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 December 31, 1996
OR
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 001-11639
LUCENT TECHNOLOGIES INC.
A Delaware I.R.S. Employer
Corporation No. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone - Area Code 908-582-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes .X.. No ....
At January 31, 1997 638,169,488 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
Months Ended
December 31,
1996 1995
Revenues............................. $ 7,938 $ 7,427
Costs................................ 4,296 5,102
Gross margin......................... 3,642 2,325
Operating Expenses
Selling, general and
administrative expenses ........... 1,459 3,046
Research and development expenses ... 713 713
Total operating expenses............. 2,172 3,759
Operating income(loss)............... 1,470 (1,434)
Other income - net .................. 9 122
Interest expense..................... 79 77
Income (loss) before income taxes.... 1,400 (1,389)
Provision (benefit)for income taxes.. 541 (372)
Net income(loss)..................... $ 859 $(1,017)
Weighted average common shares
outstanding (millions)............. 638.2 524.7
Net income(loss)
per common share................... $ 1.35 (1.94)
Dividends declared
per common share................... $ 0.075 -
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)
December 31, September 30,
1996 1996
ASSETS
Cash and cash equivalents.............. $ 3,177 $ 2,241
Accounts receivable less
allowances of $286 at
December 31, 1996 and $273 at
September 30, 1996 ................... 5,885 4,914
Inventories............................ 2,459 3,288
Contracts in process (net of contract
billings of $1,186 at
December 31, 1996 and $708 at
September 30, 1996.................... 493 505
Deferred income taxes - net............ 1,690 1,617
Other current assets................... 266 216
Total current assets................... 13,970 12,781
Property, plant and equipment, net
of accumulated depreciation of
$6,327 at December 31, 1996 and
$6,333 at September 30, 1996......... 4,687 4,687
Prepaid pension costs.................. 2,922 2,828
Deferred income taxes - net............ 973 979
Capitalized software development costs. 344 362
Other assets........................... 1,153 989
TOTAL ASSETS........................... $ 24,049 $ 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)
December 31, September 30,
1996 1996
LIABILITIES
Accounts payable....................... $ 1,577 $ 1,900
Payroll and benefit-related
liabilities.......................... 2,590 2,492
Postretirement and postemployment
benefit liabilities.................. 241 220
Debt maturing within one year.......... 2,336 2,363
Other current liabilities.............. 4,356 3,738
Total current liabilities.............. 11,100 10,713
Postretirement and postemployment
benefit liabilities.................. 5,820 5,642
Long-term debt ........................ 1,651 1,634
Other liabilities...................... 1,960 1,951
Total liabilities ..................... 20,531 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:
637,424,491 at December 31, 1996
636,662,634 at September 30, 1996..... 6 6
Additional paid-in capital............. 2,622 2,595
Guaranteed ESOP obligation............. (106) (106)
Foreign currency translation........... (22) (16)
Retained earnings...................... 1,018 207
Total shareowners' equity.............. 3,518 2,686
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY................... $24,049 $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 Three
Months Ended December 31,
1996 1995
Operating Activities
Net income(loss)......................... $ 859 $ (1,017)
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......... 387 389
Provision for uncollectibles.......... 42 19
Deferred income taxes................. (67) (745)
(Increase) in accounts receivable .... (1,025) (1,608)
Decrease in inventories
and contracts in process............ 813 215
Increase (decrease)
in accounts payable................. (319) 392
Changes in other operating assets
and liabilities..................... 645 503
Other adjustments for noncash
items - net......................... 6 34
Net cash provided by
operating activities.................. 1,241 983
Investing Activities
Capital expenditures .................... (344) (493)
Proceeds from the sale or disposal of
property, plant and equipment.......... 3 104
Purchases of equity investments.......... (16) (50)
Acquisitions, net of cash acquired....... (124) -
Dispositions............................. 179 -
Other investing activities - net......... 33 (133)
Net cash used in investing activities.... (269) (572)
Financing Activities
Repayments of long-term debt ............ (6) (14)
Repayments of debt sharing
agreement - net........................ - (67)
Proceeds of issuance of common stock..... 27 -
Dividends paid........................... (48) -
Transfers to AT&T........................ - (203)
Decrease in short-term borrowings - net.. (14) (89)
Net cash used in financing activities.... (41) (373)
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 Three
Months Ended December 31,
1996 1995
Effect of exchange rate
changes on cash........................ 5 (3)
Net increase in cash and
cash equivalents....................... 936 35
Cash and cash equivalents
at beginning of year................... 2,241 413
Cash and cash equivalents
at end of period....................... $3,177 $448
See Notes to Consolidated Financial Statements.
