UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 001-11639
LUCENT TECHNOLOGIES INC.
A Delaware I.R.S. Employer
Corporation No. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone - Area Code 908-582-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At July 31, 1998, 1,314,985,384 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)
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues............................. $ 7,228 $ 6,340 $ 22,109 $19,427
Costs................................ 3,949 3,740 11,901 11,017
Gross margin......................... 3,279 2,600 10,208 8,410
Operating Expenses
Selling, general and
administrative expenses............ 1,566 1,404 4,608 4,150
Research and development expenses.... 947 816 2,705 2,188
In-process research
and development expenses........... 668 - 1,252 79
Total operating expenses............. 3,181 2,220 8,565 6,417
Operating income..................... 98 380 1,643 1,993
Other income(expense)-net............ (7) 41 203 90
Interest expense..................... 79 77 232 233
Income before income taxes........... 12 344 1,614 1,850
Provision for income taxes........... 245 131 1,032 712
Net income(loss)..................... $ (233) $ 213 $ 582 $ 1,138
Earnings(loss) per
common share - basic............... $ (0.18) $ 0.17 $ 0.45 $ 0.89
Earnings(loss) per
common share - diluted............. $ (0.18) $ 0.17 $ 0.44 $ 0.89
Dividends per common share........... $ 0.04 $0.0375 $ 0.115 $ 0.075
</TABLE>
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)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
ASSETS
<S> <C> <C>
Cash and cash equivalents.............. $ 1,099 $ 1,350
Accounts receivable less
allowances of $374 at
June 30, 1998 and $352 at
September 30, 1997 ................... 5,792 5,373
Inventories............................ 2,973 2,926
Contracts in process, net of contract
billings of $2,825 at
June 30, 1998 and $2,003 at
September 30, 1997.................... 1,405 1,046
Deferred income taxes - net............ 1,554 1,333
Other current assets................... 482 473
Total current assets................... 13,305 12,501
Property, plant and equipment, net
of accumulated depreciation of
$6,253 at June 30, 1998 and
$6,407 at September 30, 1997.......... 4,957 5,147
Prepaid pension costs.................. 3,597 3,172
Deferred income taxes - net............ 832 1,262
Capitalized software development costs. 289 293
Other assets........................... 2,299 1,436
TOTAL ASSETS........................... $25,279 $23,811
</TABLE>
See Notes to Consolidated Financial Statements.
<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)
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
LIABILITIES
<S> <C> <C>
Accounts payable....................... $ 1,727 $ 1,931
Payroll and benefit-related
liabilities.......................... 2,354 2,178
Postretirement and postemployment
benefit liabilities.................. 194 239
Debt maturing within one year.......... 2,423 2,538
Other current liabilities.............. 3,498 3,852
Total current liabilities.............. 10,196 10,738
Postretirement and postemployment
benefit liabilities.................. 6,286 6,073
Long-term debt ........................ 1,899 1,665
Other liabilities...................... 1,976 1,948
Total liabilities ..................... 20,357 20,424
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:
1,313,862,973 at June 30, 1998
1,284,125,312 at September 30, 1997... 13 13
Additional paid-in capital............. 4,251 3,047
Guaranteed ESOP obligation............. (63) (77)
Foreign currency translation........... (307) (191)
Retained earnings...................... 1,028 595
Total shareowners' equity............... 4,922 3,387
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY................... $25,279 $23,811
</TABLE>
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)
<TABLE>
<CAPTION>
For the Nine
Months Ended June 30,
1998 1997
<S> <C> <C>
Operating Activities
Net income............................... $ 582 $ 1,138
Adjustments to reconcile net income
to net cash provided by
operating activities:
Business restructuring
charge(reversal).................... (83) (69)
Asset impairment
and other charges(reversals)........ - (46)
Depreciation and amortization......... 988 1,042
Provision for uncollectibles.......... 105 95
Deferred income taxes................. 101 (146)
Purchased in-process research and
development......................... 1,252 79
Increase in accounts receivable ...... (832) (142)
Increase in inventories
and contracts in process............ (455) (107)
Decrease in accounts payable.......... (140) (567)
Changes in other operating assets
and liabilities..................... 322 (378)
Other adjustments for noncash
items - net......................... (379) (32)
Net cash provided by
operating activities.................... 1,461 867
Investing Activities
Capital expenditures .................... (1,006) (1,088)
Proceeds from the sale or disposal of
property, plant and equipment.......... 44 42
Purchases of equity investments.......... (187) (117)
Sales of equity investments.............. 27 12
Acquisitions, net of cash acquired....... (1,068) (144)
Dispositions............................. 276 181
Other investing activities - net......... (63) (11)
Net cash used in investing activities.... (1,977) (1,125)
Financing Activities
Repayments of long-term debt ............ (85) (13)
Issuance of long-term debt............... 337 52
Proceeds of issuance of common stock..... 350 197
Dividends paid........................... (150) (144)
Decrease in short-term
borrowings - net....................... (124) (591)
Net cash provided by(used in)
financing activities............... 328 (499)
</TABLE>
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)
<TABLE>
<CAPTION>
For the Nine
Months Ended June 30,
1998 1997
<S> <C> <C>
Effect of exchange rate
changes on cash........................ (63) (17)
Net decrease in cash and
cash equivalents....................... (251) (774)
Cash and cash equivalents
at beginning of period................. 1,350 2,241
Cash and cash equivalents
at end of period....................... $ 1,099 $ 1,467
</TABLE>
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. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Lucent Technologies Inc. ("Lucent" or the "Company") 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 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 year ended September 30, 1997 and the unaudited
consolidated financial statements and notes thereto included in the Company's
quarterly report on Form 10-Q for the quarterly periods ended December 31, 1997
and March 31, 1998.
The financial statements presented have been restated to reflect the two-for-one
split of Lucent's common stock which became effective on April 1, 1998.
2. ACQUISITIONS
Yurie Systems, Inc.
- -------------------
On May 29, 1998, Lucent completed the purchase of Yurie Systems, Inc. ("Yurie")
for $1,056 in cash and options. Lucent paid for the acquisition from its general
funds which consist of cash from operations and proceeds from short-term
borrowings. Yurie is a provider of asynchronous transfer mode ("ATM") access
technology and equipment for data, voice and video networking. The acquisition
was accounted for using the purchase method of accounting. The fair market value
of Yurie's assets and liabilities, which were independently determined, has been
included in the balance sheet as of June 30, 1998.
