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, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 001-11639
LUCENT TECHNOLOGIES INC.
A Delaware I.R.S. Employer
Corporation No. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone - Area Code 908-582-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes .X.. No ....
At January 31, 1998 650,628,552 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,
1997 1996
Revenues ..................................................... $8,724 $7,938
Costs ........................................................ 4,519 4,296
Gross margin ................................................. 4,205 3,642
Operating Expenses
Selling, general and
administrative expenses .................................... 1,555 1,459
Research and development expenses ............................ 829 634
In-process research
& development expenses ...................................... 427 79
Total operating expenses ..................................... 2,811 2,172
Operating income ............................................. 1,394 1,470
Other income - net ........................................... 163 9
Interest expense ............................................. 79 79
Income before income taxes ................................... 1,478 1,400
Provision for income taxes ................................... 686 541
Net income ................................................... $ 792 $ 859
Earnings per common share - basic ............................ $ 1.23 1.35
Earnings per common share - diluted .......................... $ 1.21 1.35
Dividends declared
per common share ........................................... $ 0.15 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,
1997 1997
ASSETS
Cash and cash equivalents ......................... $ 1,225 $ 1,350
Accounts receivable less
allowances of $344 at
December 31, 1997 and $352
September 30, 1997 ............................... 6,295 5,373
Inventories ....................................... 2,604 2,926
Contracts in process (net of contract
billings of $2,363 at
December 31, 1997 and $2,003 at
September 30, 1997 ............................... 1,214 1,046
Deferred income taxes - net ....................... 1,469 1,333
Other current assets .............................. 449 473
Total current assets .............................. 13,256 12,501
Property, plant and equipment, net
of accumulated depreciation of
$6,121 at December 31, 1997 and
$6,407 at September 30, 1997 .................... 4,729 5,147
Prepaid pension costs ............................. 3,322 3,172
Deferred income taxes - net ....................... 1,120 1,262
Capitalized software development costs ............ 246 293
Other assets ...................................... 2,079 1,436
TOTAL ASSETS ...................................... $24,752 $23,811
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,
1997 1997
LIABILITIES
Accounts payable ................................. $ 1,496 $ 1,931
Payroll and benefit-related
liabilities .................................... 2,178 2,178
Postretirement and postemployment
benefit liabilities ............................ 221 239
Debt maturing within one year .................... 1,757 2,538
Other current liabilities ........................ 4,310 3,852
Total current liabilities ........................ 9,962 10,738
Postretirement and postemployment
benefit liabilities ............................ 6,136 6,073
Long-term debt ................................... 1,945 1,665
Other liabilities ................................ 2,038 1,948
Total liabilities ................................ 20,081 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:
649,336,566 at December 31, 1997
642,062,656 at September 30, 1997 ............... 6 6
Additional paid-in capital ....................... 3,717 3,047
Guaranteed ESOP obligation ....................... (77) (77)
Foreign currency translation ..................... (273) (191)
Retained earnings ................................ 1,298 602
Total shareowners' equity ........................ 4,671 3,387
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY ............................. $ 24,752 $ 23,811
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,
1997 1996
Operating Activities
Net income ............................................ $ 792 $ 859
Adjustments to reconcile net income
to net cash provided by
operating activities:
Business restructuring charge ...................... -- (54)
Asset impairment and other charges ................. -- (46)
Depreciation and amortization ...................... 343 387
Provision for uncollectibles ....................... 54 42
Deferred income taxes .............................. (22) (67)
Purchased in-process research
and development .................................. 427 79
Increase in accounts receivable .................... (1,255) (1,025)
Decrease in inventories
and contracts in process ......................... 152 813
Decrease in accounts payable ....................... (387) (319)
Changes in other operating assets
and liabilities .................................. 512 645
Other adjustments for noncash
items - net ...................................... (231) (73)
Net cash provided by
operating activities ............................... 385 1,241
Investing Activities
Capital expenditures .................................. (261) (344)
Proceeds from the sale or disposal of
property, plant and equipment ....................... 27 3
Purchases of investments .............................. (47) (16)
Sales of investments .................................. 25 --
Acquisitions, net of cash acquired .................... -- (124)
Dispositions .......................................... 281 179
Other investing activities - net ...................... (35) 33
Net cash used in investing activities ................. (10) (269)
Financing Activities
Repayments of long-term debt .......................... (20) (6)
Issuance of long-term debt ............................ 3 --
Proceeds of issuance of common stock .................. 72 27
Dividends paid ........................................ (48) (48)
Decrease in short-term borrowings - net ............... (485) (14)
Net cash used in financing activities ................. (478) (41)
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,
1997 1996
Effect of exchange rate
changes on cash ..................................... (22) 5
Net increase(decrease) in
cash and cash equivalents ........................... (125) 936
Cash and cash equivalents
at beginning of year ................................ 1,350 2,241
Cash and cash equivalents
at end of period .................................... $ 1,225 $ 3,177
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 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.
