<PAGE>
AS FILED WITH THE SEC ON MAY 10, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 001-11639
LUCENT TECHNOLOGIES INC.
A Delaware I.R.S. Employer
Corporation No. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone - Area Code 908-582-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
- -
At April 28, 2000, 3,256,392,823 common shares were outstanding.
<PAGE>
2 Form 10-Q - Part I
PART 1 - 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 Six
Months Ended Months Ended
March 31, March 31,
2000 1999 2000 1999
<C> <C> <C> <C> <C>
Revenues............................. $10,256 $ 8,783 $ 20,161 $ 18,625
Costs................................ 5,939 4,546 11,198 9,176
Gross margin......................... 4,317 4,237 8,963 9,449
Operating Expenses:
Selling, general and
administrative expenses ........... 2,030 2,058 3,999 3,995
Research and development expenses ... 1,099 1,231 2,077 2,244
In-process research
and development expenses............ 11 (6) 11 290
Total operating expenses............. 3,140 3,283 6,087 6,529
Operating income..................... 1,177 954 2,876 2,920
Other income (expense)- net ......... 31 (52) 286 64
Interest expense..................... 99 95 197 173
Income before income taxes........... 1,109 807 2,965 2,811
Provision for income taxes........... 355 272 961 1,040
Income before cumulative effect
of accounting change................ 754 535 2,004 1,771
Cumulative effect of accounting change
(net of income taxes of $842)....... - - - 1,308
Net income .......................... $ 754 $ 535 $ 2,004 $ 3,079
Earnings per common share - basic:
Income before cumulative effect
of accounting change............... $ 0.24 $ 0.17 $ 0.63 $ 0.57
Cumulative effect of accounting
change ............................ - - - 0.43
Net income .......................... $ 0.24 $ 0.17 $ 0.63 $ 1.00
Earnings per common share - diluted:
Income before cumulative effect
of accounting change............... $ 0.23 $ 0.17 $ 0.61 $ 0.55
Cumulative effect of accounting
change ............................ - - - 0.41
Net income........................... $ 0.23 $ 0.17 $ 0.61 $ 0.96
Dividends declared
per common share................... $ 0.00 $ 0.00 $ 0.04 $ 0.04
</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>
March 31, September 30,
2000 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents.............. $ 1,709 $ 1,880
Receivables less allowances
of $345 at March 31, 2000
and $376 at September 30, 1999 ....... 10,573 10,563
Inventories............................ 5,321 5,064
Contracts in process, net of contract
billings of $5,778 at
March 31, 2000 and $5,565 at
September 30, 1999.................... 1,416 1,103
Deferred income taxes - net............ 1,579 1,609
Other current assets................... 1,816 2,065
Total current assets................... 22,414 22,284
Property, plant and equipment, net
of accumulated depreciation of
$7,671 at March 31, 2000 and
$7,474 at September 30, 1999......... 7,051 6,895
Prepaid pension costs.................. 6,336 6,175
Capitalized software development costs. 555 470
Other assets........................... 3,641 3,426
TOTAL ASSETS........................... $39,997 $39,250
</TABLE>
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)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
<S> <C> <C>
LIABILITIES
Accounts payable....................... $ 2,518 $ 2,901
Payroll and benefit-related
liabilities.......................... 1,392 2,338
Postretirement and postemployment
benefit liabilities.................. 87 137
Debt maturing within one year.......... 1,890 2,871
Other current liabilities.............. 3,405 3,661
Total current liabilities.............. 9,292 11,908
Postretirement and postemployment
benefit liabilities.................. 5,954 6,305
Long-term debt ........................ 3,833 4,167
Other liabilities...................... 3,336 2,934
Total liabilities ..................... 22,415 25,314
Commitments and contingencies
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: 10,000,000,000
Issued and outstanding shares:
3,203,813,453 at March 31, 2000
3,142,537,636 at September 30, 1999... 32 31
Additional paid-in capital............. 9,830 7,994
Guaranteed ESOP obligation............. (26) (33)
Retained earnings...................... 8,050 6,188
Accumulated other comprehensive
income (loss)......................... (304) (244)
Total shareowners' equity.............. 17,582 13,936
TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY................... $39,997 $39,250
</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 Six Months
Ended March 31,
2000 1999
<S> <C> <C>
Operating Activities
Net income............................... $ 2,004 $ 3,079
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Cumulative effect of accounting change - (1,308)
Depreciation and amortization......... 1,046 865
Provision for uncollectibles.......... 83 20
Tax benefit from stock options........ 909 223
Deferred income taxes 30 243
Purchased in-process research and
development......................... 11 15
Adjustment to conform pooled
companies' fiscal years............. 11 170
Increase in accounts receivable ...... (784) (1,960)
Increase in inventories
and contracts in process............ (614) (1,073)
(Decrease) increase in accounts
payable............................. (386) 334
Changes in other operating assets
and liabilities..................... (882) (1,387)
Other adjustments for noncash
items - net......................... (960) (429)
Net cash provided by (used in)
operating activities.................... 468 (1,208)
Investing Activities
Capital expenditures .................... (1,240) (844)
Proceeds from the sale or disposal of
property, plant and equipment.......... 21 58
Purchases of equity investments.......... (116) (116)
Sales of equity investments.............. 789 1
Purchase of investment securities........ - (375)
Sales or maturity of
investment securities................... 42 320
Acquisitions of businesses,
net of cash acquired.................... (164) (212)
Dispositions of businesses............... 274 57
Other investing activities - net......... 41 (12)
Net cash used in investing activities.... (353) (1,123)
</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 Six Months
Ended March 31,
2000 1999
<S> <C> <C>
Financing Activities
Repayments of long-term debt ............ (387) (8)
Issuance of long-term debt............... 16 1,840
Proceeds from issuance of common stock... 902 315
Dividends paid........................... (126) (106)
S-Corp distribution to stockholder - (40)
(Decrease) increase in short-term
borrowings - net....................... (687) 455
Net cash (used in) provided by
financing activities................... (282) 2,456
Effect of exchange rate
changes on cash........................ (4) (21)
Net (decrease) increase in cash and
cash equivalents....................... (171) 104
Cash and cash equivalents
at beginning of year................... 1,880 1,252
Cash and cash equivalents
at end of period....................... $ 1,709 $ 1,356
</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 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.
On October 15, 1999, Lucent merged with International Network Services ("INS").
On November 3, 1999, Lucent merged with Excel Switching Corporation. These
mergers have been accounted for as "pooling-of-interests" and the consolidated
financial statements of Lucent were restated for all periods prior to the
mergers to include the accounts and operations of INS and Excel.
