1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1997 639,926,170 common shares were outstanding.
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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 Six
Months Ended Months Ended
March 31, March 31,
1997 1996 1997 1996
Revenues............................. $5,149 $4,577 $13,087 $12,004
Costs................................ 2,981 2,753 7,277 7,855
Gross margin......................... 2,168 1,824 5,810 4,149
Operating Expenses
Selling, general and
administrative expenses ........... 1,287 1,341 2,746 4,387
Research and development expenses ... 738 583 1,451 1,296
Total operating expenses............. 2,025 1,924 4,197 5,683
Operating income(loss)............... 143 (100) 1,613 (1,534)
Other income - net .................. 40 7 49 129
Interest expense..................... 77 76 156 153
Income(loss) before income taxes..... 106 (169) 1,506 (1,558)
Provision(benefit) for income taxes.. 40 (66) 581 (438)
Net income(loss)................... $ 66 $ (103) $ 925 $(1,120)
Weighted average common shares
outstanding (millions)............. 640.3 524.6 639.3 524.6
Net income(loss)
per common share................... $ 0.10 $(0.20) $ 1.45 $ (2.13)
Dividends declared
per common share................... $ 0.075 n/a $ 0.15 n/a
See Notes to Consolidated Financial Statements.
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3
Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
March 31, September 30,
1997 1996
ASSETS
Cash and cash equivalents.............. $ 2,013 $ 2,241
Accounts receivable less
allowances of $301 at
March 31, 1997 and $273 at
September 30, 1996 ................... 4,785 4,914
Inventories............................ 2,733 3,288
Contracts in process (net of contract
billings of $1,479 at
March 31, 1997 and $708 at
September 30, 1996.................... 630 505
Deferred income taxes - net............ 1,544 1,617
Other current assets................... 565 216
Total current assets................... 12,270 12,781
Property, plant and equipment, net
of accumulated depreciation of
$6,309 at March 31, 1997 and
$6,333 at September 30, 1996......... 4,760 4,687
Prepaid pension costs.................. 3,013 2,828
Deferred income taxes - net............ 1,064 979
Capitalized software development costs. 340 362
Other assets........................... 1,039 989
TOTAL ASSETS........................... $22,486 $22,626
See Notes to Consolidated Financial Statements.
(CONT'D)
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4
Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
March 31, September 30,
1997 1996
LIABILITIES
Accounts payable....................... $ 1,278 $ 1,900
Payroll and benefit-related
liabilities.......................... 1,954 2,492
Postretirement and postemployment
benefit liabilities.................. 237 220
Debt maturing within one year.......... 2,274 2,363
Other current liabilities.............. 3,602 3,738
Total current liabilities.............. 9,345 10,713
Postretirement and postemployment
benefit liabilities.................. 5,911 5,642
Long-term debt ........................ 1,678 1,634
Other liabilities...................... 1,964 1,951
Total liabilities ..................... 18,898 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:
639,085,958 at March 31, 1997
636,662,634 at September 30, 1996..... 6 6
Additional paid-in capital............. 2,698 2,595
Guaranteed ESOP obligation............. (92) (106)
Foreign currency translation........... (107) (16)
Retained earnings...................... 1,083 207
Total shareowners' equity............... 3,588 2,686
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY................... $22,486 $22,626
See Notes to Consolidated Financial Statements.
