reserves for employee separations. For the nine month period ended June 30,
1997, these reversals were offset by a one-time write-off of $79 of in-process
research and development acquired in the acquisition of Agile Networks, Inc.
("Agile").
Cash payments of $101 and $296 were made for the three month and nine month
periods ended June 30, 1997, respectively, for the 1995 business restructuring
charge. The reserve for business restructuring as of June 30, 1997 was $888.
<PAGE>
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
4. COMMITMENTS AND CONTINGENCIES
Lucent has several significant contracts for the sale of infrastructure systems
to network operators which extend over multi-year periods, and expects to enter
into similar contracts in the future, with the uncertainties that involve new
technologies which may not have been previously deployed on a large-scale
commercial basis. Lucent may incur significant cost overruns and losses on such
contracts which would be recognized in the quarter in which they became
ascertainable. Lucent in the normal course of business establishes reserves for
these contracts as deemed necessary.
One of Lucent's multi-year contracts was with Pacific Bell for the provision of
a broadband network based on hybrid fiber-coaxial cable technology. In June
1997, Lucent agreed with Pacific Bell to terminate work under that contract.
Lucent has been recording reserves in its financial statements to reflect
implementation difficulties and cost overruns under that contract, and all
expected costs associated with the contract have been reflected in Lucent's
financial statements for the periods ended June 30, 1997.
Network operators, domestically and internationally, increasingly have required
their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
In this regard, Lucent entered into a credit agreement in October 1996 to
provide Sprint Spectrum LP ("Sprint PCS") long-term financing of $1,800 for
purchasing equipment and services for its PCS network.
On May 29, 1997, Lucent closed transactions with a group of institutional
investors and with Sprint Corporation in which $500 of loans and undrawn
commitments and $300 of undrawn commitments, respectively, provided by Lucent to
Sprint PCS under the $1,800 credit facility were transferred without recourse.
As part of the revenue recognition process, Lucent has assessed the
collectibility of the accounts receivable relating to the Sprint PCS purchase
contract in light of its financing commitment to Sprint PCS. Lucent has
determined that the receivables under the contract are reasonably assured of
collection based on various factors among which was the ability of Lucent to
transfer the loans and commitments without recourse.
Lucent's current and historical manufacturing and research operations are
subject to a wide range of environmental protection laws in the United States
and other countries. In the United States, these laws often require parties to
fund remedial action regardless of fault. Lucent has remedial and investigatory
activities underway at 36 current and former facilities. In addition, Lucent was
named a successor to AT&T as a potentially responsible party ("PRP") at numerous
"Superfund" sites pursuant to 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
("NCR"), 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 the
Company's business as conducted at any time prior to, on 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. In addition, under the Separation and Distribution Agreement,
Lucent is required to pay a portion of contingent liabilities paid out in excess
of certain amounts by AT&T and NCR, including environmental liabilities.
<PAGE>
10 Form 10-Q - Part I
Lucent records an environmental reserve when it is probable that a liability has
been incurred and the amount of the liability is reasonably estimable, whether
the claims are asserted or unasserted. 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 Lucent's financial condition, results of operations or cash flows.
5. DERIVATIVE FINANCIAL INSTRUMENTS
Lucent uses various financial instruments, including derivative financial
instruments, for purposes other than trading. Lucent does not enter into
derivative financial instruments for speculative purposes. Derivatives used as
part of Lucent's risk management strategy include foreign currency contracts and
interest rate swap agreements. Foreign currency exchange contracts, including
forward and option contracts, are used to manage exposure to changes in currency
exchange rates, principally Deutsche marks and Japanese yen. Foreign exchange
contracts are designated for firmly committed or forecasted purchases and sales.
Gains and losses on foreign currency contracts designated for firm commitments
are deferred in other current assets and liabilities. Deferred gains and losses
are recognized as adjustments to the underlying hedged transactions when the
future sales or purchases are recorded, or immediately, if the commitment or the
foreign exchange contract is canceled, terminated or sold. Gains and losses on
foreign exchange contracts that are designated for forecasted transactions are
recognized in other income as the exchange rates change. Lucent enters into
interest rate swap agreements to manage exposure to changes in interest rates
and to reduce the overall costs of financing. The difference between the
interest paid and received under these swap agreements is recognized over the
life of the agreements as adjustments to the effective yield of the underlying
debt. If Lucent terminates, sells or cancels a swap agreement, the gain or loss
is recorded as an adjustment to the basis of the underlying debt and amortized
over the remaining life. Gains and losses on the fair values on interest rate
swap agreements that do not qualify as hedges are recognized in other income or
expense.