Before merging with Lucent, INS had a June 30 fiscal year end and Excel had a
December 31 fiscal year end. The unaudited consolidated statement of income for
the quarter ended March 31, 1999 was derived by combining the historical results
of operations of Lucent for the quarter ended March 31, 1999, with the
historical results of operations of INS for the quarter ended December 31, 1998
and with the historical results of operations of Excel for the quarter ended
March 31, 1999. The unaudited consolidated balance sheet at September 30, 1999
was derived by combining the historical financial position of Lucent at
September 30, 1999, with the historical financial position of INS at June 30,
1999, and with the historical financial position of Excel at September 30, 1999,
respectively. The unaudited consolidated statement of cash flows for the six
months ended March 31, 1999 was derived by combining the historical cash flows
of Lucent for the six months ended March 31, 1999, with the historical cash
flows of INS for the six months ended December 31, 1998, and with the historical
cash flows of Excel for the three months ended March 31, 1999. Intercompany
transactions for the periods presented were not material.
Excel's results of operations for the three months ended December 31, 1998, were
included in Lucent's results of operations for the year ended September 30, 1998
and were also included in Lucent's consolidated results of operations for the
year ended September 30, 1999. Excel's revenue and net loss for the three months
ended December 31, 1998 were $37 and $1, respectively. As a result, the
consolidated balance sheet of Lucent at September 30, 1999, includes an
adjustment to retained earnings to eliminate the loss recognized by Excel for
the three months ended December 31, 1998. In addition, information from the
statement of cash flows for Excel for the three months ended December 31, 1998,
has been excluded from the consolidated statements of cash flows for the six
months ended March 31, 1999, since Excel's activity for this period has been
included in the consolidated statements of cash flows for the year ended
September 30, 1998.
<PAGE>
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
In order to conform the fiscal year ends for INS and Lucent, INS's results of
operations and cash flows for the three months ended September 30, 1999, will
not be reflected in Lucent's financial statements for the six months ended March
31, 2000. INS's revenue and net income for the three months ended September 30,
1999 were $100 and $11, respectively. The consolidated balance sheet of Lucent
at March 31, 2000, includes an adjustment to retained earnings to reflect the
income recognized by INS for the three months ended September 30, 1999.
On March 17, 2000, Lucent acquired, for approximately $100 in cash, the products
and the design, marketing and sales teams of VTC Inc., a Bloomington,
Minnesota-based privately held supplier of semiconductor components to computer
hard disk drive manufacturers. Included in the purchase price was approximately
$11 ($7 after-tax) of purchased in-process research and development, which
resulted in a one-time, non-cash charge to earnings in the current quarter, and
$84 allocated to goodwill, acquired technology and other intangible assets, to
be amortized over periods not exceeding 7 years. The transaction was accounted
for as a purchase. VTC will also be able to receive an additional $50 over two
years based on it meeting certain performance-based manufacturing goals, which
would be recorded as additional goodwill.
The preparation of financial statements during interim periods requires
management to make numerous estimates and assumptions that impact the reported
amounts of assets, liabilities, revenues and expenses. Estimates and assumptions
are reviewed periodically and the effect of revisions is reflected in the
results of operations of the interim periods in which changes are determined to
be necessary. During the six months ended March 31, 1999, improved performance
on multi-year contracts and the resolution of certain contingencies had a
positive impact on the reported results of operations.
The reported results of operations and cash flows 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 Lucent's Form
10-K for the year ended September 30, 1999, and the audited restated
consolidated financial statements and notes thereto included in Exhibit 99.1 of
the Company's Form 8-K (filed February 11, 2000) for the year ended September
30, 1999.
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, 1999. Certain
prior period amounts have been reclassified to conform to the current period
presentation.
2. ANNOUNCED SPIN-OFF
On March 1, 2000, Lucent announced plans to spin off its PBX, SYSTIMAX(R)
structured cabling and LAN-based data businesses to shareowners, forming a
separate company that will focus directly and independently on the enterprise
networking market. The new company will start out as an $8 billion business with
approximately 34,000 employees.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
The spin-off is expected to be accomplished through a tax-free distribution of
shares to Lucent's shareowners. Lucent anticipates the spin-off should be
completed by the close of the quarter ending September 30, 2000. It is
anticipated that the new enterprise company will take a one-time charge for
restructuring expenses. The spin-off is subject to several conditions, including
receipt of a favorable tax ruling.
3. PHILIPS CONSUMER COMMUNICATIONS ("PCC")
On October 1, 1997, Lucent contributed its Consumer Products business to a new
venture formed by Lucent and Philips Electronics N.V. ("Philips") in exchange
for 40% ownership of PCC. In December 1998, Lucent and Philips ended the PCC
venture and regained control of their original businesses. The results of
operations and net assets of the remaining businesses Lucent previously
contributed to PCC have been consolidated as of October 1, 1998. The revenues
are included in Other and Corporate. In December 1998, Lucent sold certain
assets of the wireless handset portion of the remaining businesses to Motorola,
Inc. During the quarter ended March 31, 2000, Lucent completed the sale of the
remaining Consumer Products business.
4. ACCOUNTING CHANGE - EMPLOYEE BENEFIT PLANS
Effective October 1, 1998, Lucent changed its method for calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of annual net pension and postretirement benefit
costs. Under the previous accounting method, the calculation of the
market-related value of plan assets included only interest and dividends
immediately, while all other realized and unrealized gains and losses were
amortized on a straight-line basis over a five-year period. The new method used
to calculate market-related value includes immediately an amount based on
Lucent's historical asset returns and amortizes the difference between that
amount and the actual return on a straight-line basis over a five-year period.
The new method is preferable under Statement of Financial Accounting Standards
No. 87 because it results in calculated plan asset values that are closer to
current fair value, thereby lessening the accumulation of unrecognized gains and
losses, while still mitigating the effects of annual market value fluctuations.
The cumulative effect of this accounting change related to periods prior to
fiscal year 1999 of $2,150 ($1,308 after-tax, or $0.43 and $0.41 per basic and
diluted share, respectively) is a one-time, non-cash credit to fiscal 1999
earnings.