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5
Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Six Months
Months Ended March 31,
1997 1996
Operating Activities
Net income(loss)......................... $925 $(1,120)
Adjustments to reconcile net income(loss)
to net cash provided by (used in)
operating activities:
Business restructuring charge......... (54) 2,613
Asset impairment and other charges.... (46) 188
Depreciation and amortization......... 681 694
Provision for uncollectibles.......... 63 35
Deferred income taxes................. (11) (782)
Decrease (increase)in
accounts receivable ................ 111 (2,688)
Decrease (increase)in inventories
and contracts in process............ 390 (394)
(Decrease)increase in
accounts payable.................... (679) 571
Changes in other operating assets
and liabilities..................... (869) 158
Other adjustments for noncash
items - net......................... (108) (57)
Net cash provided by (used in)
operating activities.................... 403 (782)
Investing Activities
Capital expenditures .................... (681) (761)
Proceeds from the sale or disposal of
property, plant and equipment.......... 36 110
Purchases of equity investments.......... (89) (53)
Sales of equity investments.............. - 69
Acquisitions, net of cash acquired....... (135) (234)
Dispositions............................. 181 -
Other investing activities - net......... 80 (154)
Net cash used in investing activities.... (608) (1,023)
Financing Activities
Repayments of long-term debt ............ (7) (27)
Issuance of long-term debt............... 42 22
Proceeds of Working Capital Facility..... - 1,914
Proceeds of issuance of common stock..... 128 -
Dividends paid........................... (96) -
Repayments of debt sharing
agreement - net........................ - (67)
Transfers to AT&T........ ............... - (203)
Decrease in short-term
borrowings - net....................... (84) (66)
Net cash provided by
(used in) financing activities.......... (17) 1,573
See Notes to Consolidated Financial Statements.
(CONT'D)
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6
Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended March 31,
1997 1996
Effect of exchange rate
changes on cash........................ (6) (7)
Net decrease in cash and
cash equivalents....................... (228) (239)
Cash and cash equivalents
at beginning of year................... 2,241 413
Cash and cash equivalents
at end of period....................... $ 2,013 $ 174
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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 six month period ended
March 31, 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 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 Annual Report
on Form 10-K for the period ended September 30, 1996 and the unaudited
consolidated financial statements and notes thereto included in the Company's
quarterly report on Form 10-Q for the period ended December 31, 1996.
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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 six month periods ended March 31, 1997, earnings per common
share was calculated by dividing the three month net income of $66 and the six
month net income of $925 by the weighted average shares that were outstanding
during the respective periods. For the three and six month periods ended March
31, 1996, loss per common share was calculated by dividing the three month net
loss of $103 and the six month net loss of $1,120 by the weighted average shares
that were outstanding during the respective periods. The loss per common share
for the three and six month periods ended March 31, 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 March 31, 1997 and September 30, 1996 were as follows:
March 31, September 30,
1997 1996
Completed goods ............... $1,489 $1,837
Work in process and
raw materials................ 1,244 1,451
Total inventories ............. $2,733 $3,288
The statement of cash flows for the six-month period ended March 31, 1996
excludes $2,000 million of customer accounts receivable retained by AT&T as well
as a net asset transfer of $144 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 six month period ended March 31, 1997, Lucent reversed $54 of business
restructuring and other charges primarily related to employee separations. The
reversal was 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 $80 and $195 were made for the three month and six month
periods ended March 31, 1997, respectively for the 1995 business restructuring
charge. The reserve for business restructuring as of March 31, 1997 was $1,007.
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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 initial 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 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 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 contract modifications. Lucent will continue
to assess the adequacy of these reserves. The initial network testing of the
Pacific Bell broadband network is expected to begin in calendar year 1998.
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.
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>
10
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 $66 million, or $0.10 per share for the quarter
ended March 31, 1997. The year-ago quarterly net loss was $103 million, $0.20
loss per share and $0.16 loss per share on a pro forma basis . For the current
six-month period, Lucent reported net income of $925 million, or $1.45 per share
compared with a net loss of $1,120 million, or $2.13 per share in the prior
year. On a pro forma basis, Lucent reported net income of $727 million, or $1.14
per share for the six-month period ended March 31, 1996. The pro forma
presentation of net income and earnings per share excludes $1,847 million of
after-tax restructuring 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 $143 million reflects an increase of $243 million in the
quarter compared with the same quarter in 1996 and was 2.8% percent of revenues.
For the six months ended March 31, 1997, operating income of $1,613 million
reflects an increase of $3,147 million, largely due to the restructuring charges
in the fourth quarter of calendar year 1995. Excluding the impact of
restructuring charges, operating income for the six months ended March 31, 1997
increased $346 million to 12.3% of revenues. For both the three and six 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
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 at and for the six month period
ended March 31, 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.