The acquired technology valuation included both existing technology and
in-process research and development. The valuation of these technologies was
made by applying the income forecast method which considers the present value of
cash flows by product lines.
Included in the purchase price was $620 of purchased in-process research and
development which was a one-time, non-cash, non-tax deductible charge to
earnings as this technology had not reached technological feasibility and has no
alternative use. This technology will require varying additional development,
coding and testing efforts over the next year before technological feasibility
can be determined. The remaining purchase price was allocated to tangible assets
and intangible assets, including goodwill and acquired technology, less
liabilities assumed.
Goodwill, acquired technology and other amortizable assets were valued at $419
and are being amortized over 7, 5 and 3 year periods, respectively.
<PAGE>
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Optimay GmbH
- -------------
On April 17, 1998, Lucent acquired Optimay GmbH ("Optimay") for $64 in cash.
Optimay specializes in the development of software products and services for
chip sets to be used for Global System for Mobile communications cellular
phones. The acquisition was accounted for using the purchase method of
accounting. The fair market value of Optimay's assets and liabilities, which
were independently determined, has been included in the balance sheet as of June
30, 1998.
The acquired technology valuation included both existing technology and
in-process research and development. The valuation of these technologies was
made by applying the income forecast method which considers the present value of
cash flows by product lines.
Included in the purchase price was $48 of purchased in-process research and
development which was a one-time, non-cash, non-tax deductible charge to
earnings as this technology had not reached technological feasibility and has no
alternative use. This technology will require varying additional development,
coding and testing efforts over the next year before technological feasibility
can be determined. The remaining purchase price was allocated to tangible assets
and intangible assets, including goodwill and acquired technology, less
liabilities assumed.
Goodwill and acquired technology were valued at $19 and are both being amortized
over 5 years.
Prominet Corporation
- ---------------------
In January 1998, Lucent completed the purchase of Prominet Corporation
("Prominet"), a participant in the emerging Gigabit Ethernet networking
industry, in a merger involving $164 of Lucent stock and options. Under the
terms of the agreement, Lucent had contingent obligations to pay former Prominet
shareowners $35 in stock. These obligations were satisfied in July 1998. The $35
of stock was paid by Lucent and recorded primarily as goodwill. The acquisition
was accounted for under the purchase method of accounting. The fair market value
of Prominet's assets and liabilities, which were independently determined, has
been included in the balance sheet as of June 30, 1998.
The acquired technology valuation included both existing technology and
in-process research and development. The valuation of these technologies was
made by applying the income forecast method which considers the present value of
cash flows by product lines.
Included in the purchase price was $157 of purchased in-process research and
development which was a one-time, non-cash, non-tax deductible charge to
earnings as this technology had not reached technological feasibility and has no
alternative use. This technology will require varying additional development,
coding and testing efforts over the next year before technological feasibility
can be determined. The remaining purchase price was allocated to tangible assets
and intangible assets, including goodwill and acquired technology, less
liabilities assumed.
Including the $35 contingent obligations, goodwill and acquired technology will
be valued at $58 and will be amortized over 5 and 6 year periods, respectively.
<PAGE>
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Livingston Enterprises
- ----------------------
In December 1997, Lucent completed the purchase of Livingston Enterprises, Inc.
("Livingston"), a provider of remote access networking solutions, in a merger
involving $610 of Lucent stock and options. The acquisition was accounted for
using the purchase method of accounting. The fair market value of Livingston's
assets and liabilities, which were independently determined, has been included
in the balance sheet as of June 30, 1998.
The acquired technology valuation included both existing technology and
in-process research and development. The valuation of these technologies was
made by applying the income forecast method which considers the present value of
cash flows by product lines.
Included in the purchase price was $427 of purchased in-process research and
development which was a one-time, non-cash, non-tax deductible charge to
earnings as this technology had not reached technological feasibility and has no
alternative use. This technology will require varying additional development,
coding and testing efforts over the next year before technological feasibility
can be determined. The remaining purchase price was allocated to tangible assets
and intangible assets, including goodwill and acquired technology, less
liabilities assumed.
Goodwill and acquired technology were valued at $183 and are being amortized
over 5 and 8 year periods, respectively.
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories at June 30, 1998 and September 30, 1997 were as follows:
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
<S> <C> <C>
Completed goods ............... $ 1,594 $ 1,611
Work in process and
raw materials................ 1,379 1,315
Total inventories ............. $ 2,973 $ 2,926
</TABLE>
4. BUSINESS RESTRUCTURING AND OTHER CHARGES
For the three and nine month periods ended June 30, 1998, $65 and $155,
respectively, were applied to the 1995 business restructuring reserve of $2,801
(pre-tax). The remaining reserve for business restructuring as of June 30, 1998
was $316.
For the three months ended June 30, 1998 and 1997, Lucent reversed $50 and $15,
respectively, of business restructuring and other charges. For the nine months
ended June 30, 1998 and 1997, Lucent reversed $83 and $69, respectively, of
business restructuring and other charges primarily related to employee
separations. For the three months ended June 30, 1998, the $50 was recorded as
$19 to costs, $23 to selling, general and administrative expenses and $8 to
research and development expenses. For the three months ended June 30, 1997, the
$15 was recorded to selling, general and administrative expenses. For the nine
months ended June 30, 1998, the $83 was recorded as $19 to costs, $56 to
selling, general and administrative expenses and $8 to research and development
expenses. For the nine months ended June 30, 1997, the $69 was recorded to
selling, general and administrative expenses.
<PAGE>
10 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
5. EARNINGS(LOSS) PER COMMON SHARE
Basic earnings(loss) per common share was calculated by dividing net
income(loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings(loss) per share was calculated by dividing net
income(loss) by the sum of the weighted average number of common shares
outstanding plus all additional common shares that would have been outstanding
if potentially dilutive common shares had been issued. As a result of the net
loss reported for the three month period ended June 30, 1998, potentially
dilutive securities have been excluded from the calculation of diluted
earnings(loss) per share because their effect would be anti-dilutive.