<PAGE>
10 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
5. COMPREHENSIVE INCOME
Comprehensive Income represents net income plus the results of certain
shareowners' equity changes not reflected in the statements of income. The
components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
-------------------- -------------------
<S> <C> <C> <C> <C>
Net income................... $ 754 $ 535 $ 2,004 $ 3,079
Other comprehensive
income(loss):
Foreign currency translation
adjustments.............. (7) (96) (59) (45)
Unrealized holding gains
(losses) arising during
the period............... (46) (13) (1) (2)
Minimum pension liability
adjustment............... - 7 - 7
------- ------- ------- -------
Comprehensive income......... $ 701 $ 433 $ 1,944 $ 3,039
------- ------- ------- -------
</TABLE>
The after-tax components of accumulated other comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
Total
Accumulated
Foreign Unrealized Minimum Other
Currency Holding Pension Comprehensive
Translation Gains Liability Income/
Adjustment Adjustment (Loss)
----------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Accumulated other comprehensive
income(loss) at
September 30, 1999............ $ (313) $ 79 $ (10) $ (244)
Current period change.......... (59) 170 - 111
Reclassification adjustment
(net of tax of $110).......... - (171) - (171)
Accumulated other comprehensive ------- ------- ------- -------
income(loss)at
March 31, 2000............... $ (372) $ 78 $ (10) $ (304)
------- ------- ------- -------
</TABLE>
The foreign currency translation adjustments are not currently adjusted for
income taxes since they relate to indefinite investments in non-United States
subsidiaries.
<PAGE>
11 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
6. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories at March 31, 2000 and September 30, 1999 were as follows:
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
-------------- ---------------
<S> <C> <C>
Completed goods ............... $ 3,024 $ 2,951
Work in process and
raw materials................ 2,297 2,113
-------- --------
Total inventories ............. $ 5,321 $ 5,064
-------- --------
</TABLE>
7. EARNINGS PER COMMON 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 and six-month periods ended March 31, 2000 and
1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
---------------------- ---------------------
<S> <C> <C> <C> <C>
Number of Shares (in millions)
- ----------------------------------
Common shares - basic............. 3,183.4 3,097.7 3,168.8 3,093.8
Effect of dilutive securities:
Stock options.................... 85.0 108.7 97.1 105.7
Other............................ 5.3 7.1 5.4 7.3
Common shares - diluted........... 3,273.7 3,213.5 3,271.3 3,206.8
Options excluded from the
computation of earnings per
share - diluted since option
exercise price was greater than
the average market price of the
common shares for the period...... 39.6 2.1 11.3 4.2
</TABLE>
<PAGE>
12 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
8. OPERATING SEGMENTS
Lucent adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," beginning with its financial statements for the fiscal
year ended September 30, 1999. This standard requires disclosure of segment
information on the same basis used internally for evaluating segment performance
and for deciding how to allocate resources to segments.
Lucent operates in the global telecommunications networking industry and has
three reportable operating segments: Service Provider Networks ("SPN"),
Enterprise Networks ("Enterprise"), and Microelectronics and Communications
Technologies ("MCT"). SPN provides public networking systems and software to
telecommunications service providers and public network operators around the
world. Enterprise develops, manufactures, markets and services advanced
communications products and data networking systems for business customers. MCT
designs and manufactures high-performance integrated circuits, power systems and
optoelectronic components for applications in the communications and computing
industries. MCT also includes network products, new ventures and intellectual
property.
The three reportable operating segments are strategic market units that offer
distinct products and services. These segments were determined based on the
customers and the markets that Lucent serves. Each market unit is managed
separately as each operation requires different technologies and marketing
strategies. Intersegment transactions that occur are based on current market
prices and all intersegment profit is eliminated in consolidation.
Performance measurement and resource allocation for the reportable operating
segments are based on many factors. The primary financial measure used is
Operating income, exclusive of goodwill and existing technology amortization,
and of purchased in-process R&D and other costs from business acquisitions
(acquisition/integration-related costs).
Lucent employs shared-service concepts to realize economies of scale and
efficient use of resources. The costs of shared services, and other corporate
center operations managed on a common basis, are allocated to the segments based
on usage, where possible, or other factors based on the nature of the activity.
<PAGE>
13 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
The following tables present Lucent's revenues and operating income by
reportable operating segment:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
March 31, March 31,
2000 1999 2000 1999
External Revenues ------------------ ----------------
<S> <C> <C> <C> <C>
Service Provider Networks $ 6,470 $ 5,251 $12,686 $11,620
Enterprise Networks 1,950 2,113 3,955 4,042
Microelectronics and Communications Technologies 1,741 1,264 3,250 2,550
Total reportable segments 10,161 8,628 19,891 18,212
Other and corporate 95 155 270 413
Total External Revenues $10,256 $ 8,783 $20,161 $18,625
Intersegment Revenues
Service Provider Networks $ 5 $ 21 $ 60 $ 63
Enterprise Networks 22 60 57 130
Microelectronics and Communications Technologies 320 334 603 636
Total reportable segments 347 415 720 829
Other and corporate (347) (415) (720) (829)
Total Intersegment Revenues $ - $ - $ - $ -
Total Revenues
Service Provider Networks $ 6,475 $ 5,272 $12,746 $11,683
Enterprise Networks 1,972 2,173 4,012 4,172
Microelectronics and Communications Technologies 2,061 1,598 3,853 3,186
Total reportable segments 10,508 9,043 20,611 19,041
Other and corporate (252) (260) (450) (416)
Total Revenues $10,256 $ 8,783 $20,161 $18,625
Operating Income
Service Provider Networks $ 874 $ 760 $ 2,084 $ 2,708
Enterprise Networks 114 33 299 123
Microelectronics and Communications Technologies 316 241 674 510
Total reportable segments (a) 1,304 1,034 3,057 3,341
Acquisition/integration-related costs (11) (1) (72) (297)
Goodwill and existing technology amortization (63) (91) (127) (150)
Other and corporate (53) 12 18 26
Operating income 1,177 954 2,876 2,920
Other income(expense)-net 31 (52) 286 64
Interest expense (99) (95) (197) (173)
Income before income taxes $ 1,109 $ 807 $ 2,965 $ 2,811
</TABLE>
(a) Segment operating income excludes goodwill and existing technology
amortization, and acquisition/integration-related costs.
<PAGE>
14 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
9. 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, litigation under federal securities laws 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 March
31, 2000 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 in addition to
that provided for at March 31, 2000 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. 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, 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.
<PAGE>
15 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
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
typically 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, 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
possible loss or range of possible loss that may be incurred in excess of that
provided for at March 31, 2000 cannot be estimated.
10. SUBSEQUENT EVENTS
Ignitus Communications LLC.
On April 4, 2000, Lucent acquired the remaining 44 percent of Ignitus
Communications LLC, a start-up company that focuses on high-speed optical
communications at the network edge. Lucent previously owned 56 percent of the
company.
DeltaKabel Telecom cv
On April 5, 2000, Lucent acquired DeltaKabel TeleCom cv, of Gouda, the
Netherlands, a privately-held developer of cable modem and Internet protocol
(IP) telephony solutions for the European market. The transaction will be
accounted for as a purchase.