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11
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 the largest 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 MARCH 31, 1997 VERSUS THREE MONTHS ENDED
MARCH 31, 1996
Total revenues increased 12.5% to $5,149 million in the quarter ended March 31,
1997 compared with the same quarter of 1996, 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 and Other Systems and
Products. Revenue growth was driven by domestic and international sales. For the
quarter, total international revenues increased 25.5% 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 March 31,
1997 and 1996:
Three Months
Ended
March 31,
Dollars in Millions --------------------------------
1997 1996
------- -------
Systems for Network Operators........ $2,930 57% $2,376 52%
Business Communications Systems...... 1,308 25 1,146 25
Microelectronic Products............. 615 12 520 11
Consumer Products.................... 174 4 295 7
Other Systems and Products........... 122 2 240 5
Total................................ $5,149 100% $4,577 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $554 million, or 23.3% in
1997 compared with the same quarter in 1996. The increase resulted from higher
sales of wireless systems, switching, software 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. 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.
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12
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
20.6% 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 March 31, 1997 increased
32.4% compared with the same quarter in 1996 due to revenue growth in all major
international regions. International revenues represented 24.5% of revenues from
Systems for Network Operators for the quarter ended March 31, 1997 compared with
22.9% in the same quarter in 1996.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $162 million, or 14.1%
compared with the year-ago quarter. This increase was led by sales of
DEFINITY(R), SYSTIMAX(R) structured cabling, 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 17.6%, due to growth in all major international regions.
International revenue represented 15.3% of the revenue for the quarter. For the
quarter ended March 31, 1997, domestic revenues increased 13.5% as compared to
the same quarter of 1996.
Revenues from MICROELECTRONIC PRODUCTS increased $95 million, or 18.3% compared
with the year-ago quarter due to higher sales of customized chips for computing
and communications, including components for local area networks, data
networking, high-end computer workstations, wireless telephones, as well as
increased revenues from licensing intellectual property. Domestic revenues
increased 17.7% compared to the same quarter in 1996, led by sales to original
equipment manufacturers ("OEMs")and increases in intellectual property revenue.
International revenues increased 18.8%. The growth in international revenues was
driven by sales in the Asia/Pacific and European regions. International revenues
represented 52.4% of the Microelectronic Products sales for the quarter ended
March 31, 1997 which was flat in comparison to the same period of 1996.
Revenues from CONSUMER PRODUCTS decreased $121 million, or 41.0% compared with
the year-ago quarter. 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 continued decrease in phone
rental revenues. The closing of the Phone Center Stores accounted for $63
million of the decline in revenues for the quarter.
Revenues from OTHER SYSTEMS AND PRODUCTS decreased $118 million, or 49.2%
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 $228 million, or 8.3% compared with the year-ago quarter
resulting primarily from the 12.5% increase in revenues. Gross margin percentage
increased to 42.1% from 39.9% in the year-ago quarter reflects the benefits
associated with business productivity improvement initiatives as well as a
favorable mix of higher margin products.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
13
Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OPERATING EXPENSES - THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED
MARCH 31, 1996
Selling, general and administrative expenses decreased $54 million, or 4.0%
compared with the same quarter in 1996. This decrease was attributed 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. 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 25.0% for the quarter ended March 31, 1997 as
compared to 29.3% for the same quarter in 1996.
Research and development expenses increased $155 million during the quarter
ended March 31, 1997 compared to the same prior year quarter. This was primarily
due to expenditures in support of the wireless infrastructure, microelectronic
products and multimedia communications systems. Research and development
expenses represented 14.3% of revenues for the quarter ended March 31, 1997 as
compared with 12.7% of revenues in the same quarter of 1996.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
Other income -- net increased $33 million for the quarter ended March 31, 1997
compared with the same quarter in 1996. This increase was largely due to higher
interest income earned in 1997.
Interest expense for the quarter ended March 31, 1997 was relatively flat
compared with the same quarter in 1996.
The effective income tax rate of 38.1% for the quarter ended March 31, 1997
decreased from the effective income tax rate of 39.1% in the same quarter of
1996 primarily due to increased research tax credits.
REVENUES - SIX MONTHS ENDED MARCH 31, 1997 VERSUS SIX MONTHS ENDED MARCH 31,
1996
Total revenues increased to $13,087 million, or 9.0% compared with the same
six-month period a year-ago, primarily due to increases 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 and Other Systems and Products.