<PAGE>
7 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1. BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
On September 20, 1995, AT&T Corp. ("AT&T") announced its intention to create a
separate company comprised of the AT&T businesses and operations that now
comprise Lucent Technologies Inc. ("Lucent" or the "Company") and the associated
assets and liabilities of those businesses and operations, including Bell
Laboratories (the "Separation"). Lucent was incorporated on November 29, 1995
with 1,000 shares of Lucent common stock ("Common Stock"), authorized and
outstanding, all of which were owned by AT&T. On April 2, 1996, AT&T obtained an
additional 524,623,894 shares of Common Stock, and on April 10, 1996, Lucent
issued 112,037,037 shares in the Initial Public Offering ("IPO") for $27 per
share less underwriting discounts and commissions of $1.05 per share. 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.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Lucent pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of management, include all adjustments
necessary for a fair presentation of the results of operations, financial
position and cash flows for each period shown.
The consolidated financial statements presented for the three month period ended
December 31, 1995 reflects the results of operations and changes in cash flows
of the businesses transferred to Lucent in 1996 from AT&T as if Lucent were a
separate entity. The consolidated financial statements for 1995 have been
prepared using the historical results of operations and historical basis of the
assets and liabilities of these businesses. Additionally, the consolidated
financial statements of Lucent include the allocation of certain AT&T corporate
headquarters assets, liabilities and expenses relating to the Lucent businesses
that were transferred to Lucent from AT&T. Management believes 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.
EARNINGS(LOSS) PER COMMON SHARE
For the three month periods ended December 31, 1996 and 1995, net earnings(loss)
per common share was calculated by dividing the three month net income of $859
and the three month net loss of $1,017 by the weighted average shares that were
outstanding during the respective periods. The 1995 loss per common share
assumes that all shares issued to AT&T prior to the IPO were considered
outstanding since January 1, 1995. Determination of the weighted average shares
includes the impact of common stock equivalents.
<PAGE>
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
2. SUPPLEMENTARY BALANCE SHEET
Inventories at December 31, 1996 and September 30, 1996 were as follows:
December 31, September 30,
1996 1996
Completed goods ............... $ 1,065 $ 1,837
Work in process and
raw materials................ 1,394 1,451
Total inventories ............. $ 2,459 $ 3,288
3. SIGNIFICANT CUSTOMERS
For the quarters ended December 31, 1996 and 1995, Lucent recorded $1,204 and
$881, respectively, of revenues from AT&T.
At December 31, 1996, other current liabilities included a prepayment by AT&T of
$500 to be applied to AT&T's purchases that are due and payable on or after
January 1, 1997 for products, licensed materials and services from Lucent.
4. 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 quarter ended December 31, 1996, 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 $115 were made for the quarter ended December 31, 1996 for the
1995 business restructuring charge. The reserve for business restructuring as of
December 31, 1996 was $1,087.
<PAGE>
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
5. COMMITMENTS AND CONTINGENCIES
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 46 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, 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.
Lucent has several significant contracts for the sale of infrastructure systems
to network operators which extend over a multi-year period, 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. 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.
<PAGE>
10 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Lucent Technologies Inc. ("Lucent" or the "Company") reported net income of $859
million, or $1.35 per share for the quarter ended December 31, 1996. The
year-ago quarterly net loss was $1,017 million, or $1.94 per share. On a pro
forma basis, net income and earnings per share for the quarter ended December
31, 1995 was $830 million and $1.30, respectively. 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, 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 increased $2,904 million in the quarter compared with the same
quarter in 1995 and is 18.5% as a percent of revenues. The increase was largely
due to the restructuring charges in the fourth quarter of calendar year 1995.
