AS FILED WITH THE SEC ON FEBRUARY 14, 2002
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, 2001
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 Number: 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, 2002, 3,423,024,507 common shares were outstanding.
2 Form 10-Q - Part I
PART 1 - Financial Information
Item 1. Financial Statements
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
Three months ended
December 31,
2001 2000
----------------- ---------------
Revenues $ 3,579 $ 4,346
Costs 3,144 3,665
----------------- ---------------
Gross margin 435 681
Operating expenses:
Selling, general and administrative 1,245 1,855
Research and development 621 1,012
Business restructuring charges, reversals and asset impairments,
net (79) -
----------------- ---------------
Total operating expenses 1,787 2,867
Operating loss (1,352) (2,186)
Other income (expense), net 540 (40)
Interest expense 97 127
----------------- ---------------
Loss from continuing operations before benefit from income taxes (909) (2,353)
Benefit from income taxes (486) (778)
----------------- ---------------
Loss from continuing operations (423) (1,575)
Loss from discontinued operations (net of tax expense of $99) - (5)
----------------- ---------------
Loss before extraordinary item and cumulative effect of accounting
changes (423) (1,580)
Extraordinary gain (net of tax expense of $762) - 1,154
Cumulative effect of accounting changes (net of tax benefit of $28) - (38)
----------------- ---------------
Net loss (423) (464)
Preferred stock dividends and accretion (42) -
----------------- ---------------
Loss applicable to common shareowners $ (465) $ (464)
================= ===============
Loss per common share - basic and diluted
Loss from continuing operations $ (0.14) $ (0.47)
Net loss applicable to common shareowners $ (0.14) $ (0.14)
Weighted average number of common shares
outstanding - basic and diluted 3,416.3 3,387.2
See Notes to Consolidated Financial Statements.
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, 2001
2001
------------------- -------------------
ASSETS
Cash and cash equivalents $ 3,069 $ 2,390
Receivables, less allowance of $774 at December 31, 2001 and $634 at
September 30, 2001 3,204 4,594
Inventories 2,731 3,646
Contracts in process, net of progress billings of $8,463 at December 31, 2001
and $7,841 at September 30, 2001 783 1,027
Deferred income taxes, net 2,639 2,658
Other current assets 1,945 1,788
------------------- -------------------
Total current assets 14,371 16,103
Property, plant and equipment, net 3,059 4,416
Prepaid pension costs 4,739 4,958
Deferred income taxes, net 3,064 2,695
Goodwill and other acquired intangibles, net of accumulated amortization of
$884 at December 31, 2001 and $832 at September 30, 2001 1,357 1,466
Other assets 2,339 2,724
Net long-term assets of discontinued operations 1,270 1,302
------------------- -------------------
Total assets $ 30,199 $ 33,664
=================== ===================
LIABILITIES
Accounts payable $ 1,263 $ 1,844
Payroll and benefit-related liabilities 1,262 1,500
Debt maturing within one year 77 1,135
Other current liabilities 4,776 5,285
Net current liabilities of discontinued operations 354 405
------------------- -------------------
Total current liabilities 7,732 10,169
Postretirement and postemployment benefit liabilities 5,004 5,481
Long-term debt 3,262 3,274
Deferred income taxes, net 20 152
Other liabilities 1,716 1,731
------------------- -------------------
Total liabilities 17,734 20,807
Commitments and contingencies
8.00% redeemable convertible preferred stock 1,838 1,834
SHAREOWNERS' EQUITY
Preferred stock - par value $1.00 per share;
issued and outstanding shares: none - -
Common stock - par value $.01 per share;
Authorized shares: 10,000,000,000; 3,421,744,682 issued and 3,421,093,475
outstanding shares at December 31, 2001 and 3,414,815,908 issued and
3,414,167,155 outstanding shares at September 30, 2001 34 34
Additional paid-in capital 21,683 21,702
Accumulated deficit (10,695) (10,272)
Accumulated other comprehensive income (loss) (395) (441)
------------------- -------------------
Total shareowners' equity 10,627 11,023
------------------- -------------------
Total liabilities, redeemable convertible preferred stock and
shareowners' equity $ 30,199 $ 33,664
=================== ===================
See Notes to Consolidated Financial Statements.
4 Form 10-Q - Part I
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three months ended
December 31,
2001 2000
--------------- -----------------
Operating Activities
Net loss $ (423) $ (464)
Less: Loss from discontinued operations - (5)
Extraordinary gain - 1,154
Cumulative effect of accounting changes - (38)
--------------- -----------------
Loss from continuing operations (423) (1,575)
Adjustments to reconcile loss from continuing operations to net cash used in
operating activities, net of effects of dispositions of businesses
Non-cash portion of business restructuring charges, reversals and
asset impairments 21 -
Depreciation and amortization 416 644
Provision for uncollectibles and customer financings 451 368
Deferred income taxes (515) (923)
Net pension and postretirement benefit credit (238) (264)
Gains on sales of businesses (583) -
Other adjustments for non-cash items 69 48
Changes in operating assets and liabilities:
Decrease in receivables 1,181 2,106
Decrease (increase) in inventories and contracts in process 697 (1,140)
Decrease in accounts payable (553) (276)
Changes in other operating assets and liabilities (931) (265)
--------------- -----------------
Net cash used in operating activities from continuing operations (408) (1,277)
--------------- -----------------
Investing Activities
Capital expenditures (116) (329)
Dispositions of businesses 2,184 2,494
Other investing activities 74 (38)
--------------- -----------------
Net cash provided by investing activities from continuing operations 2,142 2,127
--------------- -----------------
Financing Activities
Repayments of credit facilities (1,000) -
Net (repayments of) proceeds from other short-term borrowings (57) 1,573
Other financing activities 21 1
--------------- -----------------
Net cash (used in) provided by financing activities from continuing
operations (1,036) 1,574
Effect of exchange rate changes on cash and cash equivalents (1) (35)
--------------- -----------------
Net cash provided by continuing operations 697 2,389
Net cash used in discontinued operations (18) (42)
--------------- -----------------
Net increase in cash and cash equivalents 679 2,347
Cash and cash equivalents at beginning of year 2,390 1,467
--------------- -----------------
Cash and cash equivalents at end of period $ 3,069 $ 3,814
=============== =================
See Notes to Consolidated Financial Statements.
5 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements have been prepared by Lucent
Technologies Inc. ("Lucent" or the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of the Company, include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of results of operations, financial
position and cash flows as of and for the periods presented.
The preparation of financial statements and related disclosures in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the periods reported.
Actual results could differ from those estimates. Estimates are used in
accounting for, among other things, long-term contracts, allowances for
uncollectible receivables and customer financings, inventory obsolescence,
product warranty, depreciation, employee benefits, taxes and contingencies.
Estimates and assumptions are reviewed periodically and the effects of revisions
which may be material are reflected in the consolidated financial statements in
the period that they are determined to be necessary.
The Company believes that the disclosures made are adequate to keep the
information presented from being misleading. The results for the three months
ended December 31, 2001 are not necessarily indicative of financial results for
the full year. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
included in Lucent's latest Annual Report on Form 10-K for the year ended
September 30, 2001.
Certain reclassifications have been made to conform to the current period
presentation.
2. BUSINESS RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS
During the three months ended December 31, 2001, Lucent recorded a net reversal
of business restructuring charges and asset impairments of $68, which consisted
of a reversal of reserves recorded during the fiscal year ended September 30,
2001 of $124 offset in part by additional charges of $56. The $124 reserve
reversal primarily related to revised estimates of certain restructuring costs
and employee separation costs due to organizational changes and higher than
expected attrition levels.
The $56 charge included restructuring costs related to approximately 500 new
employee separations of $23 and asset write-downs of $33. Asset write-downs
included inventory write-downs of $11, which were recorded as a component of
Costs.
Lucent expects to complete the restructuring program by the end of fiscal year
2002.
The following table displays the activity and balances of the restructuring
reserve accounts for the three months ended December 31, 2001:
September 30, Net charges/ Reclasses/ December 31,
2001 reserve (reversals) deductions 2001 Reserve
Restructuring costs
Employee separations $ 588 $ (40) $ (170) $ 378
Contract settlements 610 (21) (56) 533
Facility closings 296 (21) (31) 244
Other 125 3 (24) 104
----------------------------------------------------- ------------------
Total restructuring costs 1,619 (79) (281) 1,259
----------------------------------------------------- ------------------
Asset write-downs
Inventory (a) - 11 (11) -
Capitalized software - 22 (22) -
Other - (22) 22 -
----------------------------------------------------- ------------------
Total asset write-downs - 11 (11) -
----------------------------------------------------- ------------------
Total $ 1,619 $ (68) $ (292) (b) $ 1,259
===================================================== ==================
---------
(a) At December 31, 2001, the remaining inventory reserve for restructuring was
$492.
(b) Includes cash payments of $301 for the three months ended December 31, 2001.
6 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Total voluntary and involuntary employee separations associated with the
restructuring charges were 39,000, of which approximately 32,100 employees had
been terminated as of December 31, 2001 (8,400 were terminated during the three
months ended December 31, 2001). Also, since December 31, 2000, an additional
11,900 employee separations were achieved through attrition and divestiture of
businesses. The majority of the remaining employee separations are expected to
be completed by the end of the third fiscal quarter of 2002. Employee
separations impact all of Lucent's business groups and geographic regions. Of
the 39,000 employee separations, approximately 70% are management and 60% are
involuntary.