Revenue growth was driven by domestic and international sales. For the six
months ended March 31, 1997, international revenues increased 9.7% compared with
the same period a year-ago.
<PAGE>
14
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 six months ended March 31, 1997
and 1996:
Six Months
Ended
March 31,
Dollars in Millions --------------------------------
1997 1996
------- -------
Systems for Network Operators........ $ 7,956 61% $ 6,931 58%
Business Communications Systems...... 3,041 23 2,672 22
Microelectronic Products............. 1,286 10 1,079 9
Consumer Products.................... 504 4 846 7
Other Systems and Products........... 300 2 476 4
Total................................ $13,087 100% $12,004 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $1,025 million, or 14.8%
compared with the same six-month period a year-ago. The increase was driven by
higher sales of wireless systems, fiber optic systems, 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.
During the current period, Lucent began recognizing revenues related to its PCS
contracts as customers accepted networks for commercial service.
Revenues from Systems for Network Operators in the United States increased by
18.4% over the year-ago six 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 6.4% compared with the same six-month period in 1996. International
revenues represented 27.9% of revenues from Systems for Network Operators for
1997 compared with 30.1% in same six-month period in 1996.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $369 million, or 13.8%
compared with the same six month period a year-ago. This increase was led by
sales of DEFINITY(R),integrated offers, as well as higher revenue from small
business systems. This increase is partially offset by the continued erosion of
the rental base. International revenues increased by 10.6%, largely due to
growth in the Asia/Pacific and Caribbean/Latin America regions. International
revenue represented 14.8% of the revenue for 1997. For 1997, domestic revenues
increased 14.4% as compared with the same six month period of 1996.
Revenues from MICROELECTRONIC PRODUCTS increased $207 million, or 19.2% for 1997
compared with the same six-month period a year-ago due to higher sales of
customized chips for computing and communications, including components for
local area networks and data networking, high-end computer workstations,
wireless telephones, as well as increased revenues from licensing intellectual
property. Domestic revenues increased 12.1% compared with the same period in
1996, led by sales to OEMs. International revenues increased 26.4%. The growth
in international revenues was driven by sales in the Asia/Pacific and European
regions. International revenues represented 52.5% of the Microelectronic
Products sales compared with 49.5% for the same six-month period of 1996.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
15
Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues from CONSUMER PRODUCTS decreased $342 million, or 40.4% compared with
the same six-month period a year-ago. 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 continued
decrease in phone rental revenues. The closing of the Phone Center Stores
accounted for $198 million of the decline in revenues for the six-month period
of 1997.
Revenues from OTHER SYSTEMS AND PRODUCTS decreased $176 million, or 37.0%
compared with the same six-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 decreased $578 million, or 7.4% compared with the same six-month
period a year-ago due to the restructuring charges incurred during the quarter
ended December 31, 1995. Gross margin percentage increased to 44.4% from 34.6%
in the year-ago period. Without the restructuring charges, costs increased $314
million primarily due to increases in sales volume. Excluding restructuring
charges, gross margin as a percentage of revenue for the six-month period in
1996 was 42.0%. The increase in gross margin percentage for the current six
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 high margin rental revenues.
OPERATING EXPENSES - SIX MONTHS ENDED MARCH 31, 1997 VERSUS SIX MONTHS ENDED
MARCH 31, 1996
Selling, general and administrative expenses decreased $1,641 million, or 37.4%
compared with the same period a year-ago. This decrease is attributed 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 1.8 percentage
points to 21.0% of revenue. The expense levels were relatively flat in absolute
dollars. 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
and the reversal of $54 million of business restructuring reserves.
Research and development expenses increased $155 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
$419 million, primarily due to expenditures in support of the wireless
infrastructure, microelectronic products, 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 11.1% of revenues as compared with 10.8% of revenues in the same
period of 1996. Excluding 1995 restructuring charges, research and development
expenses as a percentage of revenues increased 2.5 percentage points from 8.6%
in the same period a year-ago.
<PAGE>
16
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 - SIX
MONTHS ENDED MARCH 31, 1997 VERSUS SIX MONTHS ENDED MARCH 31, 1996
Other income -- net decreased $80 million compared with the same six-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 six-month period of 1997.
Interest expense was relatively flat compared with the same six-month period in
1996.