Excluding the impact of restructuring charges, operating income increased $103
million reflecting the 6.9% revenue growth, partially offset by increases in
research and development expenses.
Prior to February 1, 1996, AT&T conducted the Company's businesses through
various divisions and subsidiaries. On February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses, except that AT&T retained accounts receivable having a face
amount of approximately $2,000 million. The 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 period ended
December 31, 1995 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. In the past, Lucent has reported net losses in the
first quarter of each calendar year.
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>
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 DECEMBER 31, 1996 VERSUS THREE
MONTHS ENDED DECEMBER 31, 1995
Total revenues increased to $7,938 million, or 6.9% in the quarter ended
December 31, 1996 compared with the same quarter of 1995, primarily due to gains
in sales from Systems for Network Operators, Microelectronic Products and
Business Communications Systems. The overall revenue growth was partially offset
by the continued decline in revenue from Consumer Products and Other Systems and
Products. Revenue growth was driven by domestic sales as well as increases in
international sales.
The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the three months ended December 31,
1996 and 1995:
Three Months
Ended
December 31,
Dollars in Millions --------------------------------
1996 1995
------- -------
Systems for Network Operators........ $5,026 63% $4,555 61%
Business Communications Systems...... 1,733 22 1,526 21
Microelectronic Products............. 671 9 559 8
Consumer Products.................... 330 4 551 7
Other Systems and Products........... 178 2 236 3
Total................................ $7,938 100% $7,427 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $471 million, or 10.3% in
1996 compared with the same quarter in 1995. The increase was driven by higher
sales of wireless systems, fiber optic systems and professional services. Demand
for those products was driven by second line subscriber growth in businesses and
residences for internet services and data traffic. During the current quarter,
Lucent began recognizing revenue related to its personal comunications services
("PCS") contracts as systems went on-line.
<PAGE>
12 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Sales from Systems for Network Operators in the United States increased by 16%
over the yearago quarter. The revenue increase in the United States was led by
sales to United States service providers, including non-traditional customers
such as competitive access providers and cable television providers.
International revenues for the quarter ended December 31, 1996 remained
relatively flat compared with the same quarter in 1995. International revenue
for 1996 includes approximately $151 million in revenue resulting from the
operations of certain subsidiaries of Philips Electronics NV ("Philips")
acquired by Lucent. International revenues represented 30.4% of revenues from
Systems for Network Operators for the quarter ended December 31, 1996 compared
with 33.9% in same quarter in 1995.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $207 million, or 13.6%
compared with the same quarter in 1995. This increase was led by sales of
DEFINITY(R), integrated offers such as call centers, as well as higher revenue
from small business systems and advanced multimedia communications systems. This
increase is partially offset by the continued erosion of the rental base.
International revenues increased by 9.6%, largely due to growth in the
Asia/Pacific and Caribbean/Latin America regions. International revenue
represented approximately 15% of the revenue for the quarter. For the quarter
ended December 31, 1996, domestic revenues increased 14.3% as compared to the
same quarter of 1995.
Sales of MICROELECTRONIC PRODUCTS increased $112 million, or 20.0% compared with
the same quarter in 1995 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 and computer
modems. Domestic revenues increased 7.4% compared to the same quarter in 1995,
led by sales to original equipment manufacturers ("OEMs"). International
revenues increased 34.2%. The growth in international revenues was driven by
sales in the Asia/Pacific and European regions. International revenues
represented 52.6% of the Microelectronic Products sales in the quarter ended
December 31, 1996 compared with 47.0% for the same period of 1995.
Revenues from CONSUMER PRODUCTS sales decreased $221 million, or 40.1% compared
with the same quarter in 1995. The decline in revenues was primarily due to the
decrease in product sales related to the closing of the Phone Center Stores, the
discontinuance of unprofitable product lines and the continued decrease in phone
rentals. Consumer Products will continue to distribute its products through
retailers.