6. SUBSEQUENT EVENTS
On July 23, 1997, Lucent commenced an all-cash tender offer (the "Tender Offer")
for the outstanding stock of Octel Communications Corporation ("Octel"), a
provider of voice, fax and electronic messaging technologies, at a purchase
price of $31 per share or an aggregate purchase price of approximately $1,800.
The Tender Offer is currently scheduled to expire on August 29, 1997 and is
subject to a number of conditions. Lucent and Octel have received a second
request from the Antitrust Division of the Department of Justice (the "DOJ") in
connection with the acquisition under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. Lucent will work expeditiously to respond to the DOJ's
request. If necessary, Lucent will extend the Tender Offer as appropriate.
Lucent anticipates paying for the Octel shares from its general funds which
consist of cash from operations and proceeds from short-term borrowings.
Lucent is currently in the process of determining the fair market value of the
net assets of Octel in order to allocate the purchase price. Based on
preliminary determinations, Lucent estimates that approximately $950 of the
purchase price would be allocated to in-process research and development. This
amount would be charged to income at the date of acquisition, which is currently
anticipated to be in the quarter ending September 30, 1997. The remaining
purchase price would be allocated to tangible assets, acquired technology and
goodwill, less liabilities assumed. Based on current estimates, Lucent
anticipates goodwill and acquired technology to be approximately $400 and will
be amortized over periods not exceeding seven years.
<PAGE>
11 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
HIGHLIGHTS
Lucent reported net income of $213 million, or $0.33 per share for the quarter
ended June 30, 1997. The year-ago quarterly net income was $72 million, or $0.11
per share. For the current nine month period, Lucent reported net income of
$1,138 million, or $1.77 per share compared with a net loss of $1,048 million,
or $1.88 per share in the prior year. On a pro forma basis, Lucent reported net
income of $799 million, or $1.25 per share for the nine month period ended June
30, 1996. The pro forma presentation of net income and earnings per share
excludes $1,847 million of after-tax restructuring and other charges in the
quarter ended December 31, 1995, and assumes that all 636.7 million common
shares outstanding on April 10, 1996 were outstanding since January 1, 1995 and
gives no effect to the use of proceeds from the IPO.
Operating income of $380 million reflects an increase of $252 million in the
quarter compared with the same quarter in 1996 and was 6.0% percent of revenues.
For the nine months ended June 30, 1997, operating income of $1,993 million
reflects an increase of $3,399 million, largely due to the restructuring and
other charges in the fourth quarter of calendar year 1995. Excluding the impact
of restructuring and other charges, operating income for the nine months ended
June 30, 1997 increased $598 million to 10.3% of revenues. For both the three
and nine month periods, the increase reflects higher sales volumes, benefits
associated with business productivity improvement initiatives and a favorable
mix of higher margin products.
Prior to February 1, 1996, AT&T conducted the Company's business 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
its business, except that AT&T retained accounts receivable having a face amount
of approximately $2,000 million. The effective date of the transfer of employee
benefit assets and liabilities to Lucent, or trusts established by Lucent, was
October 1, 1996.
The Lucent consolidated financial statements for the nine month period ended
June 30, 1996 reflect the financial position, results of operations and cash
flows of the business transferred to Lucent from AT&T in the Separation. As a
result, these 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 the business.
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, the business. Management
believes the assumptions underlying Lucent's financial statements are
reasonable.
VARIABILITY IN THE BUSINESS
Lucent's sales continue to be highly seasonal. Many of Lucent's large customers
have historically delayed a disproportionate percentage of their capital
expenditures until the fourth quarter of the calendar year. Consequently,
Lucent's results of operations for the first three quarters of each calendar
year historically have, in the aggregate, been significantly less profitable
than the fourth quarter.
To manage this fluctuation caused by the buying behaviors of large customers,
Lucent continues to seek out new types of customers both in the United States
and internationally, such as competitive access providers, cable television
network operators and computer manufacturers.
<PAGE>
12 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Lucent is one of the world's leading designers, developers and manufacturers of
telecommunications systems, software and products. Lucent is a global market
leader in the sale of public telecommunications systems, and is a supplier of
systems and software to most of the world's largest network operators. Lucent is
also a global leader in the sale of business communications systems and
microelectronic components for communications systems and computer
manufacturers. In addition, Lucent is a supplier in the United States of
consumer telecommunications products. Lucent is comprised of the systems and
technology units that were formerly part of AT&T, including the research and
development capabilities of Bell Laboratories. Lucent is engaged in the design,
development, manufacturing and servicing of systems and software for
telecommunications applications within the global telecommunications networking
industry. These integrated systems enable network operators and business
enterprises to connect, route, manage and store information between and within
locations.