<PAGE>
16 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
TeraBeam Corporation
On April 9, 2000, Lucent and TeraBeam Corporation entered into an agreement to
develop TeraBeam's fiberless optical networking system that provides high-speed
data networking between local and wide area networks. Under the agreement,
Lucent paid cash and contributed research and development assets, intellectual
property, and free-space optical products, valued in the aggregate at $450.
Lucent owns 30 percent of the venture that will develop the fiberless optical
networking system, and which will be accounted for under the equity method of
accounting. Lucent will also be a preferred supplier of optical components,
networking equipment and professional services to TeraBeam. In addition, under
certain conditions, Lucent will have the right to purchase TeraBeam's equity
interest in the venture.
Global Manufacturing Strategy
On April 19, 2000, Lucent announced that it will be changing its global
manufacturing strategy by expanding its relationships with contract
manufacturing partners and focusing its internal manufacturing operations on
high-end process manufacturing and systems integration, including new product
introductions, supply chain management, and system testing. The Company
estimates that most of the transition will be completed in the 18 to 24 months
following the announcement.
Agere, Inc.
On April 20, 2000, Lucent acquired privately-held Agere, Inc., an Austin,
Texas-based developer of programmable network processor technology, for $377 of
Lucent common stock and options. The transaction will be accounted for as a
purchase. Included in the purchase price was approximately $94 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 June 30, 2000, and $298
allocated to goodwill and other intangible assets, to be amortized over 7 years.
Ortel Corporation
On April 27, 2000, Lucent acquired Ortel Corporation, an Alhambra,
California-based developer of optoelectronic components for cable TV networks,
for approximately $2,998 of Lucent common stock and options. The transaction
will be accounted for as a purchase. Included in the purchase price was $307 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 June 30, 2000, and
$2,749 allocated to goodwill, acquired technology and other intangible assets,
to be amortized over periods not exceeding 9 years.
Announcement To Sell Power Systems Business
On May 3, 2000, Lucent announced that it is seeking a buyer for its Power
Systems business, a leading supplier of power products for the
telecommunications and computer industries. Lucent's Power Systems, which is
headquartered in Mesquite, Texas, has 4,700 employees working in 30 locations
around the world. Lucent expects to begin discussions with potential buyers
shortly and expects to identify a buyer within six months.
<PAGE>
17 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
HIGHLIGHTS
Lucent reported net income of $754 million, or $0.23 per share (diluted) for the
quarter ended March 31, 2000, Lucent's second fiscal quarter of 2000. This
compares with year-ago quarterly net income of $535 million, or $0.17 per share
(diluted). For the six months ended March 31, 2000, Lucent reported net income
of $2,004 million, or $0.61 per share (diluted) compared with net income of
$3,079 million, or $0.96 per share (diluted) in the same period last year.
Included in last year's results is a $1,308 million (or $0.41 per share-diluted)
cumulative effect of accounting change related to Lucent's pension and
postretirement benefits (see Note 4). Lucent's income before the cumulative
effect of the accounting change was $1,771 million (or $0.55 per share-diluted)
for the six months ended March 31, 1999.
Net income for the current quarter includes $11 million ($7 million, after-tax)
of purchased in-process research and development ("IPRD") expenses related to
the acquisition of VTC Inc. Net income for the year-ago quarter includes $18
million ($15 million, after-tax) of purchased IPRD expenses related to the
acquisitions of WaveAccess, Sybarus, and Enable Semiconductor's Ethernet LAN
business; a $24 million reversal of purchased IPRD related to Stratus (non-tax
impacting); and $7 million of merger-related costs associated with the
acquisition of VitalSigns (non-tax impacting). In addition, net income for the
six-month period ended March 31, 2000 includes a gain of $189 million, pre-tax
($115 million, after-tax) associated with the sale of an equity investment and a
pre-tax charge of $61 million ($40 million, after-tax) to operating expenses
primarily associated with the mergers with International Network Services
("INS"), Excel Switching Corp. and Xedia Corporation. Net income for the
prior-year six-month period also includes $296 million ($287 million, after-tax)
of purchased IPRD expenses primarily related to the acquisitions of Stratus and
Quadritek.
On March 1, 2000, Lucent announced plans to spin-off to shareowners its PBX,
SYSTIMAX(R) structured cabling and LAN-based data businesses, forming a separate
company that will focus directly and independently on the enterprise networking
market. The spin-off is expected to be accomplished through a tax-free
distribution of shares to Lucent's shareowners. Lucent anticipates the spin-off
should be completed by the close of its fourth fiscal quarter, which ends
September 30, 2000. It is anticipated that the new enterprise company will take
a one-time charge for restructuring expenses. The spin-off is subject to several
conditions, including receipt of a favorable tax ruling (see Note 2). In
addition, during the quarter, Lucent completed the sale of its remaining
consumer products business (see Note 3).
On May 3, 2000, Lucent announced that it is seeking a buyer for its Power
Systems business, a leading supplier of power products for the
telecommunications and computer industries. Lucent's Power Systems, which is
headquartered in Mesquite, Texas, has 4,700 employees working in 30 locations
around the world. Lucent expects to begin discussions with potential buyers
shortly and expects to identify a buyer within six months.
- --------------------------------------
(R) Registered trademark of Lucent
<PAGE>
18 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
On April 19, 2000, Lucent announced that it will be changing its global
manufacturing strategy by expanding its relationships with contract
manufacturing partners and focusing its internal manufacturing operations on
high-end process manufacturing and systems integration, including new product
introductions, supply chain management, and system testing. Lucent estimates
that most of the transition will be completed in the 18 to 24 months following
the announcement.
Reference is made to Notes 1 and 10 of Notes to Consolidated Financial
Statements for information regarding certain acquisitions and subsequent events.
KEY BUSINESS CHALLENGES
Lucent continues to face significant competition and expects that the level of
competition on pricing and product offerings will intensify. Lucent expects that
new competitors will enter its markets as a result of the trend toward global
expansion by U.S. and non-U.S. competitors as well as continued changes in
technology and public policy. These competitors may include entrants from the
telecommunications, software, data networking, cable television and
semiconductor industries. Existing competitors have, and new competitors may
have, strong financial capabilities, technological expertise, well-recognized
brand names and a global presence. Such competitors may include Alcatel, Cisco
Systems, Inc., Ericsson, Nortel Networks, and Siemens AG. Lucent's management
periodically assesses market conditions and redirects the Company's resources to
meet new challenges. Steps Lucent may take include acquiring or investing in new
businesses and ventures, partnering with other companies, delivering new
technologies, closing and consolidating facilities, disposing of assets,
reducing work force levels and withdrawing from markets.