Earnings(loss) per share amounts for the periods presented have been restated to
reflect the two-for-one split of Lucent's common stock which became effective on
April 1, 1998. The following table reconciles the number of shares utilized in
the earnings per share calculations for the three and nine month periods ended
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Net income(loss) $ (233) $ 213 $ 582 $ 1,138
Earnings(loss) per
common share - basic $ (0.18) $ 0.17 $ 0.45 $ 0.89
Earnings(loss) per
common share - diluted $ (0.18) $ 0.17 $ 0.44 $ 0.89
Number of Shares (in millions)
- ---------------------------------
Common shares - basic 1,311.9 1,280.1 1,301.1 1,276.8
Effect of dilutive securities:
Stock options 0.0 10.3 25.0 6.9
Other 0.0 0.1 1.6 0.1
Common shares - diluted 1,311.9 1,290.5 1,327.7 1,283.8
Potentially dilutive securities
excluded from computation of
earnings(loss) per share - diluted:
Stock options 29.7 - - -
Other 2.2 - - -
Shares excluded from the
computation of earnings (loss)
per share - diluted since option
exercise price was greater than
the average market price of the
common shares for the period 0.9 0.0 1.0 0.0
</TABLE>
<PAGE>
11 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. Consequently,
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters at June 30, 1998 cannot be ascertained. While these
matters could affect the operating results of any one quarter when resolved in
future periods and while there can be no assurance with respect thereto,
management believes that after final disposition, any monetary liability or
financial impact to Lucent beyond that provided for at June 30, 1998 would not
be material to the annual consolidated financial statements.
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T Corp. ("AT&T") as a potentially
responsible party ("PRP") at numerous "Superfund" sites pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") or comparable state statutes. Under the Separation and Distribution
Agreement ("Separation and Distribution Agreement"), among Lucent, AT&T and NCR
Corporation ("NCR"), dated as of February 1, 1996 as amended and restated,
Lucent is responsible for all liabilities primarily resulting from or relating
to the operation of Lucent's business as conducted at any time prior to or after
the separation from AT&T of the businesses and operations transferred to form
Lucent (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.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the periods of remediation for the applicable sites which range
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements for 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. Any
amounts of environmental costs that may be incurred in excess of those provided
for at June 30, 1998 cannot be determined.
<PAGE>
12 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
7. TERMINATION OF SECURITIZED CUSTOMER FINANCING ARRANGEMENT
In June 1998, Lucent terminated its securitized vendor financing program with
Citicorp. The customer financing obligations placed in the program have been
paid.
8. SUBSEQUENT EVENTS
LANNET
- -------
On July 9, 1998, Lucent announced its intention to acquire LANNET, a subsidiary
of Madge Networks N.V., for approximately $115 in cash. LANNET is an
Israeli-based supplier of Ethernet and ATM switching solutions for local area
networks. The acquisition will be accounted for using the purchase method of
accounting. The transaction is expected to be completed by the end of the
quarter ending September 30, 1998, subject to customary legal requirements.
The purchase is expected to result in a one-time, non-tax deductible, non-cash
charge to earnings for purchased in-process research and development of
approximately $65 in the quarter ending September 30, 1998. The remaining
purchase price will be allocated to tangible assets and intangible assets,
including goodwill and acquired technology, less liabilities assumed.
SDX Business Systems plc
- --------------------------
On July 14, 1998, Lucent acquired SDX Business Systems plc ("SDX") for
approximately $200 in cash. SDX is an United Kingdom provider of business
communications systems. The acquisition will be accounted for using the purchase
method of accounting.
Included in the purchase price was approximately $80 of in-process research and
development which will result in a one-time, non-tax deductible, non-cash charge
to earnings in the quarter ending September 30, 1998. The remaining purchase
price will be allocated to tangible assets and intangible assets, including
goodwill and acquired technology, less liabilities assumed.
JNA Telecommunications Limited
- ------------------------------
In July 1998, Lucent announced its intention to acquire JNA Telecommunications
Limited ("JNA"), an Australian telecom manufacturer reseller and system
integrator, for approximately $70. The transaction is expected to be completed
by the end of the quarter ending September 30, 1998, subject to customary legal
requirements.
The purchase is expected to result in a one-time, non-tax deductible, non-cash
charge to earnings for purchased in-process research and development in the
quarter ending September 30, 1998. The amount of the charge has not yet been
determined. The remaining purchase price will be allocated to tangible assets
and intangible assets, including goodwill and acquired technology, less
liabilities assumed.
<PAGE>
13 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Lucent reported a net loss of $233 million, or $0.18 per share(basic/diluted)
for the quarter ended June 30, 1998. If potentially dilutive securities were
included in the calculation of the net loss per share(diluted) for the quarter
ended June 30, 1998, Lucent would have reported a net loss per share(diluted) of
$0.17 (see Note 5). The year-ago quarterly net income was $213 million, or $0.17
per share(diluted). For the current nine month period, Lucent reported net
income of $582 million, or $0.44 per share(diluted) compared with net income of
$1,138 million, or $0.89 per share(diluted) in the same prior period. Net income
for the three and nine months periods ended June 30, 1998 includes a pre-tax
reversal of the 1995 business restructuring charges of $50 million ($32 million
after-tax) and $83 million ($53 million after-tax), respectively. Excluding the
in-process research and development charge associated with the acquisitions of
Yurie and Optimay, which Lucent completed during the current quarter, Lucent's
net income was $435 million, or $0.32 per share(diluted) for the three months
ended June 30, 1998. Excluding the in-process research and development charges
associated with the acquisitions of Livingston, Prominet, Yurie and Optimay as
well as the gain on the sale of Lucent's Advanced Technology Systems ("ATS")
business, Lucent's net income was $1,739 million, or $1.31 per share(diluted)
for the nine months ended June 30, 1998.
Gross margin increased $679 million and $1,798 million for the quarter and nine
month periods ended June 30, 1998, respectively, compared with the year-ago
periods. These increases in gross margin were primarily due to an improved mix
of products and services as well as higher sales volume compared with the same
periods of the prior year.
Operating income of $98 million reflects a decrease of $282 million in the
quarter compared with the same quarter in 1997 and was 1.4% percent of revenues.