The effective income tax rate of 38.6% for 1997 increased from the effective
income tax rate of 28.1% on the pre-tax loss in the same six-month period of
1996 which resulted from the business restructuring charges incurred in the
quarter ended December 31, 1995. Excluding the 1995 restructuring charges, the
effective income tax rate decreased from 41.5% for the six months ended March
31, 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 remained relatively flat since September 30, 1996, decreasing by
$140 million, or 0.6%. This change was due to decreases in inventories and cash.
The decrease in cash was due to the payment of employee bonuses, payment to
vendors and the acquisition of Agile. These decreases were offset by increases
in other current assets and prepaid pension costs.
Working capital, defined as current assets less current liabilities, increased
$857 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.
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. During the quarter ended March 31, 1997, Lucent entered into two medium
term note offerings totaling $40 million. The proceeds from the offerings were
used to pay down a portion of the Company's commercial paper. Lucent also
reduced its domestic credit facility from $6.0 billion to $4.0 billion. At March
31, 1997, Lucent maintained approximately $4,600 million in credit facilities of
which a portion is used to support Lucent's commercial paper program. At March
31, 1997 $4,300 million was 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, although
there can be no assurance that this will be the case.
<PAGE>
17
Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In recent years, the purchasing behavior of Lucent's large customers has
increasingly been characterized by the use of fewer, larger contracts. This
trend is expected to intensify, and contributes to the variability of Lucent's
results. Such larger purchase contracts typically involve longer negotiating
cycles, require the dedication of substantial amounts of working capital and
other 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, as well as requiring 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 Spectrum LP ("Sprint PCS") long-term financing of $1,800 million
for purchasing equipment and services for its PCS network.
On March 25, 1997, Lucent and Goldman Sachs Credit Partner L.P. ("Goldman
Sachs") entered into an agreement whereby Goldman Sachs committed to purchase at
par and without recourse $500 million of loans and undrawn commitments provided
by Lucent to Sprint PCS. The loans and undrawn commitments were provided to
Sprint PCS under the $1,800 million credit facility associated with Lucent's
contract with Sprint PCS to provide wireless equipment and systems. The closing
of the purchase of loans and undrawn commitments by Goldman Sachs is expected to
occur in the quarter ending June 30, 1997.
In addition, on April 18, 1997, Sprint Corporation (a partner in Sprint PCS) and
Lucent, entered into an agreement whereby Lucent will assign to Sprint
Corporation $300 million of currently undrawn commitments under Lucent's $1,800
million credit facility with Sprint PCS. The closing of the assignment is
expected to occur in the quarter ending June 30, 1997.
Lucent has also entered into credit agreements to extend credit, subject to
completion of final contracts and meeting certain conditions, of up to
approximately $850 million in total to three other PCS operators for possible
future sales. 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>
18
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 assumed 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 March 31,
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 for the six-months ended March 31, 1997
was $403 million compared with cash used in operating activities of $782 million
in the same year-ago period. This increase in cash was largely due to the
retention of $2,000 million of customer accounts receivable by AT&T in the
six-month period a year-ago, partially 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 utilization by AT&T of the $500 million cash advance made
to Lucent in April 1996.
Cash payments of $80 million and $195 million were made for the three-month and
six-month periods ended March 31, 1997, respectively, for the business
restructuring charge recorded in the quarter ended December 31, 1995. The
remaining balance in the business restructuring reserve will result in
approximately $1.0 billion 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 17,000 positions have been eliminated as of
March 31, 1997.
Comparing the six months ended March 31, 1997 and 1996, cash used in investing
activities decreased to $608 million from $1,023 million primarily due to a
decrease in acquisitions and an increase in dispositions. Lucent acquired Agile
and disposed of its interconnect products and custom manufacturing services
businesses during fiscal year 1997. In the six months ended March 31, 1996,
Lucent acquired several manufacturing and other operations of certain
subsidiaries of Philips Electronics NV.
Capital expenditures, the largest component of investing activities, were $681
million and $761 million for the six month periods ended March 31, 1997 and
1996, respectively. Capital expenditures 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.