Historically, revenues and earnings had been higher in the first fiscal quarter
primarily because many of Lucent's large customers delayed a disproportionate
percentage of their capital expenditures until the fourth quarter of the
calendar year (Lucent's first fiscal quarter). Lucent took measures to manage
the seasonality of its business by changing the date on which its fiscal year
ends to September 30 beginning September 30, 1996, and its compensation programs
for employees, which resulted in a somewhat more uniform distribution of
revenues and earnings throughout the year. The Company expects to see further
shifts in seasonality as market conditions, industry-buying patterns and the
composition of its customer base continue to change.
Historically, the purchasing behavior of Lucent's largest customers has been
characterized by the use of fewer, larger contracts. These contracts typically
involve longer negotiating cycles, require the dedication of substantial amounts
of working capital and other resources, and in general require costs that may
substantially precede the recognition of associated revenues. Moreover, in
return for larger, longer-term purchase commitments, customers often demand more
stringent acceptance criteria, which can also cause revenue recognition delays.
Lucent has increasingly provided or arranged long-term financing for customers
as a condition to obtain or bid on infrastructure projects. Certain multiyear
contracts involve new
<PAGE>
19 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
technologies that may not have been previously deployed on a large-scale
commercial basis. On its multiyear contracts, Lucent may incur significant
initial cost overruns and losses that are recognized in the quarter in which
they become ascertainable. Further, profit estimates on such contracts are
revised periodically over the lives of the contracts, and such revisions can
have a significant impact on reported earnings in any one quarter.
Historically, a limited number of customers have provided a substantial portion
of Lucent's total revenues. These customers include AT&T, which continues to be
a significant customer, and the Regional Bell Operating Companies ("RBOCs"). The
communications industry is experiencing a consolidation of both U.S. and
non-U.S. companies. The loss of any of these customers, or any substantial
reduction in orders by any of these customers, could materially adversely affect
the Company's operating results. Changes in implementation plans by customers
inside and outside the United States could lead to delays in network deployments
by enterprises and service providers which could impact future results.
Lucent is diversifying its customer base and seeking out new types of customers
globally. These new types of customers include competitive access providers and
local exchange carriers, wireless service providers, cable television network
operators and computer manufacturers.
<PAGE>
20 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
REVENUES
Total revenues increased 16.8% to $10,256 million in the quarter compared with
the same quarter of 1999, and 8.2% to $20,161 million for the six months
compared to the same period in 1999, respectively, due to increases in sales
from Service Provider Networks and Microelectronics and Communications
Technologies partially offset by decreases in sales from Enterprise Networks.
For the quarter, sales within the United States increased 10.8% compared with
the same quarter last year. Sales outside the United States increased 31.8%
compared with the same quarter last year, with revenue growth in all major
regions. Sales outside of the United States represented 31.9% of revenues for
the current quarter as compared to 28.3% of revenues for the same quarter last
year. For the six months, sales within the United States increased 8.1% and
sales outside the United States increased 8.6% compared with the same period in
1999. Sales outside of the United States represented 32.4% of revenues for the
six months ended March 31, 2000 as compared to 32.3% of revenues for the same
period in 1999.
The following table presents Lucent's revenues by segment and the approximate
percentage of total revenues for the three and six months ended March 31, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
March 31, March 31,
Dollars in Millions ---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service Provider Networks $ 6,470 63% $5,251 60% $12,686 63% $11,620 62%
Enterprise Networks 1,950 19 2,113 24 3,955 20 4,042 22
Microelectronics and Communications
Technologies 1,741 17 1,264 14 3,250 16 2,550 14
Other and Corporate 95 1 155 2 270 1 413 2
Total Lucent $10,256 100% $8,783 100% $20,161 100% $18,625 100%
</TABLE>
Revenues from SERVICE PROVIDER NETWORKS increased $1,219 million, or 23.2% in
the quarter compared with the same quarter in 1999 and $1,066 million, or 9.2%
in the six months compared with the same period in 1999. These increases were
driven by sales of wireless systems, service provider Internet infrastructure,
optical networking equipment and NetworkCare(R) Professional Services. The
increase for the six-month period was partially offset by faster than
anticipated shifts in customers' purchases of new optical systems, resulting in
manufacturing capacity and deployment constraints in the three months ended
December 31, 1999 and lower than expected software revenues.
<PAGE>
21 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Revenues generated from service providers in the United States increased 13.7%
for the quarter and 10.1% for the six months compared to the same periods in
1999, and included revenue gains from sales to RBOCs and competitive local
exchange carriers. Sales generated outside the United States increased 47.8%
over the year-ago quarter, reflecting increases in all regions. For the six
months, sales generated outside the United States increased 7.4% over the same
prior-year period, reflecting gains in all regions, except Europe/Middle
East/Africa. Revenues generated outside the United States represented 33.4% of
revenues for the quarter compared with 27.9% for the same quarter of 1999 and
34.1% of revenues for the six months compared with 34.6% for the same period in
1999.
Revenues from ENTERPRISE NETWORKS decreased $163 million, or 7.7% in the quarter
compared with the same quarter in 1999 and $87 million, or 2.2% in the six
months compared with the same period in 1999. Decreased sales of messaging
systems and Systimax(R) structured cabling solutions were partially offset by
increased sales of Definity(R) Enterprise Communication Servers, including those
with Call Center applications, contributed to the decreased revenue for both the
quarter and six-month period. Revenues within the United States decreased 10.4%
for the quarter compared with the same quarter of 1999 and 4.2% for the six
months compared with the same period in 1999. Revenues generated outside the
United States increased by 2.0% for the quarter and 5.5% for the six months,
with revenue growth in the Asia/Pacific and Europe/Middle East/Africa regions,
as well as Canada for the six-month period. Revenues generated outside the
United States represented 24.3% of revenues for the quarter compared with 22.0%
in the same quarter in 1999 and 22.5% for the six months compared with 20.9% for
the same period in 1999.
Revenues from MICROELECTRONICS AND COMMUNICATIONS TECHNOLOGIES increased $477
million, or 37.7% in the quarter compared with the same quarter in 1999, and
$700 million, or 27.5% in the six months compared with the same period in 1999.
These increases were driven by sales of optoelectronic components and optical
fiber, power systems, and customized chips for high-speed communications and
data networking systems. Revenues within the United States increased 55.8% for
the quarter compared with the same quarter of 1999 and 37.8% for the six months
compared with the same period in 1999. Revenues generated outside the United
States increased by 14.7% for the quarter and 14.8% for the six months, with
revenue growth in all major regions, except the Europe/Middle East/Africa region
for the quarter. Revenues generated outside the United States represented 36.6%
of revenues for the quarter compared with 43.9% in the same quarter in 1999 and
40.4% for the six months compared with 44.9% for the same period in 1999.
Revenues from OTHER AND CORPORATE decreased $60 million compared with the
year-ago quarter and $143 million compared with the year-ago six month period.