The decrease was primarily due to the in-process research and development
charges associated with the acquisitions of Yurie and Optimay. For the nine
months ended June 30, 1998, operating income of $1,643 million reflects a
decrease of $350 million compared with the same period in 1997, largely due to
the in-process research and development charges associated with the acquisitions
of Livingston, Prominet, Yurie and Optimay.
During the current nine month period, Lucent sold it ATS business, contributed
its Consumer Products business to a new venture formed by Lucent and Philips
Electronics N.V. ("Philips"), and completed its acquisitions of Livingston,
Prominet, Yurie and Optimay.
Lucent is one of the world's leading designers, developers and manufacturers of
communications systems, software and products. Lucent is a global leader in the
sale of public communications systems, and is a supplier of systems and/or
software to the world's largest network operators. Lucent is also a global
leader in the sale of business communications systems and in the sale of
microelectronic components for communications applications to manufacturers of
communications systems and computer manufacturers. Lucent was formed from the
systems and technology units that were formerly part of AT&T Corp. ("AT&T").
Lucent's research and development activities are conducted through Bell
Laboratories, one of the world's foremost industrial research and development
organizations.
<PAGE>
14 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
KEY BUSINESS CHALLENGES
Lucent continues to face significant competition and expects that the level of
competition on pricing and product offerings will increase. Lucent expects that
new and different competitors will enter its markets as a result of both the
trend toward global expansion by foreign and domestic competitors as well as
continued changes in technology and public policy. These competitors may include
entrants from the telecommunications, software, data networking and
semiconductor industries. Existing competitors have, and new competitors may
have, strong financial capability, technological expertise and well-recognized
brand names.
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. However, Lucent has taken steps to manage the
seasonality by changing its year-end and its compensation programs for its
employees.
The purchasing behavior of Lucent's large customers has increasingly been
characterized by the use of fewer, but larger, contracts which contributes to
the variability of Lucent's results. To manage this fluctuation caused by the
buying behaviors of large customers, Lucent continues to seek out new types of
customers globally, such as competitive local exchange carriers, cable
television network operators and computer manufacturers.
Historically, Lucent has relied on a limited number of customers for a
substantial portion of its total revenues. Lucent is seeking to diversify its
customer base; nevertheless, Lucent 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 Lucent's operating results.
REVENUES - THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED
JUNE 30, 1997
Total revenues increased 14.0% to $7,228 million in the quarter compared with
the same quarter of 1997, primarily due to gains in sales from Systems for
Network Operators, Business Communications Systems and Microelectronic Products.
The overall revenue growth was impacted by the elimination of the Consumer
Products sales as a component of total revenue as well as lower revenues from
Other Systems and Products. The decline in Other Systems and Products was due
primarily to the sale of Lucent's ATS business in October 1997. Revenue growth
was driven by sales increases globally. For the quarter, sales within the United
States grew by 10.8% compared with the same quarter in 1997 and sales outside
the United States increased 25.7% compared with the same quarter last year.
The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the three months ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
Dollars in Millions ---------------------------
1998 1997
------- -------
<S> <C> <C> <C> <C>
Systems for Network Operators........ $4,408 61% $3,779 59%
Business Communications Systems...... 1,995 28 1,559 25
Microelectronic Products............. 736 10 687 11
Consumer Products.................... - - 193 3
Other Systems and Products........... 89 1 122 2
Total................................ $7,228 100% $6,340 100%
</TABLE>
<PAGE>
15 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $629 million, or 16.6% in
1998 compared with the same quarter in 1997. The increase resulted from higher
sales of switching and wireless systems, as well as data networking systems for
service providers - including those provided by recently-acquired Livingston.
Demand for those products was driven in part by second line subscriber growth in
businesses and residences for Internet services and data traffic.
Revenues from Systems for Network Operators in the United States increased by
13.7% over the year-ago quarter. The revenue increase in the United States was
led by sales to Regional Bell Operating Companies ("RBOC's"), competitive local
exchange carriers, wireless service providers and long distance carriers.
Revenues generated outside the United States increased 28.3% compared with the
same quarter in 1997 due to revenue growth in Europe/Middle East/Africa,
Caribbean/Latin America and Canada. Revenues generated outside the United States
represented 22.5% of revenues for the quarter compared with 20.5% for the same
quarter of 1997.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $436 million, or 28.0%
compared with the year-ago quarter. This increase was led by sales of
DEFINITY(R) enterprise communication servers, messaging systems, including
systems provided by recently-acquired Octel Communications Corporation
("Octel"), enterprise data networking systems, SYSTIMAX(R) structured cabling,
and services. Sales within the United States increased 24.5% for the quarter
compared with the same quarter of 1997. Revenues generated outside the United
States increased by 46.0%, due to growth in all major international regions.
Revenues generated outside the United States represented 18.4% of revenues for
the quarter compared with 16.2% in the same period in 1997.
On July 9, 1998, Lucent announced its intention to acquire LANNET, a subsidiary
of Madge Networks N.V. LANNET is an Israeli-based supplier of Ethernet and ATM
switching solutions for local area networks.
On July 14, 1998, Lucent acquired SDX, an United Kingdom provider of business
communications systems.
Revenues from MICROELECTRONIC PRODUCTS increased $49 million, or 7.1% compared
with the year-ago quarter due to higher sales of customized chips for computing
and communications, including components for wireless telephones, local area
networks, power systems, optoelectronic components, data networking, and
high-end computer workstations. Sales within the United States increased 8.7%
compared to the same quarter in 1997, led by sales to original equipment
manufacturers ("OEMs"). Revenues generated outside the United States increased
5.7%. The growth in revenues outside the United States was driven by sales in
the Europe/Middle East/Africa and Caribbean/Latin America regions. Revenues
generated outside the United States represented 50.5% of sales for the quarter
compared with 51.2% for the same quarter of 1997.
The lower growth rate for Microelectronics Products reflects a reduction in the
overall microelectronics sector.
On October 1, 1997, Lucent contributed its CONSUMER PRODUCTS unit to a venture
formed with Philips. Lucent has an equity interest of 40% in the venture which
is called Philips Consumer Communications, L.P.("PCC").
Revenues from OTHER SYSTEMS AND PRODUCTS decreased $33 million, or 27.0%
compared with the year-ago quarter. The decrease is largely due to the sale of
Lucent's ATS business.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
16 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
COSTS AND GROSS MARGIN - THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS
ENDED JUNE 30, 1997
Total costs increased $209 million, or 5.6% compared with the year-ago quarter
resulting primarily from the increase in sales volume. Gross margin percentage
increased to 45.4% from 41.0% in the year-ago quarter reflecting a favorable mix
of product sales.