Revenues from sales of OTHER SYSTEMS AND PRODUCTS decreased $58 million, or
24.6% compared with the same quarter in 1995. The reduction in revenues was
largely due to the sale of Lucent's data communications and custom manufacturing
systems businesses.
Total costs decreased $806 million, or 15.8% in 1996 compared with the same
quarter in 1995 due to the restructuring charges in 1995. Without restructuring,
costs increased $86 million primarily due to increases in sales volume. As a
percentage of revenue, gross margin increased to 45.9% from 31.3% in the
year-ago quarter. Excluding restructuring, gross margin as a percentage of
revenue for the quarter ended December 31, 1995 was 43.3%. The increase in gross
margin percentage was due to overall favorable changes in the mix of hardware
revenues offset in part by the erosion of high margin rental revenues.
- --------------------------------------
(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 DECEMBER 31, 1996 VERSUS THREE
MONTHS ENDED DECEMBER 31, 1995
Selling, general and administrative expenses decreased $1,587 million, or 52.1%
compared with the same quarter in 1995. This decrease is attributed to the
restructuring charge of $1,645 million in the quarter ended December 31, 1995.
Without restructuring, selling, general and administrative expenses increased by
$58 million, or 4.1%. This increase was due in part from the start-up costs of
$39 million associated with the launch of a new company, such as advertising and
creating a new information systems infrastructure, as well as expenses
associated with the operations of Philips and additional expenses incurred as a
result of higher sales volume. These increases were offset in part by the
reversal of calendar year 1995 business restructuring reserves of $54 million.
Selling, general and administrative expenses as a percentage of revenues were
18.4% for the quarter ended December 31, 1996 as compared to 41.0% for the same
quarter in 1995. Excluding the impact of restructuring, selling, general and
administrative expenses as a percentage of revenues for the quarter ended
December 31, 1995 were 18.9%.
Research and development expenses were comparable for the quarters ended
December 31, 1996 and 1995. Excluding the impact of restructuring charges for
the quarter ended December 31, 1995, research and development expenses increased
by $264 million, primarily due to expenditures in support of the wireless
infrastructure, microelectronic products 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 9.0% of revenues for the quarter
ended December 31, 1996 as compared with 9.6% of revenues in the same quarter of
1995. Excluding 1995 restructuring charges, research and development expenses as
a percentage of revenues increased 3.0 percentage points from 6.0% for the
quarter ended December 31, 1995.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED DECEMBER 31, 1996 VERSUS THREE MONTHS ENDED DECEMBER 31, 1995
Other income -- net decreased $113 million for the quarter ended December 31,
1996 compared with the same quarter in 1995. This decrease was largely due to a
gain recognized in the December 31, 1995 quarter resulting from an adjustment of
market value for securities held for trade.
Interest expense for the quarter ended December 31, 1996 was relatively flat
compared with the same quarter in 1995.
The effective income tax rate of 38.6% for the quarter ended December 31, 1996
increased from the effective income tax benefit rate of 26.8% in the same
quarter of 1995 which resulted from the 1995 business restructuring charges.
Excluding 1995 restructuring charges, the effective income tax rate decreased
from 41.2% for the quarter ended December 31, 1995 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.
<PAGE>
14 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY
Total assets increased $1,423 million, or 6.3%, from fiscal year-end 1996. This
overall increase was due to an increase in cash and cash equivalents of $936
million and an increase of receivables of $971 million, offset by a decrease in
inventories of $829 million. The increase in cash was generated by cash flow
from operations. The increase in receivables and decrease in inventories is
consistent with the cyclical nature of business, when receivables are at their
highest levels and inventories at their lowest levels at the close of the
calendar year.
Working capital, defined as current assets less current liabilities, increased
$802 million from fiscal year-end 1996 primarily resulting from asset increases
discussed above and decreases in accounts payable offset by an increase in other
current liabilities for accrued income taxes.
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. At December 31, 1996, Lucent also maintained approximately $6,400
million in credit facilities of which a portion is used to support Lucent's
commercial paper program. At December 31, 1996, approximately $6,200 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.