These decreases were primarily due to lower revenues from the Company's consumer
products business (see Note 3).
<PAGE>
22 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
COSTS AND GROSS MARGIN
Total costs increased by $1,393 million, or 30.6% compared with the year-ago
quarter and $2,022 million, or 22.0% compared with year-ago six-month period. As
a percentage of revenue, gross margin decreased to 42.1% from 48.2% in the
year-ago quarter and to 44.5% from 50.7% in the year-ago six-month period,
respectively. These decreases are primarily due to a ramp-up of costs associated
with the introduction and implementation of new products and a change in product
mix, including lower software revenues.
OPERATING EXPENSES
Selling, general and administrative ("SG&A") expenses as a percentage of
revenues were 19.8% for the quarter and the six-month period, a decrease of 3.6
percentage points compared with 23.4% for the same quarter in 1999, and a
decrease of 1.7 percentage points for the six-month period compared with 21.5%
for the same period in 1999. SG&A expenses decreased $28 million, or 1.4%
compared with the same year-ago quarter and were essentially flat comparing the
six-month periods. Included in the current six-month period expense is $61
million ($40 million, after-tax) primarily associated with the mergers of INS,
Excel and Xedia.
Amortization expense associated with goodwill and existing technology was $63
million for the quarter compared with $91 million for the same quarter in 1999
and $127 million for the six-month period compared with $150 million for the
same period in 1999. Excluding the amortization of goodwill and existing
technology, SG&A expenses as a percentage of revenues were 19.2% for the quarter
and the six month period, a decrease of 3.2 percentage points and 1.4 percentage
points, respectively, compared with 22.4% and 20.6% for the corresponding
periods in 1999.
Research and development ("R&D") expenses represented 10.7% of revenues for the
quarter compared with 14.0% of revenues for the same quarter of 1999. For the
six months, R&D expenses represented 10.3% of revenues compared with 12.0% for
the same period of 1999.
R&D expenses decreased $132 million, or 10.7%, during the quarter compared with
the same quarter of 1999 and $167 million, or 7.4%, during the six-month period
compared with the same period of 1999. This decrease was attributable to
efficiencies in Lucent's research and development processes as well as increases
in the capitalization of software expenses.
Purchased IPRD expenses for the quarter were $11 million, reflecting the charges
associated with the acquisition of VTC, compared with income of $6 million,
reflecting an $18 million charge related to the acquisitions of WaveAccess,
Sybarus, and Enable Semiconductor's Ethernet LAN business offset by a $24
million reversal of purchased IPRD related to Stratus. Purchased IPRD expenses
for the six months were $11 million, related to the VTC acquisition as compared
to $290 million related primarily to the acquisitions of WaveAccess, Sybarus,
Enable Semiconductor's Ethernet LAN business, Stratus and Quadritek for the same
period of 1999. The 1999 period also included the $24 million reversal related
to Stratus.
<PAGE>
23 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OTHER
Other income(expense)- net for the quarter increased $83 million to $31 million
from an expense of $52 million in the year-ago quarter. For the six months other
income (expense)- net increased $222 million to $286 million from $64 million in
the year-ago period, resulting primarily from gains from the sale of various
equity securities, including a $189 million gain from the sale of an equity
investment, partially offset by fees associated with certain customer financing
transactions.
Interest expense for the quarter increased $4 million to $99 million compared
with the same quarter in 1999 and for the six months increased $24 million to
$197 million compared with the same period of 1999. The increases in interest
expense are due to higher debt levels associated with long-term notes for the
current periods compared with the same periods in 1999.
The effective income tax rate of 32.0% for the quarter decreased from 33.7% for
the prior year quarter. Excluding one-time costs associated with the VTC
acquisition in 2000 and the Stratus, Enable, Sybarus, WaveAccess, and VitalSigns
acquisitions in 1999, the effective income tax rate is 32.1% for the quarter
compared with 34.0% in the prior year quarter. This decrease was primarily due
to the tax impact of foreign activity.
The effective income tax rate of 32.4% for the six months decreased from 37.0%
for the year ago period. Excluding one-time merger related costs in 1999 and
2000 and the gain related to the sale of an equity investment in 2000, the
effective income tax rate is 32.0% for the six months compared with 33.8% in the
same year ago period. This decrease was primarily due to increased research tax
credits.
CASH FLOWS
Cash provided by operating activities for the six months ended March 31, 2000
was $468 million compared with cash used in operating activities of $1,208
million in the same year-ago period. This increase in cash flows from operating
activities was primarily due to higher collections of receivables.
Cash used in investing activities for the six months ended March 31, 2000 was
$353 million compared with $1,123 million in the same year-ago period. The
reduction in cash used in investing activities was primarily due to increased
proceeds from the sales of equity investments as well as the dispositions of
businesses, partially offset by increased capital expenditures.
Capital expenditures were $1,240 million and $844 million for the six-month
periods ended March 31, 2000 and 1999, 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 efficiency efforts and non-U.S. growth.
<PAGE>
24 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Cash used in financing activities for the six months ended March 31, 2000 was
$282 million compared with cash provided by financing activities of $2,456
million in the same year-ago period. This decrease in cash provided by financing
activities was primarily due to decreased issuances of both short- and long-term
debt, partially offset by the increase in proceeds from the issuance of common
stock.
FINANCIAL CONDITION
Total assets increased $747 million, or 1.9%, from fiscal year-end 1999. This
increase was due to increases in contracts in process, inventories, other
assets, prepaid pension costs and property, plant and equipment of $313 million,
$257 million, $215 million, $161 million and $156 million, respectively. These
increases were partially offset by decreases in other current assets and cash of
$249 million and $171 million, respectively. The increase in inventories
resulted from the need to meet current and anticipated sales commitments to
customers. Other assets increased due largely to the capitalization of internal
use software. Other current assets decreased due to the cash settlement from the
sale of an equity investment.
Total liabilities decreased $2,899 million, or 11.5% from fiscal year-end 1999.
This decrease was due primarily to lower payroll and benefit liabilities due to
the pay-out of year-end bonuses and lower debt balances resulting from the
payment of debt recorded in connection with the sale of certain customer
receivables with recourse.
Working capital, defined as current assets less current liabilities, increased
$2,746 million from September 30, 1999, primarily resulting from the decrease in
payroll and benefit liabilities and short-term debt and the increase in
contracts in process and inventories, partially offset by the decrease in other
current assets.
The ratio of total debt to total capital (debt plus equity) was 24.6% at March
31, 2000 compared to 33.6% at September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, Lucent maintained approximately $5.0 billion in credit
facilities of which a significant portion is used to support Lucent's commercial
paper program. At March 31, 2000, approximately $4.7 billion 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, short- and long-term debt financings and receivable securitizations
will be adequate to satisfy its future cash requirements, although there can be
no assurance that this will be the case.
