AS FILED WITH THE SEC ON FEBRUARY 14, 2001
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to _____________
Commission file number 001-11639
LUCENT TECHNOLOGIES INC.
A Delaware I.R.S. Employer
Corporation No. 22-3408857
600 Mountain Avenue, Murray Hill, New Jersey 07974
Telephone 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, 2001, 3,403,607,833 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,
2000 1999
---- ----
Revenues .............................................. $ 5,841 $ 8,065
Costs ................................................. 4,530 4,307
------- -------
Gross margin .......................................... 1,311 3,758
Operating expenses:
Selling, general and administrative ................... 2,137 1,338
Research and development .............................. 1,285 928
------- -------
Total operating expenses .............................. 3,422 2,266
------- -------
Operating income (loss) ............................... (2,111) 1,492
Other income (expense)- net ........................... (18) 252
Interest expense ...................................... 129 81
------- -------
Income (loss) from continuing operations before
(benefit)provision for income taxes .................. (2,258) 1,663
(Benefit) provision for income taxes .................. (679) 539
------- -------
Income (loss) from continuing operations .............. (1,579) 1,124
Income from discontinued operations
(net of tax expense of $67) .......................... -- 125
------- -------
Income (loss) before extraordinary item and
cumulative effect of accounting change ............... (1,579) 1,249
Extraordinary gain (net of tax expense of $762) ....... 1,154 --
Cumulative effect of accounting change
(net of tax expense of $17) .......................... 30 --
------- -------
Net income (loss) ..................................... $ (395) $ 1,249
======= =======
Earnings (loss) per common share - basic:
Income (loss) from continuing operations .............. $ (0.47) $ 0.36
Net income (loss) ..................................... $ (0.12) $ 0.40
Earnings (loss) per common share - diluted:
Income (loss) from continuing operations .............. $ (0.47) $ 0.34
Net income (loss) ..................................... $ (0.12) $ 0.38
Weighted average number of common
shares outstanding - basic ........................... 3,387.2 3,154.5
Weighted average number of common
shares outstanding - diluted ......................... 3,387.2 3,268.0
See Notes to Unaudited 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,
2000 2000
----------- -------------
ASSETS
Cash and cash equivalents .............................. $ 3,814 $ 1,467
Receivables less allowances of $551 at December
31, 2000 and $501 at September 30, 2000 ................ 7,286 9,558
Inventories ............................................ 6,879 5,677
Contracts in process, net of contract billings
of $7,066 at December 31, 2000 and $6,744 at
September 30, 2000 .................................... 1,691 1,881
Deferred income taxes - net ............................ 1,168 1,165
Other current assets ................................... 2,071 1,742
------- -------
Total current assets ................................... 22,909 21,490
Property, plant and equipment, net of accumulated
depreciation of $7,295 at December 31, 2000 and
$7,141 at September 30, 2000 ......................... 7,138 7,084
Prepaid pension costs .................................. 6,422 6,440
Goodwill and other acquired intangibles, net of
accumulated amortization of $1,436 at December
31, 2000 and $1,072 at September 30, 2000 ............. 9,580 9,945
Other assets ........................................... 3,992 3,833
------- -------
Total assets ........................................... $50,041 $48,792
======= =======
LIABILITIES
Accounts payable ......................................... $ 2,628 $ 2,813
Payroll and benefit-related liabilities .................. 1,154 1,210
Debt maturing within one year ............................ 5,030 3,483
Other current liabilities ................................ 3,661 3,371
------- -------
Total current liabilities ................................ 12,473 10,877
Postretirement and postemployment benefit liabilities .... 5,214 5,548
Long-term debt ........................................... 3,099 3,076
Deferred income taxes - net .............................. 1,074 1,266
Other liabilities ........................................ 2,433 1,853
------- -------
Total liabilities ........................................ 24,293 22,620
Commitments and contingencies
SHAREOWNERS' EQUITY
Preferred stock-par value $1.00 per share
Authorized shares: 250,000,000; issued and