2. ACQUISITIONS
In December 1997, Lucent completed the purchase of Livingston Enterprises, Inc.
("Livingston"), a provider of remote access networking solutions, in a merger
involving $610 million worth 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, have
been included in the balance sheet as of December 31, 1997.
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.
The fair value of existing technology products was valued at $69 and is being
amortized over eight years. In-process research and development valued at $427
was charged to expense 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.
Goodwill was valued at $114 and is being amortized over five years.
3. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories at December 31, 1997 and September 30, 1997 were as follows:
December 31, September 30,
1997 1997
Completed goods ............... $ 1,291 $ 1,611
Work in process and
raw materials................ 1,313 1,315
Total inventories ............. $ 2,604 $ 2,926
4. BUSINESS RESTRUCTURING AND OTHER CHARGES
Cash payments of $26 and $115 were made during the quarters ended December 31,
1997 and 1996, respectively for the 1995 business restructuring charge of $2,801
(pre-tax). The reserve for business restructuring as of December 31, 1997 was
$531.
For the quarter ended December 31, 1996, Lucent reversed $54 of the 1995
business restructuring charge 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").
<PAGE>
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
5. EARNINGS PER SHARE
Basic earnings per common share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing net income 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. The following table reconciles the number of shares utilized in
the earnings per share calculations for the three month period ending December
31, 1997 and 1996, respectively.
Three Months Ended Three Months Ended
December 31, 1997 December 31, 1996
------------------------------------------
Net income $ 792 $ 859
Earnings per common share - basic $ 1.23 $ 1.35
Earnings per common share - diluted $ 1.21 $ 1.35
Common shares - basic 643,666,791 637,035,279
Effect of dilutive securities:
Stock options 9,180,853 1,173,979
Other 174,835 70,283
Common shares - diluted 653,022,479 638,279,541
Options to purchase approximately 2.7 million and 3.1 million shares of common
stock were outstanding at December 31, 1997 and 1996, respectively, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares for the period.
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 December 31, 1997 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 December 31, 1997 would
not be material to the annual consolidated financial statements.
<PAGE>
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
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, 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 such 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 the financial condition of Lucent or Lucent's results of operations or
cash flows. Any amounts of environmental costs that may be incurred in excess of
those provided for at December 31, 1997 cannot be determined.
7. SUBSEQUENT EVENTS
On January 22, 1998, Lucent completed its acquisition of Prominet Corporation, a
participant in the rapidly emerging Gigabit Ethernet networking industry, in a
merger totaling $164 worth of Lucent stock and options. Under the terms of the
agreement, there are contingent obligations of $35 in stock, which Lucent
expects to pay in the current fiscal year upon resolution of these
contingencies. In that event, goodwill will be recorded under the purchase
method of accounting.
Included in the purchase price was $157 of purchased in-process research and
development which was charged to earnings at the date of acquisition. The
remaining purchase price was allocated to tangible assets and acquired
technology, less liabilities assumed.
<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 $792
million, or $1.21 per share(diluted) for the quarter ended December 31, 1997.
The year-ago quarterly net income was $859 million, or $1.35 per share(diluted).
The decrease was largely due to the write-off of $427 million of purchased
in-process research and development expenses associated with the acquisition of
Livingston Enterprises, Inc. ("Livingston").
Gross margin increased $563 million for the quarter ended December 31, 1997
compared with the year-ago quarter. The increase in gross margin was primarily
due to an improved mix of products and services as well as higher sales volume
compared with the same quarter last year.
Operating income decreased $76 million in the quarter compared with the same
quarter in 1996.
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 ("Bell Labs"), one of the world's foremost industrial research and
development organizations.
During this quarter, Lucent sold its Advanced Technology Systems ("ATS")
business, contributed its Consumer Products business to a new venture formed by
Lucent and Philips Electronics N.V. ("Philips"), and completed its acquisition
of Livingston.
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 both within the United States and outside the United States, 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.
<PAGE>
11 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUES - THREE MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE
MONTHS ENDED DECEMBER 31, 1996
Total revenues increased to $8,724 million, or 9.9% in the quarter ended
December 31, 1997 compared with the same quarter of 1996, due to gains in sales
from Systems for Network Operators, Microelectronic Products and Business
Communications Systems. The overall revenue growth was impacted by the
elimination of Consumer Products sales as a component of total revenues as well
as lower revenues from Other Systems and Products. On October 1, 1997, Lucent's
Consumer Products business became part of a venture with Philips. The decline in
Other Systems and Products was due to the sale of Lucent's ATS and Custom
Manufacturing Services ("CMS") businesses. Total revenue growth was primarily
driven by sales within the United States which grew by 11%. In addition, sales
outside the United States increased by 6%.