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 contract termination, as well as 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 long-term financing of $1,800 million for purchasing
equipment and services for its PCS network. Payment of quarterly interest on
each borrowing may be deferred at the borrower's option for up to two years.
Lucent is currently discussing with financial institutions potential
alternatives to sell loans it may make under the credit agreement, which will
depend, among other things, on the market conditions and requirements at the
time. Lucent has also entered into a credit agreement to provide, or committed
to providing subject to completion of final contracts and certain conditions, up
to approximately $850 million in total to three other PCS operators. 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. Lucent's nonderivative financial instruments include letters of
credit, commitments to extend credit and guarantees of debt.
<PAGE>
15 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, 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 December 31, 1996, 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 increased compared with the same period in
1995 due to a larger decrease in inventory levels, a slower increase in accounts
receivable and higher accrued income taxes.
Cash payments of $115 million were made for the quarter ended December 31, 1996
for the 1995 business restructuring charge. Of such total charges, approximately
$1.0 billion will result in future cash payments. Of the 23,000 employees that
Lucent announced it would downsize and that are included in the aforementioned
restructuring charges, approximately 15,600 people have left the payroll as of
December 31, 1996.
Comparing the quarters ended December 31, 1996 and 1995, the reduction in cash
used in investing was due to a decrease in capital expenditures. Capital
expenditures, the largest component, were $344 million and $493 million for the
three month periods ended December 31, 1996 and December 31, 1995, respectively.
Capital expenditures generally relate to expenditures for equipment and
facilities used in manufacturing and research and development, including
expansion of manufacturing capacity, and expenditures for cost reduction efforts
and international growth.
For the quarter ended December 31, 1996, cash used in financing activities
decreased primarily due to the transfers to AT&T during 1995. As of October 1,
1996, all transfers to and from AT&T were completed.
In 1995, Lucent relied on AT&T to provide financing for its operations. The cash
flows from financing activities in 1995 principally reflect changes in the
Company's assumed capital structure. These cash flows are not necessarily
indicative of the cash flows that would have resulted if the Company were a
stand-alone entity.
The ratio of total debt to total capital (debt plus equity) was 53.1% at
December 31, 1996 compared to 59.8% on at September 30, 1996.
OTHER
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 46 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
<PAGE>
16 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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.
Lucent has several significant contracts for the sale of infrastructure systems
to network operators which extend over a multi-year period, and expects to enter
into similar contracts in the future, with the uncertainties discussed above.
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.
In connection with the December sale of Lucent's interconnect products business,
Lucent entered into a contract to purchase products from Hicks, Muse, Tate and
Furst Incorporated of Dallas for approximately $1.8 billion over a five year
period. Lucent anticipates using these products in the normal course of
business.
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. 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.
For a description of the Future Factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion
thereof contained 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.
In addition, such forward-looking 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.
<PAGE>
17 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 issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (the "Standard"). This
Standard provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. This Standard
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996. For Lucent, this Standard will
be effective in the second quarter of the new fiscal year 1997. The adoption of
this Standard is not expected to impact Lucent's consolidated results of
operations, financial position or cash flows.
<PAGE>
18 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>
19 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 February 10, 1997
James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
20 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 Three
Months Ended
December 31, 1996
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
December 31, 1996
Earnings Before Income Taxes........................... $ 1,400
Less Interest Capitalized during
the Period........................................... 4
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... -
Add Fixed Charges...................................... 116
Total Earnings ........................................ $ 1,512
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 90
Interest Portion of Rental Expense..................... 26
Total Fixed Charges................................ $ 116
Ratio of Earnings to Fixed Charges..................... 13.0
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from the unaudited balance
sheet of Lucent at December 31, and the unaudited
consolidated statement of income for the
three-month period ended December 31, 1996 and is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,177
<SECURITIES> 0
<RECEIVABLES> 6,171
<ALLOWANCES> 286
<INVENTORY> 2,459
<CURRENT-ASSETS> 13,970
<PP&E> 11,014
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0
0
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