3. DISCONTINUED OPERATIONS
Summarized financial information for the discontinued operations is as follows:
Three months ended December 31,
2001 2000
------------------ ------------------
Agere and power systems revenues $ 459 $1,487
------------------ ------------------
Loss from discontinued operations (net of taxes)
Agere and power systems $ - $ (5)
Loss on disposal of Agere - -
------------------ ------------------
Loss from discontinued operations $ - $ (5)
================== ==================
December 31, September 30,
Net assets of Agere and power systems 2001 2001
------------------ ------------------
Current assets $2,474 $4,022
Current liabilities 2,828 (a) 4,427 (a)
------------------ ------------------
Net current liabilities of discontinued operations $ (354) $ (405)
================== ==================
Long-term assets $2,411 $2,625
Long-term liabilities 1,141 (b) 1,323 (b)
------------------ ------------------
Net long-term assets of discontinued operations $1,270 $1,302
================== ==================
-------
(a) Includes $1,377 and $2,500 of the short-term debt assumed by Agere on April
2, 2001 and $345 and $565 of reserves associated with recording Lucent's
share of Agere's estimated future losses through the planned spin-off date
at December 31, 2001 and September 30, 2001, respectively.
(b) Amounts are shown net of the minority interest in the net assets of Agere
of $850 and $1,026 at December 31, 2001 and September 30, 2001,
respectively.
4. BUSINESS DISPOSITIONS
On November 16, 2001, Lucent completed the sale of its optical fiber business to
The Furukawa Electric Co., Ltd. for approximately $2,300, $173 of which was in
CommScope, Inc. securities. The transaction resulted in a gain of $523, which is
included in other income (expense) in the three months ended December 31, 2001.
In addition, Lucent entered into an agreement on July 24, 2001 to sell two
China-based joint ventures -- Lucent Technologies Shanghai Fiber Optic Co., Ltd.
and Lucent Technologies Beijing Fiber Optic Cable Co., Ltd. -- to Corning
Incorporated for $225 in cash. This transaction, which is subject to U.S. and
foreign governmental approvals and other customary closing conditions, is
expected to close by the end of the third quarter of fiscal year 2002.
On December 22, 2001, Lucent entered into an agreement for the sale of its
customer care and billing business to CSG Systems International, Inc. for
approximately $300 in cash, subject to certain purchase price adjustments. The
sale is subject to governmental approvals and other customary closing
conditions. Lucent expects this transaction to close in the second quarter of
fiscal year 2002.
7 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
5. INVENTORIES
December 31, September 30,
2001 2001
----------------- -------------------
Completed goods $ 1,539 $ 2,023
Work in process 297 432
Raw materials 895 1,191
----------------- -------------------
Inventories $ 2,731 $ 3,646
================= ===================
6. DEBT
December 31, September 30,
2001 2001
-------------------- --------------------
Revolving credit facilities $ - $1,000
Other 77 135
-------------------- --------------------
Debt maturing within one year 77 1,135
Long-term debt 3,262 3,274
-------------------- --------------------
Total debt $3,339 $4,409
==================== ====================
7. COMPREHENSIVE LOSS
The components of comprehensive loss are reflected net of tax, except for
foreign currency translation adjustments, which are generally not adjusted for
income taxes as they relate to indefinite investments in non-U.S. subsidiaries,
and are as follows:
Three Months Ended
December 31,
2001 2000
---- ----
Net loss $(423) $ (464)
Other comprehensive income (loss):
Foreign currency translation adjustments 54 12
Reclassification adjustment to foreign currency
translation for sale of foreign entities 20 -
Unrealized holding gains (losses) on certain investments
(net of tax provision (benefit) of $4 and ($61),
respectively) 7 (94)
Reclassification adjustments for realized gains and
impairment losses on certain investments (net of tax
(benefit) provision of $(5) and $1, respectively) (35) 2
Cumulative effect of accounting change (SFAS 133) - 11
Net derivative losses on cash flow hedges - (1)
------------- --------------
Comprehensive loss $(377) $ (534)
============= ==============
8. LOSS PER COMMON SHARE
Basic and diluted loss per common share is calculated by dividing net loss
applicable to common shareowners by the weighted average number of common shares
outstanding during the period. As a result of the loss from continuing
operations reported for the three months ended December 31, 2001 and 2000,
approximately 296.2 million (including 283.9 million shares related to the
redeemable convertible preferred stock) and 55.5 million, respectively, of
potential common shares have been excluded from the calculation of diluted loss
per share because their effect would reduce the loss per share from continuing
operations and the net loss.
In addition, options where the exercise price was greater than the average
market price of the common shares of 625.2 million and 330.1 million for the
three months ended December 31, 2001 and 2000, respectively, were excluded from
the computation of diluted loss per share. Amounts applicable to common
shareowners reflect the dividends and accretion on Lucent's redeemable
convertible preferred stock.
8 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Three months ended
December 31,
---------------------------------
2001 2000
-------------- --------------
Loss per common share - basic and diluted
Loss from continuing operations $(0.14) $(0.47)
Loss from discontinued operations - (0.00)
Extraordinary gain - 0.34
Cumulative effect of accounting changes - (0.01)
-------------- --------------
Net loss applicable to common shareowners $(0.14) $(0.14)
============== ==============
Dividends declared per common share $ - $ 0.02
============== ==============
Weighted average number of common shares -
basic and diluted 3,416.3 3,387.2
============== ==============
9. OPERATING SEGMENTS
Lucent Technologies designs and delivers networks for the world's largest
communications service providers. Lucent changed its reporting segments in
fiscal year 2002 to two customer-focused reportable segments, Integrated Network
Solutions ("INS") and Mobility Solutions ("Mobility"), from Products and
Services in fiscal year 2001. These reportable segments are managed separately.
The INS segment focuses on global, wireline service providers, including long
distance carriers and both traditional local telephone companies and Internet
service providers, and provides offerings comprised of a broad range of core
switching and access and optical networking products, as well as related service
offerings. The Mobility segment focuses on global wireless service providers and
offers products and services to support the needs of its customers for radio
access and core networks. Both segments offer network management and application
and service delivery products. In addition, Lucent will support these two new
segments through its global services organization.
Performance measurement and resource allocation for the reportable segments are
based on many factors. The primary financial measure is operating income (loss),
which includes the revenues, costs and expenses directly controlled by the
reportable segment, as well as allocations of other selling, general and
administrative and research and development expenses, which are not managed at a
customer level. Operating loss for reportable segments excludes certain
personnel costs, including those related to pension and postretirement and
certain other costs related to shared services such as general corporate
functions, which are managed on a common basis in order to realize economies of
scale and efficient use of resources. Operating income loss for reportable
segments also excludes goodwill and other acquired intangibles amortization and
business restructuring charges and related asset impairments. The accounting
policies of the reportable segments are the same as those applied in the
consolidated financial statements to the extent that the related items are
included within operating loss.
The following tables present Lucent's revenues and operating loss by reportable
operating segment and a reconciliation of the totals reported for the segments
to operating loss. Amounts for the three months ended December 31, 2000 have
been restated to reflect the Company's new segment structure.
Three months ended
December 31,
2001 2000
---------------- ----------------
External Revenues
INS $ 1,883 $ 2,450
Mobility 1,468 1,189
---------------- ----------------
Total reportable segments (a) 3,351 3,639
Optical fiber business 114 518
Other (b) 114 189
---------------- ----------------
Total external revenues $ 3,579 $ 4,346
================ ================
Operating loss
INS $ (909) $(1,384)
Mobility (159) (405)
---------------- ----------------
Total reportable segments (a) (1,068) (1,789)
Goodwill and other acquired intangibles
amortization (74) (261)
Business restructuring and asset impairments,
net 68 -
Optical fiber business (68) 143
Other (b) (210) (279)
---------------- ----------------
Operating loss $(1,352) $(2,186)
================ ================
9 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
-----------
(a) Results by reportable segments include services revenues of $777 and $921
for the three months ended December 31, 2001 and 2000, respectively.
Related services' costs, included in the reportable segments' operating
losses, were $640 and $797 for the three months ended December 31, 2001 and
2000, respectively.
(b) Other primarily includes the results from billing and customer care
software products, messaging products, other smaller units and unallocated
costs of shared services and certain personnel costs, including those
related to pension and postretirement.
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under laws and government regulations
related to environmental, labor, product 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, 2001, 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, from matters other than those described
in the next paragraph, beyond that provided for at December 31, 2001, would not
be material to the annual consolidated financial statements.