outstanding shares: none ............................ -- --
Common stock-par value $.01 per share
Authorized shares: 10,000,000,000; issued and
outstanding shares: 3,391,491,521 at December 31,
2000 and 3,384,332,104 at September 30, 2000 ........ 34 34
Additional paid-in capital ........................... 20,490 20,390
Guaranteed ESOP obligation ........................... (9) (16)
Retained earnings .................................... 5,668 6,129
Accumulated other comprehensive income (loss) ........ (435) (365)
-------- --------
Total shareowners' equity ............................ 25,748 26,172
-------- --------
Total liabilities and shareowners' equity ............ $ 50,041 $ 48,792
======== ========
See Notes to Unaudited 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,
2000 1999
---- ----
Operating Activities:
Net income (loss) ........................................ $ (395) $ 1,249
Less: Income from discontinued operations ................ -- 125
Extraordinary gain ................................. 1,154 --
Cumulative effect of accounting change ............. 30 --
------- -------
Income (loss) from continuing operations ................. (1,579) 1,124
Adjustments to reconcile income (loss) from continuing
operations to net cash (used in) provided by
operating activities:
Depreciation and amortization .......................... 868 455
Provision for uncollectibles and customer financings ... 370 30
Tax benefit from employee stock options ................ 8 456
Deferred income taxes .................................. (139) 118
Pension credit ......................................... (348) (235)
Other adjustments for non-cash items ................... 36 (326)
Changes in operating assets and liabilities:
Decrease (increase) in receivables ..................... 2,073 (196)
Increase in inventories and contracts in process ....... (1,170) (297)
Decrease in accounts payable ........................... (180) (684)
Changes in other operating assets and liabilities ...... (1,043) (306)
------- -------
Net cash (used in) provided by operating activities
from continuing operations .............................. (1,104) 139
------- -------
Investing Activities:
Capital expenditures ................................. (548) (508)
Purchases of investments ............................. (41) (65)
Sales or maturity of investments ..................... 1 702
Dispositions of businesses ........................... 2,494 9
Other investing activities ........................... 3 (31)
------- -------
Net cash provided by investing activities
from continuing operations .......................... 1,909 107
------- -------
Financing Activities:
Net proceeds from short-term borrowings .............. 1,576 185
Repayments of long-term debt ......................... -- (375)
Proceeds from issuance of common stock ............... 69 557
Dividends paid ....................................... (68) (62)
------- -------
Net cash provided by financing activities
from continuing operations .......................... 1,577 305
Effect of exchange rate changes on cash and
cash equivalents ................................... (35) (11)
------- -------
Net cash provided by continuing operations ........... 2,347 540
Net cash used in discontinued operations ............. -- (129)
------- -------
Net increase in cash and cash equivalents ............ 2,347 411
Cash and cash equivalents at beginning of year ....... 1,467 1,686
------- -------
Cash and cash equivalents at end of period ........... $ 3,814 $ 2,097
======= =======
See Notes to Unaudited Consolidated Financial Statements.
5
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements have been prepared
by Lucent Technologies Inc. ("Lucent" or the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of 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 period reported.
Actual results could differ from those estimates. Estimates are used in
accounting for, among other things, long-term contracts, allowances for
uncollectible receivables, inventory obsolescence, product warranty,
depreciation, employee benefits, taxes and contingencies. Estimates and
assumptions are reviewed periodically and the effects of revisions are
reflected in the Consolidated Financial Statements in the period 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, 2000 are not necessarily indicative of financial results for
the full year. These financial statements should be read in conjunction with the
audited Consolidated Financial Statements and notes thereto included in Lucent's
latest Annual Report on Form 10-K for the year ended September 30, 2000.
The balance sheet at September 30, 2000 has been derived from the audited
consolidated financial statements at that date.