REVENUES - THREE MONTHS ENDED JUNE 30, 1997 VERSUS THREE MONTHS ENDED
JUNE 30, 1996
Total revenues increased 18.2% to $6,340 million for the quarter ended June 30,
1997 compared with the same quarter of 1996, driven by increased sales from
Systems for Network Operators, Business Communications Systems and
Microelectronic Products. The overall revenue growth was partially offset by the
continued decline in revenue from Consumer Products and Other Systems and
Products. Revenue growth was driven by domestic sales. For the quarter, total
international revenues increased slightly compared with the same quarter last
year.
The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the three months ended June 30,
1997 and 1996:
Three Months
Ended
June 30,
Dollars in Millions --------------------------------
1997 1996
------ -------
Systems for Network Operators........ $3,779 59% $2,969 55%
Business Communications Systems...... 1,559 25 1,340 25
Microelectronic Products............. 687 11 605 11
Consumer Products.................... 193 3 274 5
Other Systems and Products........... 122 2 176 4
Total................................ $6,340 100% $5,364 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $810 million, or 27.3% in
1997 compared with the same quarter in 1996. The increase resulted from higher
sales of both switching and wireless systems with associated software,
fiber-optic cable and professional services. Demand for those products was
driven by second line subscriber growth in businesses and residences for
Internet services and data traffic. Systems for Network Operators continued to
recognize revenue related to its personal communications services ("PCS")
contracts during the quarter as customers accepted networks for commercial
service.
<PAGE>
13 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues from Systems for Network Operators in the United States increased by
41.2% over the year-ago quarter. The revenue increase in the United States was
led by sales to traditional service providers and non-traditional customers such
as PCS wireless providers, competitive access providers and cable television
companies. International revenues for the quarter ended June 30, 1997 decreased
7.8% compared with the same quarter in 1996 as Lucent experienced variability in
customer purchasing patterns as well as continuing its emphasis on targeting
select international opportunities for increased profitability. International
revenues represented 20.5% of revenues from Systems for Network Operators for
the quarter ended June 30, 1997 compared with 28.3% in the same quarter in 1996.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $219 million, or 16.3%
compared with the year-ago quarter. This increase was led by sales of
DEFINITY(R), SYSTIMAX(R) structured cabling, messaging systems, integrated
offers such as call centers and higher revenues from service contracts. This
increase was partially offset by the continued erosion of the rental base.
International revenues increased by 15.6%, due to growth in all major
international regions. International revenue represented 16.2% of revenue for
the quarter. For the quarter ended June 30, 1997, domestic revenues increased
16.5% as compared to the same quarter in 1996.
On July 17, 1997, Lucent announced the proposed acquisition of Octel, a provider
of voice, fax and electronic messaging technologies. The transaction is expected
to be completed in the quarter ending September 30, 1997.
Revenues from MICROELECTRONIC PRODUCTS increased $82 million, or 13.6% compared
with the year-ago quarter due to higher product sales of customized chips for
computing and communications, including components for local area networks, data
networking, high-end computer workstations and wireless telephones. Higher sales
of power systems and optoelectronic components also contributed to the increase
for the quarter. This increase was partially offset by lower revenues from
licensing intellectual property. Domestic revenues increased 6.3% compared to
the same quarter in 1996, driven by sales to all major customer groups.
International revenues increased 21.4%. The growth in international revenues was
driven by sales in the Asia/Pacific and European regions. International revenues
represented 51.2% of the Microelectronic Products sales for the quarter ended
June 30, 1997 compared with 47.9% in the same quarter in 1996.
Revenues from CONSUMER PRODUCTS decreased $81 million, or 29.6% compared with
the year-ago quarter. The decline in revenues was primarily due to decreased
product sales as Consumer Products restructures its business and the decrease in
phone rental revenues. During the quarter, Lucent announced an agreement to
combine its Consumer Products business into a new company called Philips
Consumer Communications, a joint venture between Philips Electronics
N.V.("Philips") and Lucent. This transaction is expected to be completed by
October 1, 1997, and Lucent will initially have a 40% equity interest in the new
company.
Revenues from OTHER SYSTEMS AND PRODUCTS decreased $54 million, or 30.7%
compared with the year-ago quarter. The decrease is largely due to the sale of
Lucent's data communications and custom manufacturing services businesses in
calendar year 1996.