Lucent and certain of its former officers are defendants in several purported
shareowner class action lawsuits for alleged violations of federal securities
laws, which have been consolidated in a single action. Specifically, the
complaint alleges, among other things, that beginning in late October 1999,
Lucent and certain of its officers misrepresented Lucent's financial condition
and failed to disclose material facts that would have an adverse impact on
Lucent's future earnings and prospects for growth. This action seeks
compensatory and other damages, and costs and expenses associated with the
litigation. This action is in the early stages and Lucent is unable to determine
its potential impact on the consolidated financial statements. Lucent intends to
defend this action vigorously. In July 2001, a purported class action complaint
was filed under ERISA alleging, among other things, that Lucent and certain
unnamed officers breached their fiduciary duties with respect to Lucent's
employee savings plans claiming that the defendants were aware that Lucent stock
was inappropriate for retirement investment and continued to offer such stock as
a plan investment option. The complaint seeks damages, injunctive and equitable
relief, interest and fees and expenses associated with the litigation. In August
2001, a separate purported class action complaint was filed under ERISA
alleging, among other things, that Lucent breached its fiduciary duties with
respect to its employee benefit and compensation plans by offering Lucent stock
as an investment to employees participating in the plans despite the fact that
Lucent allegedly knew it was experiencing significant business problems. The
August complaint seeks a declaration that Lucent breached its fiduciary duties
to plan participants, an order compelling Lucent to return all losses to the
plans, injunctive relief to prevent future breaches of fiduciary duties, as well
as costs and expenses associated with litigation. Both actions are in the early
stages and the Company is unable to determine the potential impact of either
case on the consolidated financial statements. Lucent intends to defend these
actions vigorously.
On December 7, 2001, the court in Sparks, et al. v. Lucent Technologies, Inc.
et al. set a trial date of May 13, 2002. This action is a state court, class
action lawsuit filed in 1996 in Illinois under the name, Crain v. Lucent
Technologies. It seeks unspecified damages for a nationwide class of customers
based on a claim that the former AT&T Consumer Products business (which became
part of Lucent) had defrauded and misled customers who leased telephones from
Consumer Products so as to believe their lease payments would lead to ownership
of the telephones. The lawsuit seeks damages based on the difference between the
aggregate lease payments made and the fair market value of telephones. The
Sparks action is one of a number of consumer class actions which, after removal
to a federal court, were remanded to various state courts in July 2001. These
other actions are in the discovery phase and Lucent is unable to determine what,
if any, impact a resolution of the Sparks case will have on these matters. These
cases, including Sparks, are in various stages of discovery and Lucent is unable
to determine their potential impact on our consolidated financial statements.
Lucent is defending these actions vigorously.
In January 2002, the court in Vicor Corp. et al. v. Lucent Technologies Inc.
granted plaintiffs' June 30, 2001 motion for a writ of attachment in the amount
of $20 million. The Court had held a hearing on Vicor's motion on November 19
and 20, 2001. This is an action in which Vicor Corporation and VLT Corporation
("Vicor") sued Lucent in Federal District Court in Boston, MA for an unspecified
amount of damages purportedly stemming from an alleged infringement of a power
supply patent. Discovery was stayed pending the resolution of certain summary
judgment motions in the same court in a related case against Unitrode, a
supplier of controller chips to the Company and other power supply
manufacturers. In January 2001, the Court, in the Unitrode action, to which
Lucent was not a party, held that certain power supplies manufactured by the
Company and others, using the Unitrode controller, infringed Vicor's patent.
This case is in discovery and we are unable to determine its potential impact on
our consolidated financial statements. We intend to defend this action
vigorously.
10 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
Separation Agreements
In connection with the formation of Lucent from certain units of AT&T Corp. and
the associated assets and liabilities of those units and AT&T's distribution of
its remaining interest in Lucent to its shareowners, Lucent, AT&T and NCR
Corporation executed and delivered the Separation and Distribution Agreement,
dated as of February 1, 1996, as amended and restated, and certain related
agreements. The Separation and Distribution Agreement, among other things,
provides that Lucent will indemnify AT&T and NCR for all liabilities relating to
Lucent's business and operations and for all contingent liabilities relating to
Lucent's business and operations or otherwise assigned to Lucent. In addition to
contingent liabilities relating to the present or former business of Lucent, any
contingent liabilities relating to AT&T's discontinued computer operations
(other than those of NCR) were assigned to Lucent. The Separation and
Distribution Agreement provides for the sharing of contingent liabilities not
allocated to one of the parties, in the following proportions: AT&T: 75%,
Lucent: 22%, and NCR: 3%. The Separation and Distribution Agreement also
provides that each party will share specified portions of contingent liabilities
related to the business of any of the other parties that exceed specified
levels.
In connection with the spin-off of Avaya, Lucent and Avaya executed and
delivered a Contribution and Distribution Agreement ("CDA") that provides for
indemnification by each company with respect to contingent liabilities primarily
relating to their respective businesses or otherwise assigned to each, subject
to certain sharing provisions. In the event the aggregate value of all amounts
paid by each company, in respect of any single contingent liability or any set
or group of related contingent liabilities, is in excess of $50 each company
will share portions in excess of the threshold amount based on agreed-upon
percentages. The CDA also provides for the sharing of certain contingent
liabilities, specifically: (1) any contingent liabilities that are not primarily
contingent liabilities of Lucent or contingent liabilities associated with the
businesses attributed to Avaya; (2) certain specifically identified liabilities,
including liabilities relating to terminated, divested or discontinued
businesses or operations; and (3) shared contingent liabilities within the
meaning of the Separation and Distribution Agreement with AT&T Corp.
In connection with the intended spin-off of Agere and the contribution to it of
certain businesses Lucent and Agere entered into a Separation and Distribution
Agreement ("SDA") that provides that each company will bear all costs associated
with contingent liabilities primarily relating to its respective business or
otherwise assigned to each. The SDA also provides for the sharing (Lucent 86%;
Agere 14%) of certain contingent liabilities, specifically: (1) any contingent
liabilities that are not primarily contingent liabilities of Lucent or
contingent liabilities associated with the businesses attributed to Agere; (2)
certain specifically identified liabilities, including liabilities relating to
terminated, divested or discontinued businesses or operations; and (3) shared
contingent liabilities within the meaning of the Separation and Distribution
Agreement with AT&T Corp.
Other Commitment
In connection with the intended spin-off of Agere, Lucent entered into a
purchase agreement that governs the purchase of goods and services by Lucent
from Agere. Under the agreement, Lucent committed to purchase at least $2,800 of
products from Agere over a three-year period beginning February 1, 2001. In
limited circumstances, Lucent's purchase commitment may be reduced or the term
may be extended. For the period February 1, 2001 through December 31, 2001,
Lucent's purchases under this agreement were $402. Agere and Lucent are
currently discussing ways to restructure Lucent's obligations under the
agreement.
Environmental Matters
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 under way 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 with
AT&T, 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 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.
11 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 five to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily on
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 amounts 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 reasonably assured,
the amounts are reflected as receivables in the consolidated 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 December 31, 2001 cannot be
estimated.
11. RECENT PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
Under SFAS 141, all acquisitions subsequent to June 30, 2001 must be accounted
for under the purchase method of accounting, and the goodwill related to these
acquisitions will not be amortized . Under SFAS 142, pre-existing goodwill will
no longer be amortized over its useful life. Rather, goodwill will be subject to
a periodic impairment test based upon an assessment of fair value.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for
recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
discontinued operations.
Lucent is currently evaluating the impact SFAS 142, SFAS 143 and SFAS 144 to
determine the effect, if any, they may have on the consolidated financial
position and results of operations. Lucent is required to adopt each of these
standards in the first quarter of fiscal year 2003.
12 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
We design and deliver networks for the world's largest communications service
providers. Backed by Bell Labs research and development, we rely on our
strengths in mobility, optical, data and voice networking technologies, as
well as software and services, to develop next-generation networks. Our
systems, services and software are designed to help customers quickly deploy
and better manage their networks and create new, revenue-generating services
that help businesses and consumers.
OUR RESTRUCTURING PROGRAM
Fiscal year 2001 was a transition year for us in which we eliminated many
duplications in marketing functions and programs and centralized our sales
support functions to utilize our resources for the opportunities that we
currently believe to be the most profitable for us -- the large service
provider market. We evaluated our manufacturing operations and assessed our
use of contract manufacturers and decided to eliminate certain of our
manufacturing facilities and make greater use of contract manufacturers. We
assessed virtually every aspect of our product portfolio and associated
research and development ("R&D"), made decisions based on the needs of our
largest service provider customers, deployed our resources to meet those
needs and then streamlined the rest of our operations to support those
reassessments. We eliminated some marginally profitable or non-strategic
lines; merged certain technology platforms; consolidated development
activities; and eliminated management positions, which resulted in reduced
associated product development costs. We sold the assets relating to a number
of product lines whose products did not support our large service provider
customers or our strategy. In following our customers, we initiated actions
to close facilities and reduce the work forces in approximately 40 of the
approximately 60 countries in which we operated at the end of fiscal year
2000. We expect to complete our restructuring program by the end of fiscal
year 2002.
MARKET ENVIRONMENT AND STRATEGIC DIRECTION
The global communications networking industry experienced a very challenging
period in calendar year 2001, during which business activity contracted. Due
to the recent global economic slowdown, our service provider customers are
facing slowing revenue growth, reduced access to capital and the need to
carefully manage their cash flow and profitability. In response to these
challenges, service providers are reducing capital expenditures and
rethinking their plans to expand their networks. They are refocusing their
capital investment on projects that can most directly contribute to their
revenues. As a result, we have experienced lower revenues during the three
months ended December 31, 2001 as compared with the three months ended
December 31, 2000. If capital investment levels continue to decline, or if
the telecommunications market improves at a slower pace than we anticipate,
our revenues and profitability will continue to be adversely affected.