The financial information for the three months ended December 31, 1999 has been
restated to reflect the spin-off of Avaya Inc. as a discontinued operation (see
Note 2). In addition, certain reclassifications have been made to conform to the
current period presentation.
2. DISCONTINUED OPERATIONS
On September 30, 2000, Lucent completed the spin-off of Avaya Inc. in a tax-free
distribution to its shareowners. Revenues and income from discontinued
operations were $1,840 and $125 (net of tax expense of $67), respectively, for
the three months ended December 31, 1999. Income from discontinued operations
includes an allocation of Lucent's interest expense totaling $18 for the three
months ended December 31, 1999, based upon the amount of debt assumed by Avaya.
3. SALE OF POWER SYSTEMS
On December 29, 2000, Lucent completed the sale of its power systems business to
Tyco International Ltd. for $2,500 in cash. In connection with the sale, Lucent
recorded an extraordinary gain of $1,154 (net of tax of $762), subject to
potential purchase price adjustments to be resolved by the end of fiscal year
2001. Lucent does not expect such adjustments, if any, to be significant to its
consolidated results of operations.
6
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
(Unaudited)
4. ACCOUNTING CHANGE - DERIVATIVE FINANCIAL INSTRUMENTS
Effective October 1, 2000, Lucent adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), and its corresponding amendments under SFAS No. 138.
SFAS 133 requires Lucent to measure all derivatives, including certain
derivatives embedded in other contracts, at fair value and to recognize them in
the Consolidated Balance Sheet as an asset or liability, depending on Lucent's
rights or obligations under the applicable derivative contract. For derivatives
designated as fair value hedges, the changes in the fair value of both the
derivative instrument and the hedged item are recorded in earnings. For
derivatives designated as cash flow hedges, the effective portions of changes in
fair value of the derivative are reported in other comprehensive income ("OCI")
and are subsequently reclassified into earnings when the hedged item affects
earnings. Changes in fair value of derivative instruments not designated as
hedging instruments and ineffective portions of hedges are recognized in
earnings in the current period. The adoption of SFAS 133 as of October 1, 2000,
resulted in a cumulative after-tax reduction in net loss of $30 (net of tax of
$17) and an $11 credit to OCI. The reduction in net loss is primarily
attributable to derivatives not designated as hedging instruments, including
foreign currency embedded derivatives, equity warrants and other derivatives.
For the three months ended December 31, 2000, the change in fair market value of
derivative instruments was recorded in other income (expense) and was not
material.
Foreign Currency Risk
---------------------
Lucent conducts its business on a multinational basis in a wide variety of
foreign currencies. To manage this risk, Lucent enters into various foreign
exchange forward and option contracts to manage its exposure to changes in those
foreign exchange rates. Alternatively, Lucent may hedge foreign exchange risk in
certain sales and purchase contracts by embedding terms in the contracts that
affect the ultimate amount of cash flows under the contract. Principal
currencies hedged are Canadian dollars, Brazilian reals, Australian dollars,
British pounds, Japanese yen and Euros.
Lucent has designated certain freestanding foreign currency derivatives as
hedging instruments under SFAS 133 against its intercompany and external
foreign-currency-denominated loans. These exposures make up a large proportion
of the notional value of Lucent's total foreign currency risk and are well
defined as to amounts and timing of repayments. The derivatives hedging these
exposures are designated as cash flow hedging instruments for anticipated cash
flows not to exceed twelve months. Lucent will continue to hedge all other types
of foreign currency risk to preserve the economic cash flows of the Company in
accordance with corporate risk management policies but generally does not expect
to designate related derivative instruments as hedges for cost/benefit reasons.
Accordingly, the changes in fair value of these undesignated freestanding
foreign currency derivative instruments are recorded in earnings in the period
of change and are not material to Lucent due to the short maturities of these
instruments.
Lucent's foreign currency embedded derivatives consist of sales and purchase
contracts with cash flows indexed to changes in or denominated in a currency
that neither party to the contract uses as their functional currency. Changes in
the fair value of these embedded derivatives are recorded in earnings in the
current period.