The following table presents Lucent's revenues by product line and the
approximate percentage of total revenues for the three months ended December 31,
1997 and 1996:
Three Months
Ended
December 31,
Dollars in Millions -------------------------------
1997 1996
------- -------
Systems for Network Operators............. $5,943 68% $5,026 63%
Business Communications Systems........... 1,930 22 1,733 22
Microelectronic Products.................. 775 9 671 9
Consumer Products......................... - - 330 4
Other Systems and Products................ 76 1 178 2
Total..................................... $8,724 100% $7,938 100%
Revenues from SYSTEMS FOR NETWORK OPERATORS increased $917 million, or 18.2% in
1997 compared with the same quarter in 1996. The increase was driven by sales of
switching and wireless systems, software, transport and access 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.
<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 within the United States increased by
26.2% over the year-ago quarter. The revenue increase within the United States
was led by sales to competitive local exchange carriers, Regional Bell Operating
Companies, wireless providers and long distance carriers. Revenues generated
outside the United States were flat for the quarter ended December 31, 1997
compared with the same quarter in 1996. Revenues generated outside the United
States represented 25.7% of revenues from Systems for Network Operators for the
quarter ended December 31, 1997 compared with 30.4% in same quarter in 1996.
Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $197 million, or 11.4%
compared with the same quarter in 1996. This increase was led by increased sales
of messaging systems, including systems provided by the recently acquired Octel
Messaging Division, services and Systimax(R) networking systems. Revenues
generated outside the United States increased by 42.9%, largely due to growth in
the Europe/Middle East/Africa, Canada and Caribbean/Latin America regions.
Revenue from outside the United States represented approximately 18.7% of the
revenue for the quarter. For the quarter ended December 31, 1997, sales within
the United States increased 6.0% as compared to the same quarter of 1996.
On January 22, 1998, Lucent completed its acquisition of Prominet Corporation, a
participant in the rapidly emerging Gigabit Ethernet networking industry, in a
merger totaling $164 million worth of Lucent stock and options as well as
contingent obligations of $35 million in stock.
Sales of MICROELECTRONIC PRODUCTS increased $104 million, or 15.5% compared with
the same quarter in 1996 due to higher sales of customized chips for computing
and communications, including components for wireless telephones, local area
networks, data networking and high-end computer workstations. Increases in power
systems, optoelectronic components and the licensing of intellectual property
also contributed to the overall increase. Revenues generated within the United
States increased 24.8% compared to the same quarter in 1996, led by sales to
original equipment manufacturers ("OEMs"). Revenues generated outside the United
States increased 7.1%, driven by sales in the Europe/Middle East/Africa and
Caribbean/Latin America regions. Revenues from outside the United States
represented 48.8% of the Microelectronic Products sales in the quarter ended
December 31, 1997 compared with 52.6% for the same period of 1996.
On October 1, 1997, Lucent contributed its CONSUMER PRODUCTS unit to a venture
formed with Philips. Lucent has an initial equity interest of 40% in the venture
which is called Philips Consumer Communications, L.P.("PCC").
Revenues from sales of OTHER SYSTEMS AND PRODUCTS decreased $102 million, or
57.3% compared with the same quarter in 1996. The reduction in revenues was
largely due to the sale of Lucent's ATS and CMS businesses.
Total costs increased $223 million, or 5.2% in 1997 compared with the same
quarter in 1996 primarily due to the increase in sales volume. As a percentage
of revenue, gross margin increased to 48.2% from 45.9% in the year-ago quarter.
The increase in gross margin percentage was due to overall favorable changes in
the revenue mix, including record software sales and increased intellectual
property 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, 1997 VERSUS THREE
MONTHS ENDED DECEMBER 31, 1996
Selling, general and administrative expenses as a percentage of revenues were
17.8% for the quarter ended December 31, 1997 as compared with 18.4% for the
same quarter in 1996.
Selling, general and administrative expenses increased $96 million, or 6.6%
compared with the same quarter in 1996. This increase is attributed to the
increase in sales volume, investment in growth initiatives and the
implementation of SAP, an integrated software platform for information systems.
Research and development expenses represented 9.5% of revenues for the quarter
ended December 31, 1997 as compared with 9.0% of revenues in the same quarter of
1996.