Total costs increased $546 million, or 17.1% compared with the year-ago quarter
resulting primarily from the 18.2% increase in revenues. Gross margin percentage
increased to 41.0% from 40.5% in the year-ago quarter due primarily to a
favorable mix of higher margin products.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
14 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OPERATING EXPENSES - THREE MONTHS ENDED JUNE 30, 1997 VERSUS THREE MONTHS ENDED
JUNE 30, 1996
Selling, general and administrative expenses decreased $65 million, or 4.4%
compared with the same quarter in 1996. This decrease is attributable to
business productivity improvement initiatives, which included a reduction in
expenses associated with businesses exited in calendar year 1996, as well as the
elimination of start-up expenses incurred in the year-ago quarter. In addition,
the reversal of $15 million of business restructuring charges primarily related
to employee separations contributed to the decline in the current quarter. These
expense reductions were partially offset by increases associated with higher
sales levels, investment in growth initiatives, as well as implementing SAP, an
integrated software platform. Selling, general and administrative expenses as a
percentage of revenues were 22.1% for the quarter ended June 30, 1997 as
compared to 27.4% for the same quarter in 1996.
Research and development expenses increased $243 million during the quarter
ended June 30, 1997 compared to the same prior year quarter. This was primarily
due to expenditures in support of the wireless infrastructure, microelectronic
products and advanced multimedia communications systems. Research and
development expenses represented 12.9% of revenues for the quarter ended June
30, 1997 as compared with 10.7% of revenues in the same quarter in 1996.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED JUNE 30, 1997 VERSUS THREE MONTHS ENDED JUNE 30, 1996
Other income -- net decreased $11 million for the quarter ended June 30, 1997
compared with the same quarter in 1996 due primarily to foreign exchange losses.
Interest expense increased $15 million for the quarter ended June 30, 1997
compared with the same quarter in 1996 primarily due to higher interest rates on
long-term debt in comparison to commercial paper.
The effective income tax rate of 38.1% for the quarter ended June 30, 1997
decreased from the effective income tax rate of 39.0% in the same quarter in
1996 primarily due to increased research tax credits.
REVENUES - NINE MONTHS ENDED JUNE 30, 1997 VERSUS NINE MONTHS ENDED
JUNE 30, 1996
Total revenues increased to $19,427 million, or 11.9% compared with the same
nine month period a year ago, primarily due to increases in sales from Systems
for Network Operators, Business Communications Systems and Microelectronic
Products. The overall revenue growth was partially offset by the continued
decline in revenue from Consumer Products and Other Systems and Products.
Revenue growth was driven by domestic and international sales. For the nine
months ended June 30, 1997, international revenues increased 7.0% compared with
the same period a year ago.
<PAGE>
15 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the nine months ended June 30, 1997
and 1996:
Nine Months
Ended
June 30,
Dollars in Millions --------------------------------
1997 1996
------- -------
Systems for Network Operators........ $ 11,735 60% $ 9,900 57%
Business Communications Systems...... 4,600 24 4,012 23
Microelectronic Products............. 1,973 10 1,684 10
Consumer Products.................... 697 4 1,120 6
Other Systems and Products........... 422 2 652 4
Total................................ $ 19,427 100% $ 17,368 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $1,835 million, or 18.5%
compared with the same nine month period a year ago. The increase was driven by
higher sales of both switching and wireless systems with associated software,
fiberoptic cable and professional services. Demand for those products was driven
in part by second line subscriber growth in businesses and residences for
Internet services and data traffic.
Revenues from Systems for Network Operators in the United States increased by
25.3% over the year-ago nine month period. The revenue increase in the United
States was led by sales to traditional service providers, including
non-traditional customers such as PCS wireless providers, competitive access
providers and cable television companies. International revenues for 1997
increased 2.4% compared with the same nine month period in 1996. International
revenues represented 25.5% of revenues from Systems for Network Operators for
1997 compared with 29.5% in same nine month period in 1996.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $588 million, or 14.7%
compared with the same nine month period a year ago. This increase was led by
sales of DEFINITY(R), SYSTIMAX(R) structured cabling and integrated offers such
as call centers. This increase is partially offset by the continued erosion of
the rental base. International revenues increased by 11.3%, largely due to
growth in the Asia/Pacific and Caribbean/Latin America regions. International
revenue represented 15.2% of the revenue for 1997. For 1997, domestic revenues
increased 15.3% as compared with the same nine month period in 1996.