Interest Rate Risk
------------------
Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost-effective manner, Lucent, from time to time, enters into interest rate swap
agreements, in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed upon notional amounts. The interest rate
swaps in effect at December 31, 2000 were designated as fair value hedge
instruments and their fair value was not material.
Other Derivatives
-----------------
From time to time, Lucent may obtain warrants to purchase equity securities in
other companies to compliment its investment portfolio. Warrants that provide
for net share settlement are considered to be derivative instruments and are
generally not eligible to be designated as hedging instruments as there is no
corresponding underlying exposure.
7
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
(Unaudited)
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) plus the results of
certain non-shareowners' equity changes not reflected in the Consolidated
Statements of Operations. The components of comprehensive income (loss), net of
tax, (except for foreign currency translation adjustments which are not
currently adjusted for income taxes since they relate to indefinite investments
in non-United States subsidiaries) are as follows:
Three months ended
December 31,
2000 1999
-------- --------
Net income (loss).................... $ (395) $ 1,249
Other comprehensive income (loss):
Foreign currency translation
adjustments...................... 12 (81)
Unrealized investment gains (losses)
arising during the period........ (92) 45
Cumulative effect of change in
accounting principle(SFAS 133)
on other comprehensive income.... 11 -
Unrealized derivative losses
on cash flow hedges.............. (1) -
------- -------
Comprehensive income (loss).......... $ (465) $ 1,213
======= =======
6. SUPPLEMENTARY BALANCE SHEET INFORMATION
Inventories:
December 31, September 30,
2000 2000
------------ ------------
Completed goods................ $ 3,543 $ 2,976
Work in process and
raw materials................ 3,336 2,701
------- -------
Total inventories ............. $ 6,879 $ 5,677
======= =======
8
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
(Unaudited)
7. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is calculated by dividing net income
(loss) by the sum of the weighted average number of common shares outstanding
plus all additional common shares that would have been outstanding if
potentially dilutive securities or common stock equivalents had been issued. As
a result of the net loss from continuing operations reported for the three
months ended December 31, 2000, approximately 55.5 potential common shares have
been excluded from the calculation of diluted earnings (loss) per share because
their effect would be anti-dilutive. In addition, options where the exercise
price was greater than the average market price of the common shares of 330.1
and 0.8 for the periods ending December 31, 2000 and 1999, respectively, were
excluded from the computation of diluted earnings (loss) per share.
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three months ended
December 31,
2000 1999
-------- --------
Net income (loss) ................................. $ (395) $ 1,249
Earnings (loss) per common share - basic:
Income (loss) from continuing operations ......... $ (0.47) $ 0.36
Income from discontinued operations .............. -- 0.04
Extraordinary gain ............................... 0.34 --
Cumulative effect of accounting change ........... 0.01 --
------- ---------
Net income (loss) ................................ $ (0.12) $ 0.40
======= =========
Earnings (loss) per common share - diluted:
Income (loss) from continuing operations........ $ (0.47) $ 0.34
Income from discontinued operations............. -- 0.04
Extraordinary gain.............................. 0.34 --
Cumulative effect of accounting change.......... 0.01 --
------- --------
Net income (loss)............................... $ (0.12) $ 0.38
===== ========
Dividends declared per common share............. $ 0.02 $ 0.04
===== ========
Three months ended
December 31,
Number of Shares 2000 1999
---------------------------------- --------- ---------
Common shares - basic........................... 3,387.2 3,154.5
Effect of dilutive securities:
Stock options.................................. - 108.1
Other.......................................... - 5.4
------- -------
Common shares - diluted......................... 3,387.2 3,268.0
======= =======
9
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
(Unaudited)
8. OPERATING SEGMENTS
Lucent reclassified the results of operations of Avaya as discontinued
operations (see Note 2). This business was previously disclosed as a separate
operating segment. The segment data included below has been restated to exclude
amounts related to Avaya. In addition, Agere Systems Inc. ("Agere") has filed a
Form S-1 registration statement with the SEC in anticipation of an initial
public offering. Microelectronics is now being managed internally based on the
composition of Agere. The results of Microelectronics presented by Lucent will
differ from the information reported by Agere because of different assumptions
and allocations required to be made by the two companies. Accordingly, Lucent
has revised its segment reporting to reflect this change which resulted in the
transfer of the optical fiber business to the Service Provider Networks ("SPN")
segment and the transfer of the power systems business to Other and corporate.