In light of the changes in the market environment described above, we
reorganized our businesses to become more focused and better positioned to
capitalize on market opportunities. To match the realignment of our
customers' businesses, we restructured our operations into distinct wireline
and wireless units, and began to target the large service providers in each
segment, which we believe offers us the best opportunity for future growth
and stable revenue. We believe structuring our business along customer lines
- wireline and wireless - enables us to better serve and anticipate the needs
of our large service provider customers.
Our wireline segment, Integrated Network Solutions ("INS"), focuses on
global, wireline service providers, including long distance carriers and both
traditional local telephone companies and Internet service providers and will
primarily sell and service core switching and access and optical networking
products. Our wireless segment, Mobility Solutions, offers products to
support the needs of its customers for radio access and core networks and
will primarily sell wireless products to wireless service providers. Both
segments offer network management and application and service delivery
products.
We will support these two new segments through a number of central
organizations, including our services organization and our corporate
headquarters. Manufacturing and supply chain functions have been consolidated
into a single global supply chain networks organization that manages the
materials and activities necessary to produce and deliver products and
services to our customers. Bell Labs will also support both segments and work
with our customer teams in presenting our offerings to our customers.
13 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2001 VERSUS THREE MONTHS
ENDED DECEMBER 31, 2000
Revenues
The following table presents our U.S. and non-U.S. revenues by segment and the
approximate percentage of total revenues (dollars in millions):
Three months ended
December 31,
------------------------------------
2001 2000
--------------- -----------------
Total
INS $ 1,883 $ 2,450
Mobility 1,468 1,189
Other 228 707
--------------- -----------------
Total revenues $ 3,579 $ 4,346
=============== =================
U.S.
INS $ 1,018 $ 1,368
Mobility 1,072 884
Other 142 443
--------------- -----------------
Total U.S. revenues $ 2,232 $ 2,695
--------------- -----------------
Non-U.S.
INS $ 865 $ 1,082
Mobility 396 305
Other 86 264
--------------- -----------------
Total non-U.S. revenues $ 1,347 $ 1,651
--------------- -----------------
As a percentage of total
revenues
------------------------------------
U.S. 62.4% 62.0%
Non-U.S. 37.6% 38.0%
As a percentage of total
revenues
------------------------------------
INS 52.6% 56.4%
Mobility 41.0% 27.4%
Other 6.4% 16.2%
Total revenues in the first fiscal quarter decreased by approximately 18%
compared with the first fiscal quarter of the prior year. The sale of our
optical fiber business during the current quarter represented approximately 53%
of the revenue decline (included in "Other" in the tables above). The remainder
of the decline was primarily a result of the continued deterioration of
telecommunications market conditions and lower capital spending by larger
service providers globally.
INS experienced a revenue decline of 23%, which occurred in all product lines
across all regions except China, as a result of reduced spending by large
service providers. A substantial portion of INS revenues are generated from
large U.S. service providers such as AT&T, Verizon, BellSouth and SBC, among
others. Non-U.S. revenues also declined as a result of lower capital spending in
several regions.
The increase in U.S. Mobility revenues of 23% was due to growth in the major
account sector primarily relating to increased Code Division Multiple Access
("CDMA") sales and services to certain emerging service providers who are
executing on their respective wireless network build-outs. Revenues from large
service providers were consistent with the prior fiscal year quarter. A
substantial portion of Mobility's U.S. revenues are generated from four large
service providers, Verizon Wireless, AT&T Wireless, Cingular Wireless and
Sprint. The increase in non-U.S. revenues was primarily the result of build-outs
of CDMA wireless networks in the China region, partially offset by decreases in
revenues in the Asia Pacific region primarily due to lower revenues from One.Tel
Corp., which went into receivership in fiscal year 2001.
Gross Margin
Gross margin as a percentage of revenues for the three months ended December 31,
2001 decreased to 12.2% from 15.7% in the prior fiscal quarter. The decrease was
primarily due to reduced spending by large service providers that caused lower
sales volumes across most product lines and services, which resulted in less
absorption of fixed costs; and unfavorable product mix,
14 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
offset in part by lower one-time charges and cost savings related to our
restructuring program.
Based upon our estimated view of the telecommunications market in the future,
we expect gross margin as a percentage of revenue to improve from its
December 31, 2001 level through improved sales volume and product mix,
reduction of one-time charges, cost reductions, market and product
rationalization work and the introduction of new products. However, if market
conditions and economic conditions continue to deteriorate, gross margin as a
percentage of revenues may continue to decline.
Operating Expenses
The following table presents our operating expenses (dollars in millions):
Three months ended
December 31,
---------------------------------- % increase
2001 2000 (decrease)
--------------- ---------------- ----------------
Selling, general and administrative
("SG&A") expenses, excluding the
following two items: $ 720 $1,226 (41.3%)
Provision for uncollectibles and customer
financings 451 368 22.6%
Amortization of goodwill and other acquired
intangibles 74 261 (71.6%)
--------------- ----------------
Total SG&A 1,245 1,855 (32.9%)
R&D 621 1,012 (38.6%)
Business restructuring charges, reversals and
asset impairments, net (79) - NM
--------------- ----------------
Operating expenses $ 1,787 $2,867 (37.7%)
=============== ================
----------
NM Not meaningful
SG&A expenses
Excluding the provision for uncollectibles and customer financings and the
amortization of goodwill and other acquired intangibles, SG&A expenses
decreased primarily from headcount reductions under our restructuring program
and other cost savings initiatives that limited discretionary spending.
Provision for uncollectibles and customer financings
The deterioration of certain customers' credit-worthiness resulted in higher
provisions for uncollectibles and customer financings in the three months
ended December 31, 2001 as compared with the prior first fiscal quarter.
Amortization of goodwill and other acquired intangibles
Amortization of goodwill and other acquired intangibles was significantly
lower for the three months ended December 31, 2001 as compared with the first
fiscal quarter of the prior year due to the write-down of goodwill and other
acquired intangibles, in particular, the discontinuance of the Chromatis
product portfolio in connection with our restructuring program.
R&D
The decrease in R&D expenses for the three months ended December 31, 2001 as
compared with the prior fiscal year first quarter was primarily due to
product rationalizations in our restructuring program.
Business restructuring charges, reversals and asset impairments, net
During the three months ended December 31, 2001, we recorded a net reversal
of business restructuring charges and asset impairments of $68 million, which
consisted of a reversal of reserves recorded during the fiscal year ended
September 30, 2001 of $124 million offset in part by additional charges of
$56 million. The $124 million reserve reversal primarily related to revised
estimates of certain restructuring costs and employee separation costs due to
organizational changes and higher than expected attrition levels. The $56
million charge included restructuring costs related to approximately 500 new
employee separations of $23 million and asset write-downs of $33 million.
Asset write-downs included inventory write-downs of $11 million, which were
recorded as a component of costs.
For additional information, see LIQUIDITY AND CAPITAL RESOURCES - Cash
Requirements - and Note 2 to the consolidated unaudited financial statements.
15 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Other Income (Expense), net
The increase in other income (expense), net was primarily related to $583
million in gains on sales of businesses, of which $523 million related to the
gain on the sale of our optical fiber business, and interest income related
to a tax settlement of $73 million in the three months ended December 31,
2001 as compared with the three months ended December 31, 2000.
Interest Expense
Interest expense for the three months ended December 31, 2001 decreased to
$97 million as compared with $127 million for the prior fiscal quarter. The
decrease in interest expense is due to significantly lower short-term debt
levels.
Benefit from Income Taxes
The following table presents our benefit from income taxes and the related
effective tax benefit rates (dollars in millions):
Three months ended
December 31,
-------------------------------------
2001 2000
--------------- ------------------
Benefit from income taxes $(486) $(778)
Effective tax benefit rate (53.5)% (33.1)%
The effective tax benefit rate for the three months ended December 31, 2001,
was greater than the U.S. statutory rate primarily due to the tax impact from
the gain on the sale of the optical fiber business, which had a low effective
rate due to differences in the book and tax basis of the business sold,
research and development tax credits and a $60 million favorable one-time
benefit relating to a tax settlement, offset in part by non-tax deductible
goodwill amortization and valuation allowances on state net operating losses,
which decreased the effective tax benefit rate.
At December 31, 2001, we had net deferred tax assets of $5.7 billion,
reflecting net operating loss and credit carryforwards and deductible
temporary differences. Although realization is not assured, we have concluded
that it is more likely than not that the net deferred tax assets will be
realized based on the scheduling of deferred tax liabilities and projected
taxable income. The amount of the net deferred tax assets actually realized,
however, could vary if there are differences in the timing or amount of
future reversals of existing deferred tax liabilities or changes in the
actual amounts of future taxable income.
The effective tax benefit rate for the three months ended December 31, 2000,
was lower than the U.S. statutory rate primarily from the impact of non-tax
deductible goodwill amortization, offset in part by research and development
tax credits.
Loss from Continuing Operations
As a result of the above, loss from continuing operations and related per
share amounts are as follows (amounts in millions, except per share amounts):
Three months ended
December 31,
-----------------------------------
2001 2000
--------------- ----------------
Loss from continuing operations $ (423) $(1,575)
Basic and diluted loss per share from
continuing operations $(0.14) $ (0.47)
Weighted average number of common shares
outstanding - basic and diluted 3,416.3 3,387.2
Other
The loss from discontinued operations during the three months ended December
31, 2000 relates to Agere Systems, Inc. ("Agere") and our power systems
business.