OPERATING EXPENSES - THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED
JUNE 30, 1997
Selling, general and administrative expenses as a percentage of revenues were
21.7% for the quarter compared with 22.1% for the same quarter in 1997.
Selling, general and administrative expenses increased $162 million, or 11.5%
compared with the same year-ago quarter. This increase was attributed to an
increase in sales volume, investment in growth initiatives, the implementation
of SAP, an integrated software platform for information systems, and the
increase in amortization expense associated with goodwill and existing
technology. Amortization expense associated with goodwill and existing
technology was $39 million for the quarter, an increase of $31 million from the
year-ago quarter.
Research and development expenses represented 13.1% of revenues for the quarter
compared with 12.9% of revenues for the same quarter of 1997.
Research and development expenses increased $131 million during the quarter
compared with the same year-ago quarter. This was primarily due to increased
expenditures in support of wireless, data networking, optical networking and
switching and access.
The purchased in-process research and development expenses for the quarter were
$668 million. Included were charges of $620 million associated with the
acquisition of Yurie and $48 million associated with the acquisition of Optimay.
OTHER INCOME(EXPENSE), INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997
Other income(expense)-net decreased $48 million to an expense of $7 million for
the quarter compared with the same quarter in 1997. The decrease was due to
changes in net equity losses from investments.
Interest expense for the quarter increased $2 million to $79 million compared
with the same quarter in 1997.
The effective income tax rate for the 1998 quarter was significantly impacted by
the write-off of non-tax deductible purchased in-process research and
development expenses associated with the acquisitions of Yurie and Optimay.
Excluding the impact of the purchased in-process research and development
expenses associated with the Yurie and Optimay acquisitions, the effective
income tax rate was 36.0% compared with 38.1% in the same quarter of 1997. This
decrease was primarily due to the tax impact of foreign activity.
<PAGE>
17 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUES - NINE MONTHS ENDED JUNE 30, 1998 VERSUS NINE MONTHS ENDED JUNE 30,
1997
Total revenues increased to $22,109 million, or 13.8% compared with the same
nine month period in 1997, primarily due to increases in sales from Systems for
Network Operators, Business Communications Systems and Microelectronic Products.
The overall revenue growth was impacted by the elimination of the Consumer
Products sales as a component of total revenue as well as lower revenues from
Other Systems and Products. The decline in Other Systems and Products was due
primarily to the sale of Lucent's ATS in October 1997 and Custom Manufacturing
Services ("CMS") businesses in December 1996. Revenue growth was driven by sales
increases globally. For the nine month period, sales within the United States
grew 13.2% compared with the same period in 1997 and sales outside the United
States increased 15.7% compared with the same period in 1997.
The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the nine months ended June 30, 1998
and 1997:
<TABLE>
<CAPTION>
Nine Months
Ended
June 30,
Dollars in Millions --------------------------------
1998 1997
------- -------
<S> <C> <C> <C> <C>
Systems for Network Operators........ $ 14,005 63% $ 11,735 60%
Business Communications Systems...... 5,655 26 4,600 24
Microelectronic Products............. 2,216 10 1,973 10
Consumer Products.................... - - 697 4
Other Systems and Products........... 233 1 422 2
Total................................ $ 22,109 100% $ 19,427 100%
</TABLE>
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $2,270 million, or 19.3%
compared with the same nine month period in 1997. The increase resulted from
higher sales of switching and wireless systems with associated software, optical
networking systems, professional services, data networking systems for service
providers including those provided by recently-acquired Livingston. Demand for
those products was driven in part by second line subscriber growth in businesses
and residences for Internet services and data traffic.
Revenues from Systems for Network Operators in the United States increased by
22.5% over the year-ago nine month period. The revenue increase in the United
States was led by sales to RBOC's, competitive local exchange carriers, wireless
service providers and long distance carriers. Revenues generated outside the
United States for 1998 increased 10.2% compared with the same nine month period
in 1997 due to revenue growth in the Caribbean/Latin America, Europe/Middle
East/Africa, and Canada regions. Revenues generated outside the United States
represented 23.6% of revenues for 1998 compared with 25.5% in same nine month
period of 1997.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $1,055 million, or 22.9%
compared with the same nine month period in 1997. This increase was led by sales
of messaging systems, including systems provided by recently-acquired Octel,
SYSTIMAX(R) structured cabling, enterprise data networking systems and services.
Revenues generated outside the United States increased by 49.9%, due to growth
in all major international regions. Revenues generated outside the United States
represented 18.5% of the revenues for 1998 compared with 15.2% in the same nine
month period of 1997. For 1998, sales within the United States increased 18.1%
compared with the same nine month period of 1997.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
18 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Revenues from MICROELECTRONIC PRODUCTS increased $243 million, or 12.3% for 1998
compared with the same nine month period in 1997 due to higher sales of
customized chips for computing and communications, including components for
wireless telephones, local area networks, power systems, optoelectronic
components, data networking, high-end computer workstations and the licensing of
intellectual property. Sales within the United States increased 18.5% compared
with the same period in 1997, led by sales to OEMs. Revenues generated outside
the United States increased 6.6% compared with the same period in 1997. The
growth in revenues generated outside the United States was driven by sales in
the Europe/Middle East/Africa and Caribbean/Latin America regions. Revenues
generated outside the United States represented 49.5% of sales compared with
52.1% for the same nine month period of 1997.
On October 1, 1997, Lucent contributed its CONSUMER PRODUCTS unit to PCC. Lucent
has an equity interest of 40% in PCC.
Revenues from sales of OTHER SYSTEMS AND PRODUCTS decreased $189 million, or
44.8% compared with the same quarter in 1997. The reduction in revenues was
primarily due to the sale of Lucent's ATS and CMS businesses.
COSTS AND GROSS MARGIN - NINE MONTHS ENDED JUNE 30, 1998 VERSUS NINE MONTHS
ENDED JUNE 30, 1997
Total costs increased $884 million, or 8.0% compared with the same nine month
period in 1997 due to the increase in sales volume. Gross margin percentage
increased to 46.2% from 43.3% in the year-ago period. The increase in gross
margin percentage for the current nine months was due to overall favorable mix
of higher margin product sales.