Lucent operates in the global telecommunications networking industry and has two
reportable operating segments: SPN and Microelectronics. SPN provides public
networking systems, software and services to telecommunications service
providers and public network operators around the world and optical fiber for
applications in the communications and computing industries. Microelectronics
provides high-performance optoelectronic components and integrated circuits.
Intersegment transactions that occur are based on current market prices, and all
intersegment profit is eliminated in consolidation. Lucent employs
shared-service concepts to realize economies of scale and efficient use of
resources. The costs of shared services and other corporate center operations
managed on a common basis are reflected in the SPN segment.
Performance measurement and resource allocation for the reportable operating
segments are based on many factors. The primary financial measure used is
operating income, exclusive of goodwill and other acquired intangibles
amortization, and other costs from business acquisitions
(acquisition/integration-related costs).
The following tables present Lucent's revenues and operating income (loss) by
reportable operating segment:
Three Months Ended
December 31,
2000 1999
-------- --------
External Revenues
Service Provider Networks ...................... $4,336 $6,801
Microelectronics ............................... 1,146 763
------ ------
Total reportable segments .................... 5,482 7,564
Other and corporate (a) ........................ 359 501
------ ------
Total External Revenues ..................... 5,841 8,065
====== ======
Intersegment Revenues
Service Provider Networks ........................ 72 78
Microelectronics ................................. 230 217
---- ----
Total reportable segments ...................... 302 295
Other and corporate (a) .......................... (302) (295)
------ ------
Total Intersegment Revenues ................... -- --
====== ======
Total Revenues
Service Provider Networks ...................... 4,408 6,879
Microelectronics ............................... 1,376 980
------ ------
Total reportable segments .................... 5,784 7,859
Other and corporate (a) ........................ 57 206
------ ------
Total Revenues .............................. $5,841 $8,065
====== ======
10
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
(Unaudited)
Three Months Ended
December 31,
2000 1999
------- -------
Operating income (loss)
Service Provider Networks ........................ $(1,904) $ 1,228
Microelectronics ................................. 187 234
------- -------
Total reportable segments (b) .................. (1,717) 1,462
Acquisition/integration-related costs ............ -- (61)
Goodwill and other acquired intangibles
amortization ................................... (372) (50)
Other and corporate (a) .......................... (22) 141
------- -------
Operating income (loss) .......................... $(2,111) $ 1,492
======= =======
(a) Other and corporate primarily includes the results of the power systems
business (see Note 3), results from the Company's remaining consumer
products business in the prior year quarter and other smaller units,
including eliminations of internal business. The remaining consumer
products business was sold in the second fiscal quarter of 2000.
(b) Reportable segment operating income (loss) excludes goodwill and other
acquired intangibles amortization, and acquisition/integration-related
costs.
9. 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 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, 2000, cannot be ascertained. While
these matters could affect the operating results of any one quarter when
resolved in future periods and while there can be no assurance with respect
thereto, management believes that after final disposition, any monetary
liability or financial impact to Lucent, from matters other than those described
in the next paragraph, beyond that provided for at December 31, 2000 would not
be material to the annual Consolidated Financial Statements.