Cash used in financing activities for the six months ended March 31, 1997 was
$17 million compared with cash provided by financing activities of $1,573
million in the same period a year-ago. This decrease was primarily due to
borrowings in the first calendar quarter of 1996 under the Working Capital
Facility entered into by Lucent.
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.
<PAGE>
19
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 52.4% at March
31, 1997 compared to 59.8% on 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 initial 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 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 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 contract modifications. Lucent will continue
to assess the adequacy of these reserves. The initial network testing of the
Pacific Bell broadband network is expected to begin in calendar year 1998.
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>
20
Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
This Form 10-Q 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, 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; the 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>
21
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, some of
which may vary from year to year, 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>
22
Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RECENT PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(the "SFAS 125"). SFAS 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996.
Lucent adopted SFAS 125 in the quarter ended March 31, 1997. The adoption of
SFAS 125 had no impact on Lucent's consolidated results of operations, financial
position or cash flows.
In February 1997, 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. For Lucent, SFAS
128 will be effective for the quarter ending December 31, 1997. The adoption of
SFAS 128 is not expected to impact Lucent's earnings per share.
<PAGE>
23
Form 10-Q - Part II
Part II - Other Information
Item 1. Legal Proceedings.
On March 13, 1997, the action against the Company filed by Bell Atlantic
Corporation ("Bell Atlantic") and DSC Communications Corporation ("DSC") in the
United States District Court for the Eastern District of Texas on February 14,
1996 was dismissed. The dismissal followed a settlement between the Company and
Bell Atlantic that involves long-term volume purchasing commitments by Bell
Atlantic, and the voluntary dismissal by DSC of its claims against Lucent and
dismissal by Lucent of its counterclaim against DSC. No cash payments were
involved with Bell Atlantic or DSC. The complaint in this action (reported in
the Company's Form 10-K for the transition period ended September 30, 1996)
alleged, among other things, that AT&T Corp. or the Company monopolized or
attempted to monopolize alleged markets for communications transmission
equipment, related software and caller identification services, and sought
injunctive relief and damages.
Item 4. Submission of Matters to a Vote of Security Holders.
Lucent held its 1997 Annual Meeting of Shareowners on February 19, 1997. At that
meeting, shareowners elected three individuals as Directors of the Company for
terms to expire at the Annual Meeting to be held in the year 2000. The persons
elected and the results of the voting are as follows:
Votes Votes
For Withheld
Carla Hills 505,092,493 7,799,422
Drew Lewis 504,933,708 7,958,207
Donald S. Perkins 504,717,494 8,174,421
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>
24
Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lucent Technologies Inc.
Date May 14, 1997
James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
25
Form 10-Q
Exhibit Index
Exhibit
Number
12 Computation of Ratio of Earnings to
Fixed Charges
27 Financial Data Schedule
Exhibit 12
Form 10-Q
For the Six
Months Ended
March 31, 1997
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Six
Months Ended
March 31, 1996
Earnings Before Income Taxes........................... $ 1,506
Less Interest Capitalized during
the Period........................................... 7
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... 1
Add Fixed Charges...................................... 236
Total Earnings ........................................ $ 1,734
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 178
Interest Portion of Rental Expense..................... 58
Total Fixed Charges................................ $ 236
Ratio of Earnings to Fixed Charges..................... 7.3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the unaudited balance
sheet of Lucent at March 31, 1997 and the
unaudited consolidated statement of income for the
six-month period ended March 31, 1997 and is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 2,013
<SECURITIES> 0
<RECEIVABLES> 5,086
<ALLOWANCES> 301
<INVENTORY> 2,733
<CURRENT-ASSETS> 12,270
<PP&E> 11,069
<DEPRECIATION> 6,309
<TOTAL-ASSETS> 22,486
<CURRENT-LIABILITIES> 9,345
<BONDS> 1,678
0
0
<COMMON> 6
<OTHER-SE> 3,582
<TOTAL-LIABILITY-AND-EQUITY> 22,486
<SALES> 13,087
<TOTAL-REVENUES> 13,087
<CGS> 7,277
<TOTAL-COSTS> 7,277
<OTHER-EXPENSES> 4,197
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 1,506
<INCOME-TAX> 581
<INCOME-CONTINUING> 925
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 925
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 0
</TABLE>