<PAGE>
25 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Network operators worldwide are requiring their suppliers to arrange or provide
long-term financing for them as a condition of obtaining or bidding on
infrastructure projects. These projects may require financing in amounts ranging
from modest sums to more than a billion dollars. Lucent has increasingly
provided or arranged long-term financing for customers. As market conditions
permit, Lucent's intention is to lay off these long-term financing arrangements,
which may include both commitments and drawn-down borrowings, to financial
institutions and other investors. This enables Lucent to reduce the amount of
its commitments and free up additional financing capacity.
As of March 31, 2000, Lucent had made commitments or entered into agreements to
extend credit to certain customers, including PCS and wireless operators, for an
aggregate of approximately $7.2 billion. Excluding amounts that are not
available because the customer has not yet satisfied the conditions precedent
for borrowing, at March 31, 2000, approximately $2.6 billion in loan commitments
was undrawn and available for borrowing and approximately $1.1 billion had been
advanced and was outstanding. In addition, Lucent had made commitments to
guarantee customer debt of about $1.5 billion at March 31, 2000. Excluding
amounts not available for guarantee because conditions precedent have not been
satisfied, approximately $600 million of guarantees was undrawn and available
and about $800 million was outstanding on March 31, 2000. As part of the revenue
recognition process, Lucent determines whether the receivables under these
contracts are reasonably assured of collection based on various factors among
which is the ability of Lucent to sell these loans and commitments. Lucent
intends to continue pursuing opportunities for the sale of future loans and
commitments.
In addition to the above arrangements, Lucent will continue to provide or commit
to financing where appropriate for its business. The ability of Lucent to
arrange or provide financing for its customers will depend on a number of
factors, including Lucent's capital structure and level of available credit, and
its continued ability to lay off commitments and drawn-down borrowings on
acceptable terms. 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 that could impact its results of operations, financial
condition and cash flows. 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 that are used to hedge foreign currency and interest rate
exposure 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.
<PAGE>
26 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Certain securities held in Lucent's equity and investment portfolio are subject
to equity price risk. Lucent generally does not hedge its equity price risk,
however on occasion, may use equity derivative financial instruments which are
subject to equity price risks to complement its investment strategies. Lucent
has entered into an equity swap agreement, which among the terms included in the
agreement, Lucent is obligated to pay to a third party in July 2000 and
September 2000 any depreciation in the market value of certain equity securities
sold during the three months ended December 31, 1999 or receive any appreciation
in such market value. Changes in the market value of this equity swap are
reflected in net income.
Lucent uses foreign currency exchange contracts, and to a lesser extent foreign
currency options, to reduce significant exposure to the risk that the eventual
net cash inflows and outflows resulting from the sale of products to non-U.S.
customers and purchases from non-U.S. suppliers will be adversely affected by
changes in exchange rates. Foreign currency exchange contracts are designated
for recorded, firmly committed or anticipated purchases and sales. The use of
these derivative financial instruments allows Lucent to reduce its overall
exposure to exchange rate movements, since the gains and losses on these
contracts substantially offset losses and gains on the assets, liabilities and
transactions being hedged.
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
interest rate swap agreements in effect as of March 31, 2000 and September 30,
1999. 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.
OTHER - Environmental Matters
See discussion in Note 9 to the Consolidated Financial Statements.
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
Lucent. 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. Lucent undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
<PAGE>
27 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Future Factors include increasing price and products and services competition by
non-U.S. and U.S. 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 and services; the achievement of lower costs and expenses; customer
demand for the Company's products and services; the ability to successfully
integrate the operations and business of acquired companies; U.S. and non-U.S.
governmental and public policy changes that may affect the level of new
investments and purchases made by customers; changes in environmental and other
U.S. and non-U.S. governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers;
technological, implementation and cost/financial risks in the use of large,
multiyear 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
U.S. and non-U.S. 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 Lucent's
Form 10-K for the year ended September 30, 1999 in Item 1 in the section
entitled "X. OUTLOOK- A. 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 non-U.S. and
U.S. standard-setting bodies.
Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.
<PAGE>
28 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, eleven member countries of the European Union established
fixed conversion rates between their existing sovereign currencies, and adopted
the Euro as their new common legal currency. 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. 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.
Lucent has in place a joint European-United States team representing affected
functions within the Company. This team is evaluating Euro-related issues
affecting the Company that include its pricing/marketing strategy, conversion of
information technology systems, existing contracts and currency risk and risk
management in the participating countries. The Euro conversion may affect
cross-border competition by creating cross-border price transparency.
Lucent will continue to evaluate issues involving introduction of the Euro as
further accounting, tax and governmental legal and regulatory guidance is
available. 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 March 31, 2000, Lucent employed approximately 151,000 persons, including
77.2% located in the United States. Of these domestic employees, approximately
38% are represented by unions, primarily the Communications Workers of America
("CWA")and the International Brotherhood of Electrical Workers ("IBEW"). Lucent
has 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 LIQUIDITY AND CAPITAL RESOURCES and KEY BUSINESS CHALLENGES.
Seasonality:
See discussion above under KEY BUSINESS CHALLENGES.
Future Capital Requirements:
See discussion above under FINANCIAL CONDITION and LIQUIDITY AND CAPITAL
RESOURCES.
<PAGE>
29 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.
Lucent hedges certain foreign currency transactions. The decline in value of
non-U.S. dollar currencies, may, if not reversed, adversely affect Lucent's
ability to contract for product sales in U.S. dollars because Lucent's products
may become more expensive to purchase in U.S. dollars for local customers doing
business in the countries of the affected currencies.
Legal Proceedings and Environmental:
See discussion above in Note 9 - COMMITMENTS AND CONTINGENCIES.
RECENT PRONOUNCEMENTS
Effective October 1, 1999, Lucent adopted Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). As a result, certain costs of computer software
developed or obtained for internal use have been capitalized and will be
amortized over a three-year period. The impact of adopting SOP 98-1 was a
reduction of costs and operating expenses of $68 million and $148 million during
the three and six months ended March 31, 2000, respectively.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company is currently
evaluating the impact of SAB No. 101 to determine what effect, if any, it could
have on our financial position and results of operations.