For the quarter ended December 31, 1997, research and development expenses
increased $195 million over the year-ago quarter. This increase was primarily
due to investments in high growth areas such as wireless, data networking,
optical networking and microelectronics.
The purchased in-process research and development expenses for the quarter
reflects $427 million of in-process research and development in connection with
the acquisition of Livingston compared with $79 million for in-process research
and development expenses for Agile Networks, Inc. for the same period in 1996.
OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE MONTHS ENDED DECEMBER 31, 1996
Other income -- net increased $154 million for the quarter ended December 31,
1997 compared with the same quarter in 1996. This increase was primarily due to
the pre-tax gain of $149 million associated with the sale of Lucent's ATS
business.
Interest expense for the quarter ended December 31, 1997 was flat compared with
the same quarter in 1996.
The effective income tax rate of 46.4% for the quarter ended December 31, 1997
increased from the effective income tax rate of 38.6%. The increase was due to
the write-off of purchased in-process research and development expenses
associated with the acquisition of Livingston. Excluding the impact of the
purchased in-process research and development associated with the Livingston
acquisition, the effective income tax rate decreased to 36.0%. This decrease was
primarily due to tax impact of foreign activity.
<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 $941 million, or 4.0%, from fiscal year-end 1997. This
overall increase was due to an increase of receivables of $922 million and an
increase in other assets of $643 million, offset by a decrease in inventories of
$322 million and a decrease in property, plant and equipment of $418 million.
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. The
increase in other assets and decrease in property, plant and equipment was
primarily due to Lucent's contribution of its Consumer Products business to PCC.
Total liabilities decreased $343 million, or 1.7% from fiscal year-end 1997.
This decrease was largely due to the pay down of commercial paper.
Working capital, defined as current assets less current liabilities, increased
$1,531 million from fiscal year-end 1997 primarily resulting from the increase
in accounts receivable as discussed above and the following reclassification of
short-term debt to long-term debt. On January 9, 1998, Lucent issued $300
million of 30 year debentures and reclassified the amount from debt maturing
within one year to long-term debt. The proceeds were used to pay down a portion
of Lucent's commercial paper during the second quarter of fiscal 1998.
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 December 31, 1997, Lucent maintained approximately $5,200 million in credit
facilities of which a portion is used to support Lucent's commercial paper
program. At December 31, 1997, approximately $5,000 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.
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.
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 LPC ("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 December, 31, 1997, all of these commitments were drawn down
by Sprint PCS. Of Lucent's remaining commitment of $1,000 million, about $150
million was drawn down by Sprint PCS as of December 31, 1997.
*Sprint Spectrum is a service mark of Sprint Communications Company, LP.
- -------------------------
<PAGE>
15 Form 10-Q - Part I
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 additional $150 million of loans and
future loans and commitments to Sprint PCS.
In addition, as of September 30, 1997, Lucent had entered into agreements to
extend credit of up to an aggregate of approximately $850 million to other PCS
operators for possible future sales. During the quarter, commitments for $500
million, included in the $850 million, expired and were not extended. As of
December 31, 1997, no amounts had been advanced under the remaining agreement.
About $135 million was drawn down in January 1998. Lucent has 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.
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 December 31, 1997 and
1996. The strategy employed by Lucent to manage its exposure to interest rate
fluctuations is unchanged from that date. 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.
<PAGE>
16 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
CASH FLOWS
Cash provided by operating activities decreased compared with the same period in
1996 due to a smaller decrease in inventory levels and a larger increase in
accounts receivable. The increase in receivables and decrease in inventories is
consistent with the seasonal nature of business.
Cash payments of $26 million were made for the quarter ended December 31, 1997
for the 1995 business restructuring charge. Of the 23,000 positions that Lucent
announced it would downsize and that are included in the 1995 business
restructuring charge, the workforce has been reduced by approximately 19,000
positions as of December 31, 1997.
Comparing the quarters ended December 31, 1997 and 1996, the reduction in cash
used in investing was due to proceeds from the sale of ATS this quarter, the
fact that no cash was used for the Livingston acquisition and a decrease in
capital expenditures. Capital expenditures, the largest component, were $261
million and $344 million for the three month periods ended December 31, 1997 and
December 31, 1996, 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, 1997, cash used in financing activities
increased primarily due to the pay down of short-term borrowings.
The ratio of total debt to total capital (debt plus equity) was 44.2% at
December 31, 1997 compared to 55.4% 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 a potentially responsible
party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes. Under the Separation and Distribution Agreement,
among AT&T, Lucent and NCR Corporation ("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 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
<PAGE>
17 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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
December 31, 1997 cannot be determined.
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; 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.