During the three months ended December 31, 2000, we recorded an extraordinary
gain of $1.2 billion, net of a $762 million tax provision, or $0.34 per basic
and diluted share, from the sale of our power systems business.
16 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Effective October 1, 2000, we recorded a net $38 million charge for the
cumulative effect of certain accounting changes. This comprised a $30 million
earnings credit ($0.01 per basic and diluted share) from the adoption of
Statement of Financial Accounting Standards No. 133, 'Accounting for
Derivative Instruments and Hedging Activities' and a $68 million charge to
earnings ($0.02 per basic and diluted share) from the adoption of Securities
and Exchange Commission ("SEC") Staff Accounting Bulletin 101, 'Revenue
Recognition in Financial Statements'.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow for the three months ended December 31, 2001 and 2000
Net cash used in operating activities
Net cash used in operating activities was $408 million for the three months
ended December 31, 2001. This primarily resulted from the loss from
continuing operations (adjusted for non-cash items) of $802 million and
changes in other operating assets and liabilities of $931 million, partially
offset by a reduction in working capital requirements of $1.3 billion. The
reduction in working capital, which includes changes in receivables,
inventories and contracts in process and accounts payable primarily resulted
from the sequential decrease in sales volume during the current quarter. The
most significant reduction in working capital was a $1.2 billion decrease in
receivables, which also reflected a $110 million reduction in receivables
sold through our receivable securitization facility. Although receivables
decreased during the current quarter, the average receivable days sales
outstanding increased from 80 days at September 30, 2001 to 98 days at
December 31, 2001. Improvements in inventory and contracts in process
resulted from our continued efforts to streamline inventory supply chain
operations. The changes in other operating assets and liabilities include
cash outlays under our restructuring program of $301 million and various
other changes, including a reduction in deferred income and advance
billings and progress payments, partially offset by a reduction of notes
receivables under our customer financing program of $230 million.
Net cash used in operating activities was $1.3 billion for the three months
ended December 31, 2000. This primarily resulted from the loss from
continuing operations (adjusted for non-cash items) of $1.7 billion, changes
in other operating assets and liabilities of $265 million, partially offset
by a reduction in working capital requirements of $690 million. The reduction
in working capital primarily resulted from the sequential decrease in sales
volume during the quarter ended December 31, 2000. The $2.1 billion decrease
in receivables included a favorable impact from the sale of approximately
$600 million of receivables. Although receivables significantly decreased
during the quarter, the average days sales outstanding increased from 114
days to 159 days, due to lower collection efficiency. The increase in
inventory and contracts in process of $1.1 billion resulted from increased
production to meet anticipated sales commitments which did not materialize.
The changes in other operating assets and liabilities resulted from increases
in notes receivables of $549 million under our customer financing program
which were partially offset by various other changes.
Net cash provided by investing activities
Net cash provided by investing activities was $2.1 billion for the three
months ended December 31, 2001 and was primarily from $2.2 billion in
proceeds received from the dispositions of businesses, which includes the
$2.1 billion of proceeds received from the sale of our optical fiber
business. These proceeds were partially offset by capital expenditures of
$116 million.
Net cash provided by investing activities was $2.1 billion for the three
months ended December 31, 2000 and was primarily from $2.5 billion in
proceeds from the sale of the power systems business. These proceeds were
partially offset by capital expenditures of $329 million.
Capital expenditures primarily relate to expenditures for equipment and
facilities used in manufacturing, research and development and internal use
software.
Net cash (used in) provided by financing activities
Net cash used in financing activities for the three months ended December 31,
2001 was primarily due to repayments under our credit facilities of $1.0
billion.
Net cash provided by financing activities for the three months ended December
31, 2000 of $1.6 billion resulted primarily from short-term borrowings which
largely consisted of commercial paper issuances of $909 million and the
transfer of $500 million of notes receivable with recourse that was accounted
for as a secured borrowing.
17 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Cash Requirements
Our cash requirements through the end of fiscal year 2002 are primarily to
fund:
o operations, including spending on R&D;
o capital expenditures;
o cash restructuring outlays;
o capital requirements in connection with our existing customer financing
commitments;
o debt service; and
o preferred stock dividend requirements (we paid $73 million in cash on
February 1, 2002).
Although we have implemented a more selective customer financing program in
fiscal year 2001, we have existing, and expect to continue to enter into,
financing arrangements for our customers that involve significant capital
requirements. For example, we expect that approximately $700 million of the
undrawn commitments at December 31, 2001 may be drawn during the remainder of
fiscal year 2002. In addition, our capital needs associated with customer
financing may increase if our ability to sell the notes representing existing
customer financing, or transfer future funding commitments, on acceptable
terms to financial institutions and investors is limited by a deterioration
in the credit quality of the customers to which we have extended financing
(see Customer Financing).
Under our restructuring program we expect to:
o compared to our first fiscal quarter of 2001, reduce annual operating
expense run rate by $4.0 billion by the end of fiscal year 2002. As of
December 31, 2001, we had achieved over 85% of this objective on an
annualized basis;
o compared to our first fiscal quarter of 2001, reduce working capital
(defined as the change in receivables and inventory adjusted for
non-cash charges and asset securitizations, and normalized for the
change in quarterly sales) by $4.0 billion. As of December 31, 2001,
we had achieved over 80% of this objective; and
o reduce our annual capital spending rate to approximately $750 million.
Subject to its timely and successful implementation, we expect our
restructuring program to yield gross cash savings in excess of $5 billion
annually. These anticipated savings result primarily from reduced headcount.
Total cash outlays under the restructuring program are expected to be
approximately $2.1 billion, of which approximately $850 million was paid
through December 31, 2001, with the majority of the remainder to be paid by
the end of fiscal year 2002.
We expect to complete the restructuring program by the end of fiscal year
2002. If implemented in the manner and on the timeline we intend, we expect
to realize the full benefits of our restructuring program by the end of
fiscal year 2002. However, we cannot assure you that our restructuring
program will achieve all of the cost and expense reductions and other
benefits we anticipate or on the timetable contemplated. Because this
restructuring program involves realigning our business units and sales
forces, it may be disruptive to our customer relationships.
If we do not complete our restructuring program and achieve our anticipated
cost and expense reductions in the time frame we contemplate, our cash
requirements to fund our operations are likely to be significantly higher
than we currently anticipate. In addition, because market demand continues to
be uncertain and because we are currently implementing our restructuring
program and new business strategy, which may also have other unanticipated
adverse effects on our business, it is difficult to estimate our ongoing cash
requirements. Also, continued decreases in spending by large service
providers would likely have an adverse effect on revenues and gross margins.
Sources of Cash
We expect to fund our currently expected cash requirements for the remainder
of fiscal year 2002 through a combination of the following sources:
o cash and cash equivalents as of December 31, 2001;
o available credit under our credit facilities;
o capital market transactions;
o dispositions and sales of assets;
o accounts receivable securitization facility; and
o cash flows from operations, subject to the successful execution of our
business strategy.
18 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
We had net liquidity of approximately $5.0 billion on December 31, 2001,
resulting from cash and cash equivalents of $3.1 billion and availability
under our credit facility of $1.9 billion. As of December 31, 2001, we had no
outstanding balance under our credit facility.
We have a $500 million securitization facility that expires in June 2004 that
allows us to sell certain trade accounts receivable on a revolving basis in
exchange for cash and a subordinated retained interest in the remaining
outstanding receivables. For the three months ended December 31, 2001, we
sold $110 million and repurchased $220 million of accounts receivable under
this facility and the balance of the undivided interests held by unrelated
third parties decreased by $110 million to $176 million. The retained
interests are collateralized by $997 million of accounts receivable. Our
ability to obtain proceeds depends upon a combination of factors, including
our credit ratings and increasing the level of our eligible accounts
receivable.
Credit facility
The total lending commitments under our credit facility are reduced if we
undertake certain debt reduction transactions or generate additional funds
from specified non-operating sources, as defined in our credit facility.
However, this lending commitment cannot be reduced to less than $1.5 billion.
As of December 31, 2001, we had generated $4.6 billion ($2.2 billion was
generated in the three months ended December 31, 2001) from specified
non-operating sources. This resulted in the termination of our 364-day $2
billion credit facility and a reduction in the total lending commitments
under our remaining $2 billion credit facility expiring in February 2003 to
$1.9 billion.
Our remaining credit facility is secured by liens on substantially all of our
assets, including the pledge of Agere stock owned by us. Our ability to
access our credit facility is subject to our compliance with the terms and
conditions of the credit facility, including financial covenants. These
financial covenants require us to have minimum earnings before interest,
taxes, depreciation and amortization ("EBITDA") and minimum net worth
measured at the end of each fiscal quarter. As of December 31, 2001, we were
in compliance with these covenants. In addition, in the event a subsidiary,
including Agere, defaults on its debt, as defined in the credit facility, it
would constitute a default under our credit facility. As of December 31,
2001, Agere was in compliance with these covenants.
The credit facility includes certain other conditions and terms, including
those necessary to allow the distribution of Agere stock to our shareowners
(see Agere Spin-Off Update). In addition, we cannot resume payment of
dividends on our common stock unless we achieve certain credit ratings or
EBITDA levels and no event of default exists under the credit facility.