OPERATING EXPENSES - NINE MONTHS ENDED JUNE 30, 1998 VERSUS NINE MONTHS ENDED
JUNE 30, 1997
Selling, general and administrative expenses as a percentage of revenues were
20.8% for 1998, a decrease of 0.6 percentage points from the same period in
1997.
Selling, general and administrative expenses increased $458 million, or 11.0%
compared with the same period in 1997. This increase is attributed to the higher
sales volume, investment in growth initiatives as well as the implementation of
SAP, an integrated software platform, and the increase in amortization expense
associated with goodwill and existing technology. Amortization expense
associated with goodwill and existing technology was $95 million for the nine
months ended June 30, 1998, an increase of $70 million from the same year-ago
period. These increases were offset by the reversal of $56 million of 1995
business restructuring charges. In addition, the 1997 period included a $69
million reversal of 1995 business restructuring charges.
Research and development expenses represented 12.2% of revenues for the period
as compared with 11.3% of revenues from the same period in 1997.
Research and development expenses increased $517 million compared with the same
period in 1997. This was primarily due to increased expenditures in support of
wireless, data networking, optical networking, switching and access and
microelectronic products.
The purchased in-process research and development expenses for 1998 were $1,252
million reflecting the charges associated with the acquisitions of Livingston,
Prominet, Yurie and Optimay compared with $79 million related to the acquisition
of Agile Networks, Inc ("Agile"). for the same period in 1997.
<PAGE>
19 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - NINE
MONTHS ENDED JUNE 30, 1998 VERSUS NINE MONTHS ENDED JUNE 30, 1997
Other income -- net increased $113 million for 1998 compared with the same
period in 1997. This increase was primarily due to the pre-tax gain of $149
million associated with the sale of Lucent's ATS business partially offset by
increased net losses associated with Lucent's equity investments.
Interest expense was $232 million for the first nine months of 1998, a decrease
of $1 million compared with the same period in 1997.
The effective income tax rate of 63.9% for 1998 increased from the effective
income tax rate of 38.5% in the same year-ago period. The increase was due to
the write-off of non-tax deductible purchased in-process research and
development expenses associated with the acquisitions of Livingston, Prominet,
Yurie and Optimay. Excluding the impact of the purchased in-process research and
development expenses associated with these acquisitions, the effective income
tax rate was 36.0% for 1998. This decrease was primarily due to the tax impact
of foreign activity.
TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY
Total assets increased $1,468 million, or 6.2%, from fiscal year-end 1997. This
increase was primarily due to an increase in other assets of $863 million. The
increase in other assets was largely due to the increase in equity investments
as a result of Lucent's contribution of its Consumer Products business to PCC
as well as the increase in goodwill and existing technology associated with the
Livingston, Prominet, Yurie and Optimay acquisitions.
Total liabilities decreased $67 million, or 0.3% from fiscal year-end 1997. This
decrease was largely due to the reduction of accounts payable and the reduction
in commercial paper.
Working capital, defined as current assets less current liabilities, increased
$1,346 million from fiscal year-end 1997 primarily resulting from the increase
in accounts receivable, contracts in process and current deferred taxes-net and
the reduction in accounts payable and cash. The decrease in cash and cash
equivalents was largely due to the acquisitions of Yurie and Optimay, partially
offset by the sale and repayment of customer loans.
Lucent expects that, from time to time, outstanding commercial paper balances
may be replaced with short- or long-term borrowings as market conditions permit.
At June 30, 1998, Lucent maintained approximately $5,000 million in credit
facilities of which a portion is used to support Lucent's commercial paper
program. At June 30, 1998, approximately $4,900 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.
Lucent plans to pay for the proposed acquisitions of LANNET, SDX, and JNA from
its general funds which consist of cash from operations and proceeds from
short-term borrowings.
<PAGE>
20 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Network operators, inside and outside the United States, 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.
Lucent has increasingly provided or arranged long-term financing for customers.
In this regard, Lucent entered into a credit agreement in October 1996 to
provide Sprint Spectrum* Holdings L.P. ("Sprint PCS") long-term financing of
$1,800 million for purchasing equipment and services for its personal
communications services ("PCS") network.
In May 1997, under the $1,800 million credit facility provided by Lucent to
Sprint PCS, Lucent closed transactions to lay off $500 million of loans and
undrawn commitments and $300 million of undrawn commitments to a group of
institutional investors and Sprint Corporation (a partner in Sprint PCS),
respectively. As of June 30, 1998, all of these commitments were drawn down by
Sprint PCS. On June 8, 1998, Lucent sold $645 million of loans in a private
sale. As of June 30, 1998, Lucent has $369 million of undrawn commitments and
$62 million of drawn loans.
As part of the revenue recognition process, Lucent has assessed the
collectibility of the accounts receivable relating to the Sprint PCS purchase
contract in light of its financing commitment to Sprint PCS. Lucent has
determined that the receivables under the contract are reasonably assured of
collection based on various factors among which was the ability of Lucent to
sell the loans and commitments without recourse. Lucent intends to continue
pursuing opportunities for the sale of the $62 million of loans, and the future
loans and commitments to Sprint PCS.
In addition, as of June 30, 1998, Lucent had made commitments or entered into an
agreement to extend credit of up to an aggregate of approximately $1,200 million
to five other PCS or wireless network operators for possible future sales. As of
June 30, 1998, $16 million had been advanced under two of these arrangements.
Lucent has provided, or proposed or committed 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.
Lucent believes that it will be able to access the capital markets on terms and
in amounts that will be satisfactory to Lucent and that it will be able to
obtain bid and performance bonds, to arrange or provide customer financing as
necessary, and to engage in hedging transactions on commercially acceptable
terms, although there can be no assurance that this will be the case.
RISK MANAGEMENT
Lucent is exposed to market risk from changes in foreign currency exchange rates
and interest rates, which could impact its results of operations and financial
condition. Lucent manages its exposure to these market risks through its regular
operating and financing activities and, when deemed appropriate, through the use
of derivative financial instruments. Derivative financial instruments are viewed
as risk management tools and are not used for speculative or trading purposes.