Revenues from MICROELECTRONIC PRODUCTS increased $289 million, or 17.2% for 1997
compared with the same nine month period a year ago due to higher product sales
of customized chips for computing and communications, including components for
local area networks and data networking, high-end computer workstations and
wireless telephones. Higher sales of power systems and optoelectronic components
also contributed to the increase for the nine month period. Revenues from the
licensing of intellectual property increased compared with the nine month period
a year ago. Domestic revenues increased 10.0% compared with the same period in
1996, driven by sales to all major customer groups. International revenues
increased 24.6%, driven by sales in the Asia/Pacific and European regions.
International revenues represented 52.1% of the Microelectronic Products sales
compared with 49.0% for the same nine month period in 1996.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
16 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues from CONSUMER PRODUCTS decreased $423 million, or 37.8% compared with
the same nine month period a year ago. The decline in revenues was primarily due
to decreased product sales related to the closing of the Phone Center Stores,
the discontinuance of unprofitable product lines and the continued decrease in
phone rental revenues. The closing of the Phone Center Stores accounted for $204
million of the decline in revenues for the nine month period of 1997.
Revenues from OTHER SYSTEMS AND PRODUCTS decreased $230 million, or 35.3%
compared with the same nine month period a year ago. The reduction in revenues
was largely due to the sale in calendar year 1996 of Lucent's data
communications and custom manufacturing systems businesses.
Total costs were relatively flat compared with the same nine month period while
gross margin percentage increased to 43.3% from 36.4% in the year-ago period.
Excluding the restructuring charges recorded in the quarter ended December 31,
1995, costs increased $860 million primarily due to increases in sales volume.
Excluding restructuring charges, gross margin for the nine month period in 1996
was 41.5%. The increase in gross margin percentage for the current nine months
was due to overall favorable mix of higher margin product revenues and the
benefits associated with the business productivity improvement initiatives
offset in part by the erosion of higher margin rental revenues.
OPERATING EXPENSES - NINE MONTHS ENDED JUNE 30, 1997 VERSUS NINE MONTHS ENDED
JUNE 30, 1996
Selling, general and administrative expenses decreased $1,706 million, or 29.1%
compared with the same period a year ago. This decrease is attributable to the
restructuring charge of $1,645 million in the quarter ended December 31, 1995.
Excluding the impact of the 1995 restructuring charges, selling, general and
administrative expenses as a percentage of revenue declined 2.8 percentage
points to 21.4% of revenue. The current period includes increased expenditures
associated with higher sales levels, investment in growth initiatives, as well
as the implementation of SAP, an integrated software platform. These
expenditures were offset by business productivity improvement initiatives, which
included a reduction in expenses associated with businesses exited in calendar
year 1996, the lower start-up costs compared to 1996, and the reversal of $69
million of business restructuring reserves.
Research and development expenses increased $398 million as compared with the
same period a year ago. Excluding the impact of restructuring charges for the
quarter ended December 31, 1995, research and development expenses increased by
$662 million, primarily due to expenditures in support of the wireless
infrastructure, microelectronic products, advanced multimedia communications
systems and the one-time write-off of $79 million of in-process research and
development acquired in the acquisition of Agile. Research and development
expenses represented 11.7% of revenues as compared with 10.8% of revenues in the
same period in 1996. Excluding 1995 restructuring charges, research and
development expenses as a percentage of revenues increased 2.5 percentage points
from 9.2% in the same period a year ago.
<PAGE>
17 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - NINE
MONTHS ENDED JUNE 30, 1997 VERSUS NINE MONTHS ENDED JUNE 30, 1996
Other income -- net decreased $91 million compared with the same nine month
period in 1996. This decrease was largely due to gains recognized on the sale of
certain investments and insurance recoveries in the year-ago period, offset in
part by increased interest income in the nine month period in 1997.
Interest expense increased $18 million compared with the same nine month period
in 1996 due primarily to the change in debt structure from short-term to
long-term debt in the year-ago period.
The effective tax rate of 38.5% for 1997 increased from the effective tax rate
of 27.2% on the pre-tax loss in the same nine-month period of 1996 due to the
business restructuring charges incurred in the quarter ended December 31, 1995.
Excluding the 1995 restructuring charges, the effective tax rate decreased from
41.3% for the nine months ended June 30, 1996 primarily due to the tax impact
resulting from foreign earnings and increased research credits, offset in part
by the tax impact associated with the write-off of in-process research and
development acquired in the acquisition of Agile.
TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY
Total assets increased by $247 million, or 1.1% since September 30, 1996. This
change was due to increases in other current assets and prepaid pension costs
offset by decreases in cash and inventories. The decrease in cash was primarily
due to the reduction in short-term debt.
Working capital, defined as current assets less current liabilities, increased
$1,029 million from September 30, 1996, primarily resulting from net current
asset increases discussed above and decreases in current liabilities which
included the utilization by AT&T of the $500 million cash advance made to Lucent
in April 1996 and reduction of short-term debt.
The contribution by Lucent of the net assets of its Consumer Products business
to the joint venture between Philips and Lucent will not have a material impact
on Lucent's financial position.
Lucent expects that, from time to time, outstanding commercial paper balances
may be replaced with short- or long-term borrowings as market conditions permit.
At June 30, 1997, Lucent maintained approximately $4,700 million in credit
facilities of which a portion is used to support Lucent's commercial paper
program. At June 30, 1997, $4,458 million of these credit facilities were
unused. Future financings will be arranged to meet Lucent's requirements with
the timing, amount and form of issue depending on the prevailing market and
general economic conditions. Lucent anticipates that borrowings under its bank
credit facilities, the issuance of additional commercial paper, cash generated
from operations and short- and long-term debt financings will be adequate to
satisfy its future cash requirements, including payments due in connection with
the Octel acquisition, although there can be no assurance that this will be the
case.
<PAGE>
18 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 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
performance and acceptance criteria which can also cause revenue recognition
delays and require financing from Lucent.
Network operators, domestically and internationally, increasingly have required
their suppliers to arrange or provide long-term financing for them as a
condition to obtaining or bidding on infrastructure projects. These projects may
require financing in amounts ranging from modest sums to over a billion dollars.
In this regard, Lucent entered into a credit agreement in October 1996 to
provide Sprint PCS long-term financing of $1,800 million for purchasing
equipment and services for its PCS network.
On May 29, 1997, Lucent closed transactions with a group of institutional
investors and with Sprint Corporation in which $500 million of loans and undrawn
commitments and $300 million of undrawn commitments, respectively, provided by
Lucent to Sprint PCS under the $1,800 million credit facility were transferred
without recourse.
As part of the revenue recognition process, Lucent has assessed the
collectibility of the accounts receivable relating to the Sprint PCS purchase
contract in light of its financing commitment to Sprint PCS. Lucent has
determined that the receivables under the contract are reasonably assured of
collection based on various factors among which was the ability of Lucent to
transfer the loans and commitments without recourse.
Lucent has also entered into agreements to extend credit of up to an aggregate
of approximately $850 million to three other PCS operators for possible future
sales. As of June 30, 1997, no amounts had been advanced under these agreements,
which, in the case of agreements relating to about $500 million of credit, are
subject to fulfillment of certain conditions and completion of final contract
documentation. Lucent is continuing to propose, and commit to provide, financing
where appropriate for its business, in addition to the above arrangements. The
ability of Lucent to arrange or provide financing for network operators will
depend on a number of factors, including Lucent's capital structure and level of
available credit.
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.
Lucent's derivative financial instruments include foreign currency exchange
contracts and interest rate swaps. Lucent's nonderivative financial instruments
include letters of credit, commitments to extend credit and guarantees of debt.
<PAGE>
19 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
By their nature, all such instruments involve risk, including market risk and
the credit risk of nonperformance by counterparties. The maximum potential loss
may exceed the amount recognized in the balance sheet. All of Lucent's foreign
currency exchange contracts are hedges against specific exposures. In foreign
exchange contracts and interest rate swap agreements, Lucent assumes the risk
from the possible inability of counterparties to meet the terms of their
contracts; however, management believes this risk to be remote since the
counterparties to these contracts are major international institutions. Lucent
controls its exposure to credit risk associated with its financial instruments
through credit approvals, credit limits and monitoring procedures. At June 30,
1997, in management's opinion, Lucent did not have any significant exposure to
any individual customer or counterparty, nor did Lucent have any major
concentration of credit risk related to any financial instrument.
CASH FLOWS
Cash provided by operating activities was $867 million compared with $518
million for the nine months ended June 30, 1997 and 1996, respectively. This
increase in cash was largely due to the retention of $2,000 million of customer
accounts receivable by AT&T in the nine month period a year ago offset by a
decrease in accounts payable and a net increase in other operating assets and
liabilities over the same period a year ago. The change in other operating
assets and liabilities was primarily due to the receipt of the $500 million cash
advance made to Lucent in April 1996 by AT&T and the utilization by AT&T of that
advance in 1997.