Payment of dividends on the common stock is limited to the rate of dividends
paid prior to the discontinuation of the cash dividend. We are permitted to
pay cash dividends on our convertible preferred stock if no event of default
exists under the credit facility.
Business dispositions and asset sales
Optical fiber business
On November 16, 2001, we completed the sale of our optical fiber business to
The Furukawa Electric Co., Ltd. for $2.3 billion, $173 million of which was
paid to us in CommScope, Inc. securities. In addition, we entered into an
agreement on July 24, 2001 to sell two China-based joint ventures -- Lucent
Technologies Shanghai Fiber Optic Co., Ltd. and Lucent Technologies Beijing
Fiber Optic Cable Co., Ltd. -- to Corning Incorporated for $225 million. This
transaction, which is subject to U.S. and foreign governmental approvals and
other customary closing conditions, is expected to close by the end of the
third quarter of fiscal year 2002.
New Ventures Group ("NVG")
On December 21, 2001, we created a new venture capital partnership named New
Venture Partners II LP with Coller Capital of London, an international
specialist investment manager. Under the terms of the agreement, we sold 80%
of our equity stake in our former NVG business to Coller Capital for $93
million in cash.
Voice Enhancement and Echo Cancellation Business
On December 3, 2001, we completed the sale of our voice enhancement and echo
cancellation business to NMS Communications for $60 million in cash.
Customer care and billing business
On December 22, 2001, we entered into an agreement for the sale of our
customer care and billing business to CSG Systems International, Inc. for
approximately $300 million in cash, subject to certain purchase price
adjustments, governmental approvals and other customary closing conditions.
We expect this transaction to close in the second quarter of fiscal year
2002.
19 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Enterprise services business
On November 6, 2001, we announced our intention to sell the enterprise
professional services portion of our services business.
Outsourcing
As we continue to expand the use of outsourcing arrangements for the
manufacture of some of our products, both domestically and internationally,
we may enter into additional sales of manufacturing operations with contract
manufacturers during fiscal year 2002. If we are unable to identify contract
manufacturers willing to contract with us on competitive terms and to devote
sufficient resources to fulfill their obligations to us, our existing
customer relationships may suffer, which could have an adverse effect on our
results of operations.
Future capital requirements
We believe our cash on hand, availability under our credit facility and other
planned sources of liquidity are currently sufficient to meet our
requirements through the end of fiscal year 2002. We cannot assure you,
however, that these sources of liquidity will be available when needed or
that our actual cash requirements will not be greater than we currently
expect. As described above, the receipt of proceeds from specified asset
sales in excess of a specified threshold results in a further reduction in
the amount of available borrowings under our credit facility. If our sources
of liquidity are not available or if we cannot generate positive cash flow
from operations, we will be required to obtain additional sources of funds
through additional operating improvements, asset sales and financing from
third parties or a combination thereof. Although we believe that we have the
ability to take these actions, we cannot assure you that these additional
sources of funds, if available, would have reasonable terms.
We will consider opportunities to raise additional capital, which
could include raising funds through equity or debt offerings as market
conditions permit. While we currently believe we do not need this capital
to fund our near-term needs, these additional fund raising efforts, if
undertaken, would provide us with additional liquidity and financial
flexibility.
Credit ratings
Our credit ratings as of February 14, 2002, remain below investment grade and
are unchanged from those included in our latest Annual Report on Form 10-K
for the year ended September 30, 2001. We cannot assure you that our credit
ratings will not be reduced in the future by Standard & Poor's, Moody's or
Fitch.
Agere Spin-Off Update
We remain committed to completing the process of separating Agere from us,
and we intend to move forward with our distribution of our shares of Agere
stock in a tax-free spin-off to our shareowners. However, we cannot assure
you that the conditions to our obligation to complete the distribution will
be satisfied by a particular date or that the terms and conditions of our
indebtedness will permit the distribution by a particular date or at all due
to uncertain market conditions.
The pledge can be released and the distribution can occur at our request if
all the following remaining terms and conditions as defined under the credit
facility are met:
o no event of default exists under the credit facility;
o we have generated positive EBITDA for the fiscal quarter immediately
preceding the distribution; we intend to use our results from our second
fiscal quarter to meet this financial covenant.
o we meet a minimum current asset ratio;
o we have received $5.0 billion in cash from certain non-operating sources;
and
o the credit facility, expiring in February 2003, has been reduced to $1.75
billion or less.
As of February 14, 2002, we have generated $4.9 billion of funds from certain
non-operating sources. We expect to satisfy the $5.0 billion requirement
noted above, as well as reducing our total lending commitments below $1.75
billion, upon receipt of the $300 million of cash proceeds expected from the
completion of the sale of our billing and customer care business.
We have received a private letter ruling from the Internal Revenue Service
holding that the distribution of our shares of Agere common stock to our
shareowners in the spin-off and to holders of our debt in the debt for equity
exchange will be tax free to us and our shareowners. The effectiveness of the
original ruling was conditioned on completion of the spin-off by September
30, 2001. However, we have received a supplemental ruling from the Internal
Revenue Service that maintains the effectiveness of the original ruling so
long as the spin-off is completed on or before June 30, 2002. The
supplemental ruling also favorably resolves certain additional tax issues
arising from the issuance of preferred stock.
20 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Customer Financing
The following table presents our customer financing commitments at December
31, 2001 and September 30, 2001 (dollars in billions):
December 31, 2001 September 30, 2001
------------------------------------------------ ----------------------------------------------
Total loans Total loans
and and
guarantees Loans Guarantees guarantees Loans Guarantees
-------------- ------------ ------------- -------------- ------------ -------------
Drawn commitments $1.2 $0.8 $0.4 $3.0 $2.6 $0.4
Available but not drawn 1.0 1.0 - 1.4 1.4 -
Not available 0.3 0.2 0.1 0.9 0.6 0.3
-------------- ------------ ------------- -------------- ------------ -------------
Total commitments $2.5 $2.0 $0.5 $5.3 $4.6 $0.7
============== ============ ============= ============== ============ =============
Some of our customers 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. We use a disciplined
credit evaluation and business review process that takes into account the
credit quality of individual borrowers and their related business plans, as
well as market conditions. We consider requests for financing on a
case-by-case basis and offer financing only after careful review. As market
conditions permit, our intention is to sell or transfer these long-term
financing arrangements, which may include both commitments and drawn-down
borrowings, to financial institutions and other investors. This enables us to
reduce the amount of our commitments and free up additional financing
capacity. As part of the revenue recognition process, we determine whether
the notes receivable under these contracts are reasonably assured of
collection based on various factors, including our ability to sell these
notes.
In September 2000, Lucent and a third party created a non-consolidated
Special Purpose Trust ("Trust") for the purpose of allowing us from time to
time to sell on a limited-recourse basis customer finance loans and
receivables ("Loans") at any given point in time through a wholly owned
bankruptcy-remote subsidiary, which in turn would sell the Loans to the
Trust. Due to our credit downgrade in February 2001, we are unable to sell
additional Loans to the Trust, as defined by agreements between us and the
Trust. Payments to repurchase certain Loans from the Trust for the three
months ended December 31, 2001 were $90 million. As of December 31, 2001, the
Trust held approximately $350 million of customer financing loans and
receivables.
Our credit process monitors the drawn and undrawn commitments and guarantees
of debt to our customers. Customers are reviewed on a quarterly or annual
basis depending upon their risk profile. As part of our review, we assess the
customer's short-term and long-term liquidity position, current operating
performance versus plan, execution challenges facing the company, changes in
competitive landscape, industry and macroeconomic conditions, and changes to
management and sponsors. Depending upon the extent of any deterioration of a
customer's credit profile or non-compliance with our legal documentation, we
undertake actions that could include canceling the commitment, compelling the
borrower to take corrective measures, and increasing efforts to mitigate
potential losses. These actions are designed to mitigate unexpected events
that could have an impact on our future results of operations and cash flows;
however, there can be no assurance that this will be the case. Adverse
industry conditions have negatively affected the creditworthiness of several
customers that participate in our customer financing program. The decrease in
the drawn and total commitments from September 30, 2001 was due to the
removal of approximately $1 billion of fully reserved accounts, sales of
loans and cancellations, partially offset by draw-downs. Reserves associated
with total drawn commitments, including guarantees, were approximately $700
million reflecting a net exposure of approximately $500 million.
Our overall customer financing exposure, coupled with a continued decline in
telecommunications market conditions, negatively affected revenue, results of
operations and cash flows in fiscal year 2001 and has continued through the
first quarter of fiscal year 2002. We will continue to provide or commit to
financing, on a more limited basis, where appropriate for our business. Our
ability to arrange or provide financing for our customers will depend on a
number of factors, including our capital structure, credit rating and level
of available credit, and our continued ability to sell or transfer
commitments and drawn-down borrowings on acceptable terms. Due to recent
economic uncertainties and reduced demand for financings in capital and bank
markets, we may be required to continue to hold certain customer financing
obligations for longer periods prior to the sale to third-party lenders. In
addition, specific risks associated with customer financing, including the
risks associated with new technologies, new network construction, market
demand and competition, customer business plan viability and funding risks
may require us to hold certain customer financing obligations and retain the
related credit risk over a longer term. Any unexpected developments in our
customer financing arrangements could negatively affect revenue, results of
operations and cash flows in the future. In addition, we may be required to
record additional reserves related to customer financing in the future.