In addition, Lucent and certain of its former officers are defendants in several
purported shareholder class action lawsuits for alleged violations of federal
securities laws. Specifically, the complaints allege, 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. These actions seek compensatory and other damages, and
costs and expenses associated with the litigation. These actions are in the
early stages and the Company is unable to determine their potential impact on
the Consolidated Financial Statements. Lucent intends to defend these actions
vigorously. Also, Lucent has been served with several derivative complaints
filed by individual Lucent shareholders against the current members of Lucent's
Board of Directors, a former director and a current officer. These actions make
claims for breach of fiduciary duties allegedly owed to the Company, and seek
damages against the defendants and in favor of Lucent, as well as costs and
expenses associated with litigation for the individual plaintiffs. These
derivative actions are in the early stages and the Company is unable to
determine their potential impact on the Consolidated Financial Statements.
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
11
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
(Unaudited)
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 which 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 Contribution and Distribution Agreement 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.
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,
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 including related businesses discontinued or disposed of prior to
the Separation, and Lucent's assets including, without limitation, those
associated with these sites. In addition, under such Separation and Distribution
Agreement, Lucent is required to pay a portion of contingent liabilities paid
out in excess of certain amounts by AT&T and NCR, including environmental
liabilities.
It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the periods of remediation for the applicable sites, which
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 probable, the amounts
are reflected as receivables in the financial statements. Although Lucent
believes that its reserves are adequate, there can be no assurance that the
amount of capital expenditures and other expenses which will be required
relating to remedial actions and compliance with applicable environmental laws
will not exceed the amounts reflected in Lucent's reserves or will not have a
material adverse effect on Lucent's financial condition, results of operations
or cash flows. Any possible loss or range of possible loss that may be incurred
in excess of that provided for at December 31, 2000 cannot be estimated.
12
Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Millions Except Per Share Amounts)
(Unaudited)
10. RECENT PRONOUNCEMENT
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance
on the recognition, presentation and disclosure of revenues in financial
statements and requires adoption no later than the fourth quarter of fiscal
2001. The Company is currently evaluating the impact of SAB 101 and its
related interpretations to determine the effect it will have on the Company's
consolidated financial position and results of operations.
13
Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
Lucent Technologies ("Lucent" or the "Company") designs and delivers the
systems, software, silicon and services for next-generation communications
networks for service providers and enterprises. Backed by research and
development of Bell Labs, Lucent focuses on high-growth areas such as broadband
and mobile Internet infrastructure; communications software; communications
semiconductors and optoelectronics; Web-based enterprise solutions that link
private and public networks; and professional network design and consulting
services.
During the fiscal year ended September 30, 2000 and continuing through the first
fiscal quarter of 2001, various initiatives were undertaken to reorganize the
Company to become more focused and better positioned to capitalize on market
opportunities. This reorganization included:
o On September 30, 2000 Lucent completed the spin-off of Avaya Inc., formerly
its enterprise networks business.
o In December 2000, Agere Systems Inc. ("Agere"), Lucent's microelectronics
business, filed a Form S-1 registration statement with the Securities and
Exchange Commission ("SEC") in anticipation of an initial public offering
("IPO") (this report does not constitute the offering of any securities,
which will be made only by a prospectus filed with the SEC). Lucent plans
to distribute the remaining shares through a tax-free distribution to its
shareholders ("Distribution"). The IPO and Distribution are subject to
certain conditions, including a favorable tax ruling by the IRS. In
connection with the IPO, the Company may be adjusting its capital
structure including a possible reduction in the amount of debt
outstanding. See additional comments on the Distribution under
LIQUIDITY AND CAPITAL RESOURCES.
o On December 29, 2000 Lucent completed the sale of its power systems
business to Tyco International Ltd, for $2.5 billion in cash.
o On January 24, 2001, Lucent announced its restructuring program (see
Restructuring Plan).