<PAGE>
30 Form 10-Q - Part I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
SUPPLEMENTAL PRO FORMA ONGOING LUCENT FINANCIAL INFORMATION
(Supplemental Pro Forma net income excludes one-time acquisition and
merger-related costs and amortization of goodwill and acquired technology)
The following table presents supplemental pro forma financial information for
Ongoing Lucent operations, which excludes the parts of the enterprise networks
business that are expected to be spun off by September 30, 2000, and the
consumer products business, which was sold during the current quarter. In
addition, this supplemental pro forma information excludes purchased IPRD of $11
million ($7 million, after-tax) related to the acquisition of VTC in the current
quarter and $18 million ($15 million, after-tax) of purchased IPRD expenses
related to the acquisitions of WaveAccess, Sybarus, and Enable Semiconductor's
Ethernet LAN business, a $24 million reversal of purchased IPRD related to
Stratus (non-tax impacting), and $7 million of merger-related costs associated
with the acquisition of VitalSigns (non-tax impacting) in the prior-year
quarter.
The financial information for Ongoing Lucent operations has been derived from
the historical results of operations of total Lucent by excluding the results of
operations of the parts of the enterprise networks business(including certain
corporate income and expenses) expected to be spun and the consumer products
business. The assumptions underlying the financial information may not
necessarily reflect the results of operations of the ongoing businesses in the
future, or what the results of operations would have been had the ongoing
businesses been a separate, stand-alone entity during the periods presented.
Lucent is providing the supplemental pro forma financial information presented
below because the Company believes it will be meaningful to investors in
evaluating Lucent's financial results. This information supplements, but should
not be viewed as an alternative to, net income determined in accordance with
Generally Accepted Accounting Principles or certain pro forma presentations
under Securities and Exchange Commission regulations. This information is based
upon the Company's current estimates and understanding of the assets that are
expected to be spun and to the extent that the final structure differs, results
may change.
<TABLE>
<CAPTION>
* Three Months Ended
Ongoing Lucent March 31,
Dollars in Millions ----------------------
2000 1999
------- ------
<S> <C> <C>
Revenues $ 8,325 $6,604
Gross margin 3,459 3,209
Total operating expenses 2,386 2,318
Operating income 1,073 891
Income before income taxes 945 745
Income tax expenses 303 253
Net income 642 492
Net income per share-diluted 0.20 0.15
Goodwill & acquired technology
amortization, net 34 60
Supplemental Pro forma net income 676 552
Supplemental Pro forma net income
per share-diluted 0.21 0.17
</TABLE>
* Preliminary estimates that are subject to change.
<PAGE>
31 Form 10-Q - Part II
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
Lucent held its 2000 Annual Meeting of Shareowners on February 16, 2000. At that
meeting, shareowners elected Carla Hills as a Director of the Company for a term
to expire at the Annual Meeting to be held in the year 2003. In addition,
shareowners approved one Company proposal and rejected three shareowner
proposals. The director elected and the results of the voting are as follows:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
<S> <C> <C>
Carla A. Hills 2,576,821,162 46,189,860
<CAPTION>
Votes Votes Broker
For Against Abstain Non-votes
<S> <C> <C> <C> <C>
Company proposal:
Approve an Amendment
to the Certificate of
Incorporation to
Increase Authorized
Common Stock . . . . . . 2,395,113,456 209,154,979 18,742,587 0
Shareowner proposals:
Eliminate classified
board . . . . . . . . . 840,639,048 1,072,492,531 50,745,379 659,134,064
Adopt Different
Confidential
Voting Policy . . . . . 871,480,211 1,040,243,145 52,153,602 659,134,064
Adopt Different
Anti-Slave
Labor Policy . . . . . . 149,449,597 1,621,812,392 192,614,969 659,134,064
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
(3) Certificate of Incorporation
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
<PAGE>
32 Form 10-Q - Part II
Part II - Other Information
(b) Reports on Form 8-K:
Current Report on Form 8-K dated January 6, 2000 was filed on January 7,
2000 pursuant to Item 5 (Other Events).
Current Report on Form 8-K dated February 10, 2000 was filed on
February 11, 2000 pursuant to Item 5 (Other Events) and Item 7 (Financial
Statements, Pro Forma Financial Information and Exhibits) containing
restated financial statements to reflect certain mergers accounted for as
pooling of interests.
Current Report on Form 8-K dated and filed March 1, 2000 pursuant to Item 5
(Other Events) and Item 7 (Financial Statements, Pro Forma Financial
Information and Exhibits).
Current Report on Form 8-K dated March 9, 2000 was filed on March 10, 2000
pursuant to Item 5 (Other Events) and Item 7 (Financial Statements,
Pro Forma Financial Information and Exhibits).
<PAGE>
33
Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lucent Technologies Inc.
Date May 10, 2000
/s/ James S. Lusk
------------------------------
James S. Lusk
Senior Vice President and Controller
(Principal Accounting Officer)
<PAGE>
34 Form 10-Q
Exhibit Index
Exhibit
Number
(3) Certificate of Incorporation, as amended effective
February 16, 2000 (incorporated by reference to
Exhibit 3.1 to Registration Statement on Form S-4,
File No. 333-31400)
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
<PAGE>
EX-12
Statement re: Computation of Ratios
Exhibit 12
Form 10-Q
For the Six
Months Ended
March 31, 2000
Lucent Technologies Inc.
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
For the Six
Months Ended
March 31, 2000
<S> <C>
Income Before Income Taxes............................. $ 2,965
Less Interest Capitalized during
the Period........................................... 8
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... -
Add Fixed Charges...................................... 347
Total Earnings ........................................ $ 3,304
Fixed Charges
Total Interest Expense Including Capitalized Interest.. $ 230
Interest Portion of Rental Expense..................... 117
Total Fixed Charges................................ $ 347
Ratio of Earnings to Fixed Charges..................... 9.5
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of Lucent at March 31, 2000 and the unaudited
consolidated statement of income for the six month period ended March 31, 2000
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-1-1999
<PERIOD-END> MAR-31-2000
<CASH> 1,709
<SECURITIES> 0
<RECEIVABLES> 10,918
<ALLOWANCES> 345
<INVENTORY> 5,321
<CURRENT-ASSETS> 22,414
<PP&E> 14,722
<DEPRECIATION> 7,671
<TOTAL-ASSETS> 39,997
<CURRENT-LIABILITIES> 9,292
<BONDS> 3,833
0
0
<COMMON> 32
<OTHER-SE> 17,550
<TOTAL-LIABILITY-AND-EQUITY> 39,997
<SALES> 20,161
<TOTAL-REVENUES> 20,161
<CGS> 11,198
<TOTAL-COSTS> 11,198
<OTHER-EXPENSES> 2,088
<LOSS-PROVISION> 83
<INTEREST-EXPENSE> 197
<INCOME-PRETAX> 2,965
<INCOME-TAX> 961
<INCOME-CONTINUING> 2,004
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,004
<EPS-BASIC> 0.63
<EPS-DILUTED> 0.61
</TABLE>