21 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Accounting Policies Involving Significant Estimates
Our financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
Most of our sales are generated from complex arrangements, which require
significant revenue recognition judgments particularly in the areas of
customer acceptance, installation, and collectibility. The assessment of
collectibilty is particularly critical in determining whether or not revenue
should be recognized in the current market environment. A portion of our
sales are generated from long-term contracts which require important revenue
and cost judgments which underlie our determinations regarding overall
contract profitability and timing of revenue recognition.
We are required to estimate the collectibility of our trade receivables and
notes receivable. A considerable amount of judgment is required in assessing
the ultimate realization of these receivables including the current
credit-worthiness of each customer. Significant changes in required reserves
have been recorded in recent periods and may occur in the future due to the
current market environment.
We are required to state our inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements and compare that with the current
or committed inventory levels. We have recorded significant changes in
required reserves in recent periods due to changes in strategic direction,
such as discontinuances of product lines as well as changes in market
conditions due to changes in demand requirements. It is possible that changes
in required inventory reserves may continue to occur in the future due to the
current market conditions.
During fiscal year 2001, we recorded significant reserves in connection with
our restructuring program. These reserves include estimates pertaining to
employee separation costs and the settlements of contractual obligations
resulting from our actions. Although we do not anticipate significant
changes, the actual costs may differ from these estimates.
We currently have significant deferred tax assets, which are subject to
periodic recoverability assessments. Realization of our deferred tax assets
is principally dependent upon our achievement of projected future taxable
income. Our judgments regarding future profitability may change due to future
market conditions, our ability to continue to successfully execute our
restructuring program and other factors. These changes, if any, may require
possible material adjustments to these deferred tax asset balances.
We are subject to proceedings, lawsuits and other claims related to
environmental, labor, product and other matters. We are required to assess
the likelihood of any adverse judgments or outcomes to these matters as well
as potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies are made after careful
analysis of each individual issue. The required reserves may change in the
future due to new developments in each matter or changes in approach such as
a change in settlement strategy in dealing with these matters.
We have significant intangible assets related to goodwill and other acquired
intangibles as well as capitalized software costs. The determination of
related estimated useful lives and whether or not these assets are impaired
involves significant judgments. Changes in strategy and/or market conditions
could significantly impact these judgments and require adjustments to
recorded asset balances.
We have significant pension and postretirement benefit costs and credits
which are developed from actuarial valuations. Inherent in these valuations
are key assumptions including discount rates and expected return on plan
assets. We are required to consider current market conditions, including
changes in interest rates, in selecting these assumptions. Changes in the
related pension and postretirement benefit costs or credits may occur in the
future in addition to changes resulting from fluctuations in our related
headcount due to changes in the assumptions.
We are required to estimate and accrue for our share of Agere's net losses
through the anticipated spin-off date. We utilize Agere's projections of
future results of operations and our best estimate of the intended spin
date in determining the required reserve. It is possible that the actual
results could differ from these related estimates due to uncertain market
conditions and/or a possible change in the anticipated spin-off date.
22 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RISK MANAGEMENT
We are exposed to market risk from changes in foreign currency exchange
rates, interest rates and equity prices that could affect our results of
operations and financial condition. We manage our exposure to these market
risks through our regular operating and financing activities and, when deemed
appropriate, hedge these risks through the use of derivative financial
instruments. We use the term hedge to mean a strategy designed to manage
risks of volatility in prices or rate movements on certain assets,
liabilities or anticipated transactions and by creating a relationship in
which gains or losses on derivative instruments are expected to
counterbalance the losses or gains on the assets, liabilities or anticipated
transactions exposed to such market risks. We use derivative financial
instruments as risk management tools and not for trading or speculative
purposes. In addition, derivative financial instruments are entered into with
a diversified group of major financial institutions in order to manage our
exposure to nonperformance on such instruments. Our risk management objective
is to minimize the effects of volatility on our cash flows by identifying the
recognized assets and liabilities or forecasted transactions exposed to these
risks and appropriately hedging them with either forward contracts or, to a
lesser extent, option contracts, swap derivatives or by embedding terms into
certain contracts that affect the ultimate amount of cash flows under the
contract. We generally do not hedge our credit risk on customer receivables.
Foreign Currency Risk
We use foreign exchange forward contracts and, to a lesser extent, option
contracts to minimize 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 exchange forward and option contracts are utilized
for recognized receivables and payables, firmly committed or anticipated cash
inflows and outflows. The use of these derivative financial instruments
allows us to reduce our 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. Cash inflows and
outflows denominated in the same foreign currency are netted on a legal
entity basis and the corresponding net cash flow exposure is appropriately
hedged. We do not hedge our net investment in non-U.S. entities because we
view those investments as long-term in nature.
We have not changed our foreign exchange risk management strategy since the
year ended September 30, 2001. We are currently in the process of further
centralizing the foreign exchange and liquidity management needs of many of
our operating subsidiaries under the model of an in-house bank. While this
implementation would not change the fundamental objective of our foreign
currency risk management policy, it is expected to yield benefits by way of
economic efficiency, process efficiency and improved visibility of financial
flows.
Interest Rate Risk
We use a combination of financial instruments, including medium-term and
short-term financings, variable-rate debt instruments and, to a lesser
extent, interest rate swaps to manage the interest rate mix of our total debt
portfolio and related cash flows. To manage this mix in a cost-effective
manner, we, from time to time, may enter into interest rate swap agreements
in which we agree to exchange various combinations of fixed and/or variable
interest rates based on agreed-upon notional amounts. We had no interest rate
swap agreements in effect at December 31, 2001. The objective of maintaining
the mix of fixed and floating rate debt is to mitigate the variability of
cash flows resulting from interest rate fluctuations as well as reduce the
cash flows attributable to debt instruments. Our portfolio of customer
finance notes receivable predominantly comprises variable-rate notes at LIBOR
plus a stated percentage and subjects us to variability in cash flows and
earnings for the effect of changes in LIBOR. We do not enter into derivative
transactions on our cash equivalents and short-term investments, since our
relatively short maturities do not create significant risk.
We have not changed our interest rate risk management strategy since
September 30, 2001 and do not foresee or expect any significant changes in
our exposure to interest rate fluctuations, but we are considering expanding
the use of interest rate swaps in the near future on our debt obligations.
23 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Equity Price Risk
Our investment portfolio consists of equity investments accounted for under
the cost and equity methods as well as equity investments in publicly-held
companies that are classified as available-for-sale. These available-for-sale
securities are exposed to price fluctuations and are generally concentrated
in the high-technology communications industry, many of which are small
capitalization stocks. At December 31, 2001, the fair value of one
available-for-sale security totaled $184 million out of a total
available-for-sale portfolio of $236 million. Due to the continued weak
economic conditions in the technology sector, we may, from time to time,
record impairment losses and write down the carrying value of certain equity
investments when the declines in fair value are other than temporary. The
amount of impairment losses recorded for the three months ended December 31,
2001 were not material. We generally do not hedge our equity price risk and
as of December 31, 2001, we had no outstanding hedge instruments for our
equity price risk.
OTHER INFORMATION
On November 21, 2000, we announced that we had identified an issue impacting
revenue in the fourth fiscal quarter of 2000. We informed the SEC and
initiated a review by our outside counsel and outside auditors. In late
December 2000, we announced the results of the review, which resulted in
certain adjustments to our fourth fiscal quarter of 2000 results. We are
cooperating fully with the SEC's investigation of these matters.
RECENT PRONOUNCEMENTS
See discussion in Note 11 to the unaudited consolidated financial statements.
LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
See discussion in Note 10 to the unaudited consolidated financial statements.
24 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q and other documents we file with the SEC
contain forward-looking statements that are based on current expectations,
estimates, forecasts and projections about the industries in which we
operate, our beliefs and our management's assumptions. In addition, other
written or oral statements that constitute forward-looking statements may be
made by or on behalf of us. Words such as 'expects,' 'anticipates,'
'targets,' 'goals,' 'projects,' '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 that are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is expressed or forecast in such
forward-looking statements. Except as required under the federal securities
laws and the rules and regulations of the SEC, we do not have any intention
or obligation to update publicly any forward-looking statements after the
distribution of this Form 10-Q, whether as a result of new information,
future events, changes in assumptions, or otherwise.
See reports filed by Agere with the SEC for a further list and description of
risks and uncertainties related to Agere.
The following items are representative of the risks, uncertainties and
assumptions that could affect the outcome of the forward-looking statements.