On a total basis, Lucent reported a net loss of $395 million, or $0.12 loss per
basic and diluted share for the quarter ended December 31, 2000, as compared
with net income in the prior year quarter of $1,249 million, or $0.38 per
diluted share. The net loss for the current quarter includes an extraordinary
gain of $1,154 million, or $0.34 per basic and diluted share, related to the
sale of the power systems business, and a gain from a cumulative effect of
accounting change of $30 million, or $0.01 per basic and diluted share, related
to the adoption of Statement of Financial Accounting Standard No. 133 ("SFAS
133") - "Accounting for Derivative Instruments and Hedging Activities" (see Note
4 of the accompanying Consolidated Financial Statements). Net income for the
prior year quarter includes $125 million from discontinued operations ($0.04 per
share-diluted).
RESTRUCTURING PLAN
On January 24, 2001, Lucent announced a restructuring plan to primarily
streamline its Service Provider Networks ("SPN") business and corporate
operations including reducing its cost structure and improving working capital.
As part of the business-restructuring plan, Lucent expects to record a charge to
earnings in the range of $1.2 billion to $1.6 billion in the second fiscal
quarter of 2001. The charge relates to headcount reductions, elimination of
certain product lines and associated asset writedowns and facility
consolidations. As of February 2001, the Company has identified $1.2 billion in
restructuring and asset writedown actions and expects to solidify plans for up
to an additional $400 million in charges by the end of the fiscal quarter ending
March 31, 2001.
14
Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This restructuring plan will allow the Company to concentrate its investments,
resources and management attention on optical, data and wireless solutions,
along with the network design, consulting and integration services to support
them. Lucent will continue to review its internal processes throughout fiscal
year 2001, which may result in additional cost structure improvements and
associated business restructuring charges as it moves from a multi-divisional
company to one with a single focus on the service provider market.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2000 VERSUS THREE MONTHS
ENDED DECEMBER 31, 1999
REVENUES
Total revenues for the current quarter decreased 27.6% to $5,841 million
compared with the prior year quarter. Sales within the United States decreased
35.0% and non-U.S. revenues decreased 13.7% compared with the prior year
quarter. The non-U.S. sales represented 41.7% of total revenues compared with
35.0% in the prior year quarter. The substantial decline in revenues largely
contributed to the substantial loss from continuing operations. The decrease
occurred in the Company's SPN segment (see below) and resulted primarily from a
significant sales decline in North America due to an overall softening in the
competitive local exchange carrier market, slowdown in capital spending by
established service providers, lower sales in hardware, significantly lower
software sales, a more selective vendor financing program and the Company's move
to a fulfillment model with distributors.
Revenues by Segment
Lucent operates in the global telecommunications networking industry and has two
reportable operating segments: SPN and Microelectronics. SPN provides public
networking systems, software and services to telecommunications service
providers and public network operators around the world and optical fiber for
applications in the communications and computing industries. Microelectronics
provides high-performance optoelectronic components and integrated circuits.
Agere has filed a Form S-1 registration statement with the SEC in anticipation
of an initial public offering. Microelectronics is now being managed internally
based on the composition of Agere. Accordingly, Lucent has revised its segment
reporting to reflect this change which resulted in the transfer of optical fiber
to the SPN segment.
The following table presents Lucent's revenues by segment and the approximate
percentage of total revenues for the three months ended December 31, 2000 and
1999 (in millions):
Three Months Ended
December 31,
2000 1999
-------- --------
SPN ......................... $4,336 74% $6,801 84%
Microelectronics ............ 1,146 20 763 10
Other and Corporate ......... 359 6 501 6
------ ------ ------ ---
Total Lucent ................ $5,841 100% $8,065 100%
====== ====== ====== ===
Revenues from SPN decreased $2,465 million, or 36.2% compared to the prior year
quarter. Revenue decreases were primarily attributable to the factors noted
above and a substantial reduction of revenues to one large U.S. customer and the
wind down of a major long-term foreign project.
15
Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Revenues generated from service providers in the United States decreased 40.1%
for the first fiscal quarter of 2001 in comparison to the prior year quarter.
Sales generated outside the United States decreased 28.9% over the prior year
quarter.