In addition, derivative financial instruments are entered into with a
diversified group of major financial institutions in order to manage Lucent's
exposure to nonperformance on such instruments.
- -------------------------
*Sprint Spectrum is a service mark of Sprint Communications Company, LP.
<PAGE>
21 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost effective manner, Lucent, from time to time, enters into interest rate swap
agreements, in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed upon notional amounts. Lucent had no
material interest rate swap agreements in effect as of June 30, 1998 and
September 30, 1997. Management does not foresee or expect any significant
changes in its exposure to interest rate fluctuations or in how such exposure is
managed in the near future.
CASH FLOWS
Cash provided by operating activities for the nine months ended June 30, 1998
was $1,461 million compared with $867 million in the same year-ago period. This
growth was due to the increased change in payroll and benefit related
liabilities and in accrued income taxes, offset by the increase in accounts
receivable.
Cash payments of $45 million and $135 million were made for the three month and
nine month periods ended June 30, 1998, respectively, for the business
restructuring charge recorded in the quarter ended December 31, 1995. Of the
23,000 positions that Lucent announced it would eliminate in connection with the
restructuring charges, approximately 19,800 positions have been eliminated as of
June 30, 1998.
Comparing the nine months ended June 30, 1998 and 1997, cash used in investing
activities increased to $1,977 million from $1,125 million primarily due to the
cash used in acquisitions of Yurie and Optimay in 1998. The acquisitions of
Livingston and Prominet in fiscal 1998 were completed through the issuance of
stock and options and did not require the use of cash. Lucent disposed of its
ATS business in 1998. During the nine months ended June 30, 1997, Lucent
acquired Agile and disposed of its interconnect products and custom
manufacturing services businesses.
Capital expenditures were $1,006 million and $1,088 million for the nine month
periods ended June 30, 1998 and 1997, 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 provided by financing activities for the nine months ended June 30, 1998
was $328 million compared with $499 million used in financing activities in the
same period a year-ago. This increase in cash provided by financing activities
was due to lower paydowns of short-term borrowings compared with the prior
period and increased issuances of long-term debt and common stock.
<PAGE>
22 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 46.8% at June
30, 1998 compared to 55.4% on at September 30, 1997.
OTHER
Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T as PRP at numerous "Superfund"
sites pursuant to the CERCLA or comparable state statutes. Under the Separation
and Distribution Agreement, among AT&T, Lucent and NCR dated as of February 1,
1996, as amended and restated, Lucent is responsible for all liabilities
primarily resulting from or related to the operation of Lucent's business as
conducted at any time prior to or after the Separation including related
businesses discontinued or disposed of prior to the Separation, and Lucent's
assets including, without limitation, those associated with these sites. 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.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the period of remediation for the applicable site which ranges
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are, depending on the site, based primarily upon internal or third party
environmental studies, and estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements in respect to environmental reserves
are the gross undiscounted amount of such reserves, without deductions for
insurance or third party indemnity claims. In those cases where insurance
carriers or third party indemnitors have agreed to pay any amounts and
management believes that collectibility of such amounts is probable, the amounts
are reflected as receivables in the financial statements. Although Lucent
believes that its reserves are adequate, there can be no assurance that the
amount of capital and other expenditures that 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. Any amounts of environmental costs that may be incurred in excess of
those provided for at June 30, 1998 cannot be determined.
<PAGE>
23 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this report contain forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industries in which Lucent operates, management's beliefs and
assumptions made by management. In addition, other written or oral statements
which constitute forward-looking statements may be made by or on behalf of the
Company. Words such as "expects," anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. The Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Future Factors include increasing price and product/services competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost effective basis; the mix
of products/services; the achievement of lower costs and expenses; the outcome
and impact of Year 2000; 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 report
including the other sections referred to and also see the discussion in the
Company's Form 10-K for the year ended September 30, 1997 in Item 1 in the
section entitled "OUTLOOK-Forward Looking Statements" and the remainder of the
OUTLOOK section.
Competition:
See discussion above under KEY BUSINESS CHALLENGES.
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 communications
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, products, software and services successfully on a timely
basis and to reduce costs of existing systems, products, 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.
<PAGE>
24 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.
Readiness for Year 2000:
Lucent has taken actions to assess the nature and extent of the work required to
make its systems, products, factories and infrastructure Year 2000 ready. Lucent
began work several years ago to prepare its products and its financial,
information and other computer-based systems for the Year 2000. Lucent is
working toward making its internal information technology and manufacturing
infrastructure Year 2000 ready, including replacing or updating existing legacy
systems as needed. Additionally, Lucent is engaged in the process of evaluating
the Year 2000 readiness of suppliers. Where Lucent determines that critical
suppliers are not Year 2000 ready, Lucent will monitor their progress and take
appropriate actions. Based on current progress and future plans, Lucent believes
that the Year 2000 date change will not significantly affect Lucent's ability to
deliver products and services to its customers on a timely basis.
Lucent also has committed resources to make its current product offerings Year
2000 ready, as well as to provide evolution paths for its customers who have
non-Year 2000 ready equipment. Lucent has different product lines with different
customer groups. As a result, Lucent has established Year 2000 program offices
in each of its principal product groups. These program offices identify non-Year
2000 ready products and develop evolution strategies that include the upgrade of
some products and the replacement of others. In addition, these program offices
support Lucent's customer teams, who are working with their customers to develop
customer-specific Year 2000 solutions. Lucent also conducts tests to understand
the functional impact of the Year 2000 date change on many of its products that
are currently not Year 2000 ready. Lucent is sharing this impact information
with its customers. Effective communication and coordination are important to
minimizing the impact of the Year 2000 on Lucent's customers. Lucent is working
with its customers to understand the customer's installed product base of Lucent
products, provide relevant product information, jointly develop a strategy for
migrating the customer as appropriate, and provide other support.
Lucent believes it is taking the necessary steps to resolve Year 2000 issues,
however, given the uncertain consequences of failure to resolve significant Year
2000 issues, there can be no assurance that any one or more such failures would
not have a material adverse effect on Lucent. Lucent continues to evaluate the
estimated costs associated with the efforts to prepare for Year 2000 based on
actual experience. While the efforts will involve additional costs, Lucent
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial prospects. The actual outcomes and results
could be affected by Future Factors including, but not limited to, the continued
availability of skilled personnel, cost control, the ability to locate and
remediate software code problems, critical suppliers and subcontractors meeting
their commitments to be Year 2000 ready, and timely actions by customers.