In addition, such forward-looking statements could be affected by general
industry and market conditions and growth rates, general U.S. and non-U.S.
economic and political conditions, including the global economic slowdown and
interest rate and currency exchange rate fluctuations and other future events
or otherwise.
o If the telecommunications market does not improve, or improves at a slower
pace than we anticipate, our results of operations will continue to suffer.
o We have substantial cash requirements and may require additional sources
of funds if our sources of liquidity are unavailable or insufficient to
satisfy these requirements. We cannot assure you that the additional
sources of funds would be available or available on reasonable terms.
o We incurred a net loss in fiscal year 2001 and the first fiscal quarter of
2002 and may continue to incur net losses in the future; if we continue to
incur net losses, we may be unable to comply with our debt covenants.
o If our financial performance does not improve, we may be unable to complete
our intended spin-off of Agere.
o Our new strategic direction and our restructuring program may not yield
the benefits we expect and could even harm our financial condition,
reputation and prospects.
o Our results of operations, working capital requirements and cash flow from
operating activities can vary greatly from fiscal quarter to fiscal
quarter.
o A decline in our credit ratings could adversely affect our operations
through the inability to obtain financing from third parties, increase our
cost of financing and limit our ability to offer customer financing.
o We operate in a highly competitive industry. Our failure to compete
effectively would harm our business.
o A limited number of our customers account for a substantial portion of our
revenues, and the loss of one or more key customers could significantly
reduce our revenues, profitability and cash flow.
o We have developed outsourcing arrangements for the manufacture of some of
our products. If these third parties fail to deliver quality products and
components at reasonable prices on a timely basis, we may alienate some
of our customers and our revenues, profitability and cash flow may
decline. If we do not control or manage these relationships properly and
effectively we could suffer unintended adverse consequences, such as
damage to our reputation, violation of local laws and regulations and
increased costs to our business.
o We have long-term sales agreements with a number of our large customers.
Some of these may prove unprofitable as our costs and product mix
shift over the life of the agreement.
o We are exposed to the credit risk of our customers as a result of our
vendor financing arrangements and accounts receivables.
o If we cannot provide customer financing we may not be able to maintain
some of our customer relationships.
o If we fail to maintain a product mix that is attractive to our customers,
enhance our existing products and keep pace with technological advances in
our industries or if we pursue technologies that do not become commercially
accepted, customers may not buy our products and our revenues,
profitability and cash flow may be adversely affected.
25 Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
o Rapid changes to existing regulations or technical standards or the
implementation of new regulations or technical standards upon products
and services not previously regulated could be disruptive, time consuming
and costly.
o Because many of our current and planned products are highly complex, they
may contain defects or errors that are detected only after deployment in
communications networks; if that occurs, our reputation may be harmed.
o We are party to several lawsuits, which, if determined adversely to us,
could result in the imposition of damages against us and could harm our
business and financial condition.
o If we fail to protect our intellectual property rights, our business
and prospects may be harmed. We may be subject to intellectual property
litigation and infringement claims, which could cause us to incur
significant expenses or prevent us from selling our products.
o Our success depends on our ability to retain and recruit key personnel.
o We are subject to environmental, health and safety laws which could
increase our costs and restrict our future operations.
o We conduct a significant amount of our operations outside the United
States, which subjects us to social, political and economic risks of doing
business in foreign countries and may cause our profitability to decline
due to increased costs.
o We are exposed to market risk from changes in foreign currency exchange
rates, interest rates and equity prices that could impact our results of
operations and financial condition.
o We may be unable to realize an economic benefit from our deferred tax
assets which would have an adverse effect on our future results of
operations.
26 Form 10-Q - Part II
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Part II - Other Information
Item 1. Legal Proceedings
On December 7, 2001, the court in Sparks, et al. s v. Lucent Technologies, Inc.
et al. set a trial date of May 13, 2002. This action is a state court, class
action lawsuit filed in 1996 in Illinois under the name, Crain v. Lucent
Technologies. It seeks unspecified damages for a nationwide class of customers
based on a claim that the former AT&T Consumer Products business (which became
part of Lucent) had defrauded and misled customers who leased telephones from
Consumer Products so as to believe their lease payments would lead to ownership
of the telephones. The lawsuit seeks damages based on the difference between the
aggregate lease payments made and the fair market value of telephones. The
Sparks action is one of a number of consumer class actions which, after removal
to a federal court, were remanded to various state courts in July 2001. These
other actions are in the discovery phase and we are unable to determine what, if
any, impact a resolution of the Sparks case will have on these matters. These
cases include: Carey, et al. v. AT&T Corp.; and Jackson, et al. v. AT&T Corp, et
al., two nationwide class action lawsuits filed in 1996 in Alabama; Brown, et
al. v Lucent Technologies, Inc., a lawsuit filed in 1998 in the Eastern District
of Missouri; Santone, et al. v. AT&T, et al., a case filed in 1998 in state
court in California; Boughner v. AT&T Corp., an action filed in 1999 in New York
State Supreme Court in Nassau County; and, Katz, et al. v. AT&T Corp., a
nationwide class action complaint filed in 1999 in the Superior Court of New
Jersey, County of Somerset. These cases, including Sparks, are in various stages
of discovery and we are unable to determine their potential impact on our
consolidated financial statements. We are defending these actions vigorously.
In January 2002, the court in Vicor Corp. et al. v. Lucent Technologies Inc.
granted plaintiffs' June 30, 2001 motion for a writ of attachment in the amount
of $20 million. The Court had held a hearing on Vicor's motion on November 19
and 20, 2001. This is an action in which Vicor Corporation and VLT Corporation
("Vicor") sued us in Federal District Court in Boston, MA for an unspecified
amount of damages purportedly stemming from an alleged infringement of a power
supply patent. Discovery was stayed pending the resolution of certain summary
judgment motions in the same court in a related case against Unitrode, a
supplier of controller chips to the Company and other power supply
manufacturers. In January 2001, the Court, in the Unitrode action, to which
Lucent was not a party, held that certain power supplies manufactured by the
Company and others, using the Unitrode controller, infringed Vicor's patent.
This case is in discovery and we are unable to determine its potential impact on
our consolidated financial statements. We intend to defend this action
vigorously.
27
Item 5. Other Information
Attached as Exhibit 99(i) is an update of our "description of capital stock"
which reflects amendments made to our restated certificate of incorporation,
filed with the Secretary of State of the State of Delaware on February 17, 1999,
February 16, 2000 and August 6, 2001, and amendments made to our by-laws on
February 17, 1999, October 24, 1999, November 14, 2000 and January 6, 2002. The
description of capital stock is contained in our registration statement on
Form 10, filed with the SEC on February 26, 1996, as amended by Amendment No. 1
filed on Form 10/A on March 12, 1996, Amendment No. 2 filed on Form 10/A on
March 22, 1996 and Amendment No. 3 filed on Form 10/A on April 1, 1996.
Attached as Exhibit 4(iv), is current form of our common stock certificate which
replaces the form of our common certificate filed as Exhibit 4.1 to our amended
registration statement on Form S-1/A (No. 333-00703), filed with the SEC on
April 1, 1996.
28 Form 10-Q - Part II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
(3)(ii) By-Laws of the Registrant, as amended through January 6, 2002.
(4)(iv) Form of the Registrant's common stock certificate.
(10)(iii)A 1 Employment Agreement dated January 6, 2002, between Patricia F. Russo and Lucent
Technologies Inc.
(10)(iii)A 2 Bernardus J. Verwaayen Separation Agreement, dated January 11, 2002.
(99)(i) Description of capital stock.
(b) Reports on Form 8-K filed during the current quarter:
On December 13, 2001, we filed a Current Report on Form 8-K pursuant to
Item 9 (Regulation FD Disclosures) to furnish a press release with
comments on our first quarter of fiscal 2002.
On November 30, 2001, we filed a Current Report on Form 8-K pursuant to
Item 5 (Other Events) to furnish consolidated financial statements and
management's discussion and analysis of results of operations and
financial condition at September 30, 2001 and 2000 and for each of the
years ended September 30, 2001, 2000 and 1999.
On November 20, 2001, we filed a Current Report on Form 8-K pursuant to
Item 5 (Other Events) to furnish a press release announcing completion
of the sale of our Optical Fiber Solutions business, as well as a copy
of Amendment No. 1 dated as of November 15, 2001, to the Asset and
Stock Purchase Agreement by and between Lucent and Furukawa.
On November 8, 2001, we filed a Current Report on Form 8-K pursuant to
Item 9 (Regulation FD Disclosures) to furnish information regarding the
supplemental ruling dated October 31, 2001 from the Internal Revenue
Service, which was issued in connection with our spin-off of Agere
Systems Inc.
On November 7, 2001, we filed a Current Report on Form 8-K pursuant to
Item 9 (Regulation FD Disclosures) to furnish viewgraphs presented at
an analyst meeting in New York, N.Y., as well as through a webcast.
On October 23, 2001, we filed a Current Report on Form 8-K pursuant to
Item 9 (Regulation FD Disclosures) to furnish the slides presented in a
webcast of our quarterly earnings conference call.
On October 23, 2001, we filed a Current Report on Form 8-K pursuant to
Item 5 (Other Events) to furnish a press release reporting earnings
results of our fourth fiscal quarter.
29 Form 10-Q - Part II
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.
Registrant
Date February 14, 2002
/s/ John A. Kritzmacher
--------------------------------
John A. Kritzmacher
Senior Vice President and Controller
(Principal Accounting Officer)
30 Form 10-Q - Part II
Exhibit Index
Exhibit Number
(3)(ii) By-Laws of the Registrant, as amended through January 6, 2002.
(4)(iv) Form of the Registrant's common stock certificate.
(10)(iii)A 1 Employment Agreement dated January 6, 2002, between Patricia F. Russo and Lucent
Technologies Inc.
(10)(iii)A 2 Bernardus J. Verwaayen Separation Agreement, dated January 11, 2002.
(99)(i) Description of capital stock.