Cash payments of $101 million and $296 million were made for the three month and
nine month periods ended June 30, 1997, respectively, for the business
restructuring charge recorded in the quarter ended December 31, 1995. The
remaining balance in the business restructuring reserve of $888 million will
result in future cash payments. Of the 23,000 positions that Lucent announced it
would eliminate and that are included in the aforementioned restructuring
charges, approximately 17,600 positions have been eliminated as of June 30,
1997.
Comparing the nine months ended June 30, 1997 and 1996, cash used in investing
activities decreased to $1,125 million from $1,338 million. The decrease is the
result of the acquisition of several manufacturing and other operations of
certain subsidiaries of Philips Electronics NV in 1996 and the disposition of
the interconnect products and custom manufacturing services businesses during
fiscal year 1997.
Capital expenditures, the largest component of investing activities, were $1,088
million and $1,055 million for the nine month periods ended June 30, 1997 and
1996, respectively. Capital expenditures include 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.
Cash used in financing activities for the nine months ended June 30, 1997 was
$498 million compared with cash provided by financing activities of $2,571
million in the same period a year ago. This decrease was primarily due to the
proceeds received from the IPO in the year-ago period and the repayment of
commercial paper in the current quarter.
In 1995, Lucent relied on AT&T to provide financing for its operations. The cash
flows from financing activities in first four months of fiscal 1996 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 had been a stand-alone entity.
<PAGE>
20 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The ratio of total debt to total capital (debt plus equity) was 47.2% at June
30, 1997 compared to 59.8% at September 30, 1996.
OTHER
Lucent has several significant contracts for the sale of infrastructure systems
to network operators which extend over multi-year periods, and expects to enter
into similar contracts in the future, with the uncertainties that involve new
technologies which may not have been previously deployed on a large-scale
commercial basis. Lucent may incur significant cost overruns and losses on such
contracts which would be recognized in the quarter in which they became
ascertainable. Lucent in the normal course of business establishes reserves for
these contracts as deemed necessary.
One of Lucent's multi-year contracts was with Pacific Bell for the provision of
a broadband network based on hybrid fiber-coaxial cable technology. In June
1997, Lucent agreed with Pacific Bell to terminate work under that contract.
Lucent has been recording reserves in its financial statements to reflect
implementation difficulties and cost overruns under that contract, and all
expected costs associated with the contract have been reflected in Lucent's
financial statements for the period ended June 30, 1997.
Lucent's current and historical manufacturing and research operations are
subject to a wide range of environmental protection laws in the United States
and other countries. In the United States, these laws often require parties to
fund remedial action regardless of fault. Lucent has remedial and investigatory
activities underway at 36 current and former facilities. In addition, Lucent was
named a successor to AT&T as a PRP at numerous "Superfund" sites pursuant to
CERCLA or comparable state statutes. Under the Separation and Distribution
Agreement, Lucent is responsible for all liabilities primarily resulting from or
related to the operation of the Company's business as conducted at any time
prior to, on 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. In addition, under the Separation
and Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental 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, whether
the claims are asserted or unasserted. 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 Lucent's financial condition, results of operations or cash flows.
<PAGE>
21 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by management. Any
Form 10-K, Annual Report to Shareowners, Quarterly Report to Shareowners, Form
10-Q or Form 8-K of the Company may include forward-looking statements. In
addition, other written or oral statements which constitute forward-looking
statements may be made by or on behalf of the Company. Words such as "expects,"
anticipates," "intends," "plans," "believes," "seeks," "estimates," variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions ("Future
Factors") which are difficult to predict. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking statements. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise. Future Factors include increasing price and
product/services competition by foreign and domestic competitors, including new
entrants; rapid technological developments and changes and the Company's ability
to continue to introduce competitive new products and services on a timely, cost
effective basis; the mix of products/services; the achievement of lower costs
and expenses; domestic and foreign governmental and public policy changes which
may affect the level of new investments and purchases made by customers; changes
in environmental and other domestic and foreign governmental regulations;
protection and validity of patent and other intellectual property rights;
reliance on large customers; technological, implementation and cost/financial
risks in increasing use of large, multi-year contracts; the cyclical nature of
the Company's business; the outcome of pending and future litigation and
governmental proceedings and continued availability of financing, financial
instruments and financial resources in the amounts, at the times and on the
terms required to support the Company's future business. These are
representative of the Future Factors that could affect the outcome of the
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general domestic and
international economic conditions including interest rate and currency exchange
rate fluctuations and other Future Factors.