<PAGE>
25 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
European Monetary Union - Euro:
On January 1, 1999, several member countries of the European Union will
establish fixed conversion rates between their existing sovereign currencies,
and adopt the Euro as their new common legal currency. As of that date, the Euro
will trade on currency exchanges and the legacy currencies will remain legal
tender in the participating countries for a transition period between January 1,
1999 and January 1, 2002.
During the transition period, cash-less payments can be made in the Euro, and
parties can elect to pay for goods and services and transact business using
either the Euro or a legacy currency. Between January 1, 2002 and July 1, 2002,
the participating countries will introduce Euro notes and coins and withdraw all
legacy currencies so that they will no longer be available.
The Euro conversion may affect cross-border competition by creating cross-border
price transparency. Lucent is assessing its pricing/marketing strategy in order
to insure that it remains competitive in a broader European market. Lucent is
also assessing its information technology systems to allow for transactions to
take place in both the legacy currencies and the Euro and the eventual
elimination of the legacy currencies, and reviewing whether certain existing
contracts will need to be modified. Lucent's currency risk and risk management
for operations in participating countries may be reduced as the legacy
currencies are converted to the Euro. Final accounting, tax and governmental
legal and regulatory guidance is not available. Lucent will continue to evaluate
issues involving introduction of the Euro. Based on current information and
Lucent's current assessment, Lucent does not expect that the Euro conversion
will have a material adverse effect on its business or financial condition.
Employee Relations:
On June 30, 1998, Lucent employed approximately 136,000 persons, of whom 79.6%
were located in the United States. Of these domestic employees, 40.0% are
represented by unions, primarily the Communications Workers of America
("CWA")and the International Brotherhood of Electrical Workers ("IBEW"). Lucent
has concluded new five year agreements with the CWA and IBEW expiring May 31,
2003.
Multi-Year Contracts:
Lucent has 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 uncertainties affecting recognition
of revenues, stringent acceptance criteria, implementation of new technologies
and possible significant initial cost overruns and losses. See also discussion
above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY, and KEY BUSINESS
CHALLENGES.
Seasonality:
See discussion above under KEY BUSINESS CHALLENGES.
Future Capital Requirements:
See discussion above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY.
<PAGE>
26 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Growth Outside the U.S., Foreign Exchange and Interest Rates: Lucent intends to
continue to pursue growth opportunities in markets outside the U.S. In many
markets outside the U.S., long-standing relationships between potential
customers of Lucent and their local providers, and protective regulations,
including local content requirements and type approvals, create barriers to
entry. In addition, pursuit of such growth opportunities outside the U.S. 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.
Difficulties in foreign financial markets and economies, and of foreign
financial institutions, could adversely affect demand from customers in the
affected countries.
See discussion above under RISK MANAGEMENT with respect to foreign exchange and
interest rates. A significant change in the value of the dollar against the
currency of one or more countries where Lucent sells products to local customers
or makes purchases from local suppliers may materially adversely affect Lucent's
results. Lucent 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.
While Lucent hedges transactions with non-U.S. customers, the decline in value
of the Asia/Pacific currencies, or declines in currency values in other regions,
may, if not reversed, adversely affect future product sales because Lucent's
products may become more expensive to purchase for local customers doing
business in the countries of the affected currencies.
Legal Proceedings and Environmental:
See discussion above in Note 6 - COMMITMENTS AND CONTINGENCIES.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS 133 requires an entity to measure all derivatives at fair value
and to recognize them in the balance sheet as an asset or liability, depending
on the entity's rights or obligations under the applicable derivative contract.
Lucent will designate each derivative as belonging to one of several possible
categories, based on the character of the underlying item that is being hedged.
The accounting treatment of each derivative and the related hedge will depend on
the category to which the derivative belongs. SFAS 133 generally provides for
matching the timing of income recognition for the derivative with the timing of
income recognition for the underlying item being hedged. SFAS 133 will be
effective for Lucent no later than the quarter ending December 31, 1999. SFAS
133 may not be applied retroactively to financial statements of prior periods.
SFAS 133 is not expected to have a material impact on Lucent's consolidated
results of operations, financial position, and cash flows. Lucent's business
practices and operating environment are not expected to be materially affected
by SFAS 133.
<PAGE>
27 Form 10-Q - Part II
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K:
Not applicable
<PAGE>
28 Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lucent Technologies Inc.
Date August 13, 1998
By James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
Exhibit 12
Form 10-Q
For the Nine
Months Ended
June 30, 1998
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine
Months Ended
June 30, 1998
<S> <C>
Earnings Before Income Taxes........................... $ 1,614
Less Interest Capitalized during
the Period........................................... 14
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... 11
Add Fixed Charges...................................... 361
Total Earnings ........................................ $ 1,950
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 261
Interest Portion of Rental Expense..................... 100
Total Fixed Charges................................ $ 361
Ratio of Earnings to Fixed Charges..................... 5.4
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of Lucent at June 30, 1998 and the unaudited
consolidated statement of income for the nine month period ended June 30, 1998
and is qualified in its entirety by reference to such financial statements. The
financial data schedule reflects the two-for-one split of Lucent's common stock
which became effective on April 1, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,099
<SECURITIES> 0
<RECEIVABLES> 6,166
<ALLOWANCES> 374
<INVENTORY> 2,973
<CURRENT-ASSETS> 13,305
<PP&E> 11,210
<DEPRECIATION> 6,253
<TOTAL-ASSETS> 25,279
<CURRENT-LIABILITIES> 10,196
<BONDS> 1,899
0
0
<COMMON> 13
<OTHER-SE> 4,909
<TOTAL-LIABILITY-AND-EQUITY> 25,279
<SALES> 22,109
<TOTAL-REVENUES> 22,109
<CGS> 11,901
<TOTAL-COSTS> 11,901
<OTHER-EXPENSES> 8,565
<LOSS-PROVISION> 105
<INTEREST-EXPENSE> 232
<INCOME-PRETAX> 1,614
<INCOME-TAX> 1,032
<INCOME-CONTINUING> 582
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 582
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.44
</TABLE>