<PAGE>
18 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Dependence On New Product Development:
The markets for the Company's principal products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating 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.
Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.
Readiness for Year 2000:
Lucent has taken actions to understand the nature and extent of the work
required to make its systems, products and infrastructure Year 2000 compliant.
Lucent began work several years ago to prepare its products and its financial,
information and other computer-based systems for the Year 2000, including
replacing and/or updating existing legacy systems. Lucent believes it is taking
the necessary steps to resolve Year 2000 issues, however, given the potential
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
these 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.
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.
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.
<PAGE>
19 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 October 1997, the American Institute of Certified Public Accountants issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP
97-2 provides guidance on when revenue should be recognized and in what amounts
for licensing, selling, leasing, or otherwise marketing computer software. SOP
97-2 is effective for financial statements for fiscal years beginning after
December 15, 1997. Earlier application for financial statements or information
that has not been issued is encouraged. Lucent is in the process of evaluating
if the adoption of SOP 97-2 will have an impact, if any, on its software revenue
recognition practices.
<PAGE>
20 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
During the current quarter, Lucent adopted Statement of Financial Accounting
Standard No. 128, "Earnings Per Share" ("SFAS No. 128"), as issued by the
Financial Accounting Standards Board. SFAS No. 128 simplifies the standards for
computing earnings per share and requires retroactive restatement of all prior
period earnings per share calculations. The table below reports an update to
Lucent's five year summary table as reported in the Company's Annual Report on
Form 10-K for the Fiscal Year ended September 30, 1997.
Five Year Summary
(Dollars in millions, except per share amounts)
(Unaudited)
Year Ended Nine Months Ended
September 30, September 30, Year Ended December 31,
------------- ----------------- -----------------------
1997 1996 1996 1995 1995 1994 1993
(1) (4) (1)
Earnings(loss)
per common share -
basic (2) 0.85 (1.37) 0.38 0.28 (1.65) n/a n/a
Earnings(loss)
per common share -
diluted (2) 0.84 (1.37) 0.38 0.28 (1.65) n/a n/a
Earnings(loss)
per common share -
Pro Forma(3) n/a (1.25) 0.35 0.24 (1.36) n/a n/a
(1) Includes pretax restructuring and other charges of $2,801 ($1,847 after
taxes) recorded as $892 of costs, $1,645 of selling, general and
administrative expenses and $264 of research and development expenses.
(2) The calculation of earnings(loss) per common share - basic and
earnings(loss) per common share - diluted includes the retroactive
recognition to January 1, 1995 of the 524,624,894 shares owned by AT&T on
April 10, 1996.
(3) The calculation of earnings(loss) per common share on a pro forma basis
assumes that all 636,661,931 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.
(4) Beginning September 30, 1996, Lucent changed its fiscal year-end from
December 31 to September 30, and reported results for the nine-month
transition period ended September 30, 1996.
<PAGE>
21 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:
Current Report on Form 8-K dated October 21, 1997 was filed pursuant to
Item 5 (Other Events) and Item 7 (Financial Statements, Pro Forma
Financial Information and Exhibits).
<PAGE>
22 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 13, 1998
By James S. Lusk
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
23 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, 1997
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
For the Three
Months Ended
December 31, 1997
Earnings Before Income Taxes ................................ $ 1,478
Less Interest Capitalized during
the Period ................................................ 4
Less Undistributed Earnings of Less than 50%
Owned Affiliates .......................................... 3
Add Fixed Charges ........................................... 122
Total Earnings .............................................. $ 1,593
Fixed Charges
Total Interest Expense Including Capitalized Interest ....... $ 93
Interest Portion of Rental Expense .......................... 29
Total Fixed Charges ..................................... $ 122
Ratio of Earnings to Fixed Charges .......................... 13.1
<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, 1997 and is
qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,225
<SECURITIES> 0
<RECEIVABLES> 6,639
<ALLOWANCES> 344
<INVENTORY> 2,604
<CURRENT-ASSETS> 13,256
<PP&E> 10,850
<DEPRECIATION> 6,121
<TOTAL-ASSETS> 24,752
<CURRENT-LIABILITIES> 9,962
<BONDS> 1,945
0
0
<COMMON> 6
<OTHER-SE> 4,665
<TOTAL-LIABILITY-AND-EQUITY> 24,752
<SALES> 8,724
<TOTAL-REVENUES> 8,724
<CGS> 4,519
<TOTAL-COSTS> 4,519
<OTHER-EXPENSES> 2,811
<LOSS-PROVISION> 54
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 1,478
<INCOME-TAX> 686
<INCOME-CONTINUING> 792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.21
</TABLE>