For a further description of Future Factors that could cause actual results to
differ materially from such forward-looking statements, see below in this Form
10-Q and also see the discussion in the Company's Form 10-K for the Transition
Period from January 1, 1996 to September 30, 1996 in Item 1 under the section
entitled "OUTLOOK-Forward Looking Statements" and the remainder of the OUTLOOK
section.
Competition:
The Company currently faces significant competition in its markets and expects
that the level of price and product competition will increase. In addition, as a
result of both the trend toward global expansion by foreign and domestic
competitors and technological and public policy changes, the Company anticipates
that new and different competitors will enter its markets. These competitors may
include entrants from the telecommunications, software and data networking
industries. Existing competitors have, and new competitors may have, strong
financial capability, technological expertise and well-recognized brand names.
<PAGE>
22 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Dependence On New Product Development:
The markets for the Company's principal products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating telecommunications
systems for network operators and business customers. The Company's operating
results will depend to a significant extent on its ability to continue to
introduce new systems, software and services successfully on a timely basis and
to reduce costs of existing systems, software and services. The success of these
and other new offerings is dependent on several factors, including proper
identification of customer needs, cost, timely completion and introduction,
differentiation from offerings of the Company's competitors and market
acceptance. In addition, new technological innovations generally require a
substantial investment before any assurance is available as to their commercial
viability, including, in some cases, certification by international and domestic
standards-setting bodies.
Reliance On Major Customers:
Historically, the Company has relied on a limited number of customers for a
substantial portion of its total revenues, including AT&T which continues to be
a significant customer. Sales to approximately ten network operators constituted
over one-third of total revenues in prior years. The Company has diversified its
customer base in the past several years and expects this trend to continue.
Nevertheless, the Company expects that a significant portion of its future
revenues will continue to be generated by a limited number of customers. The
loss of any of these customers or any substantial reduction in orders by any of
these customers could materially adversely affect the Company's operating
results. The United States government is, in the aggregate, also a large
customer of the Company. Given the current pressures on the government to reduce
its overall level of spending, there can be no assurance that government
purchases from the Company will not decrease in the future.
Multi-Year Contracts:
See discussion in Item 2 above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY
and OTHER.
Seasonality:
See discussion in Item 2 above under VARIABILITY IN THE BUSINESS.
Future Capital Requirements:
See discussion in Item 2 above under TOTAL ASSETS, WORKING CAPITAL AND
LIQUIDITY.
International Growth And Foreign Exchange:
The Company intends to continue to pursue growth opportunities in international
markets. In many international markets, long-standing relationships between
potential customers of the Company and their local providers, and protective
regulations, including local content requirements and type approvals, create
barriers to entry. In addition, pursuit of such international growth
opportunities may require significant investments for an extended period before
returns on such investments, if any, are realized. Such projects and investments
could be adversely affected by reversals or delays in the opening of foreign
markets to new competitors, exchange controls, currency fluctuations, investment
policies, repatriation of cash, nationalization, social and political risks,
taxation, and other factors, depending on the country in which such opportunity
arises.
A significant change in the value of the dollar against the currency of one or
more countries where the Company recognizes substantial revenue or earnings may
materially adversely affect the Company's results. The Company attempts to
mitigate any such effects through the use of foreign currency contracts,
although there can be no assurances that such attempts will be successful.
<PAGE>
23 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 simplifies the
standards for computing earnings per share and is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. The adoption of SFAS 128 is not expected
to impact Lucent's previously reported earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The adoption of SFAS 130 will
have no impact on Lucent's consolidated results of operations, financial
position or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The adoption of SFAS 131 will have no impact
on Lucent's consolidated results of operations, financial position or cash
flows.
<PAGE>
24 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:
Not applicable
<PAGE>
25 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 13, 1997
James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
26 Form 10-Q
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
Exhibit 12
to Form 10-Q
For the Quarter
Ended June 30, 1997
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Nine
Months Ended
June 30, 1997
Earnings Before Income Taxes........................... $ 1,850
Less Interest Capitalized during
the Period........................................... 10
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... 2
Add Fixed Charges...................................... 349
Total Earnings ........................................ $ 2,187
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 266
Interest Portion of Rental Expense..................... 83
Total Fixed Charges................................ $ 349
Ratio of Earnings to Fixed Charges..................... 6.3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the unaudited balance
sheet of Lucent at June 30, 1997 and the unaudited
consolidated statement of income for the
nine-month period ended June 30, 1997 and is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
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