Revenues from Microelectronics increased $383 million, or 50.2% over the prior
year quarter, reflecting growth in optoelectronic components, wired and wireless
local area network systems and customized chips for computing and high-speed
communications products.
Revenues from within the United States increased 42.8% in comparison to the
prior year quarter. Revenue from outside the United States increased 55.1% in
comparison to the year-ago quarter, reflecting increases in all regions.
Revenues from Other and Corporate decreased $142 million, or 28.3% compared to
the prior year quarter. The decrease is largely due to revenues generated in the
prior year quarter from the Company's remaining consumer products business,
which was sold in the second fiscal quarter of 2000, partially offset by
increased revenues in the current quarter from the power systems business, which
was sold on December 29, 2000.
GROSS MARGIN
As a percentage of revenue, gross margin decreased to 22.4%, or 24.2 percentage
points from 46.6% in the prior year quarter. The lower gross margin was
primarily due to decreased sales volumes across all SPN product lines except
optical fiber, reduced sales of high-margin software products, costs associated
with an infrastructure built to support higher revenue levels and an increasing
proportion of lower margin sales as the Company continues to expand into
non-U.S. markets.
OPERATING EXPENSES
Selling, general and administrative expenses (SG&A) increased $799 million, or
59.7%, to $2,137 million compared with $1,338 million in the prior year quarter.
Approximately $340 million of the increase, which is primarily related to notes
receivable, represents reserves for customer financing and uncollectibles
reflecting ongoing credit concerns in the emerging service provider market. The
remainder of the increase is attributable to amortization of goodwill and other
acquired intangibles and costs associated with an infrastructure built to
support a higher revenue base.
Amortization of goodwill and other acquired intangibles was $372 million for the
quarter compared with $50 million for the prior year quarter. The increase is
from acquisitions made subsequent to the first fiscal quarter of 2000. As a
result of these acquisitions, amortization of goodwill and other acquired
intangibles in fiscal year 2001 will be significantly higher than the prior
year.
Research and development expense increased $357 million, or 38.5%, to $1,285
million from $928 million in the prior year quarter. The increase is primarily
due to acquisitions made during fiscal year 2000 and new product development,
particularly in Internet infrastructure, optical networking, next-generation
3G/UMTS wireless and microelectronics.
OTHER INCOME (EXPENSE) - NET
Other income (expense), net, was an expense of $18 million for the quarter
compared to other income of $252 million in the prior year quarter. The change
between periods was largely due to foreign exchange losses and lower gains on
sales of investments. The prior year quarter included a $189 million gain from
the sale of an equity investment.
INTEREST EXPENSE
Interest expense for the quarter increased $48 million to $129 million
reflecting higher average short-term debt levels coupled with an increase in
weighted average interest rates as compared to the same prior year quarter.
16
Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(BENEFIT) PROVISION FOR INCOME TAXES
For the first fiscal quarter of 2001, the Company recorded a benefit for income
taxes of $679 million on a pre-tax loss from continuing operations of $2,258
million, yielding an effective tax benefit rate of 30.1%. This rate is lower
than the U.S. statutory rate primarily from the impact of non-tax deductible
goodwill amortization on the pre-tax loss from continuing operations offset in
part by research and development tax credits. For the prior year quarter,
the Company recorded a provision for income taxes of $539 million on
pre-tax income from continuing operations of $1,663 million, yielding an
effective tax provision rate of 32.4%. This rate is lower than the U.S.
statutory rate primarily due to research and development tax credits and
the tax impact of non-U.S. activity.
CASH FLOWS - THREE MONTHS ENDED DECEMBER 31, 2000 VERSUS THREE MONTHS ENDED
DECEMBER 31, 1999
Operating Activities
Net cash used in operating activities was $1,104 million in the current quarter
primarily due to the loss from continuing operations (adjusted for non-cash
items) of $784 million, increase in inventories and contracts in process of
$1,170 million and changes in other assets and liabilities of $1,043 million.
These increases were partially offset by a decrease in receivables of $2,073
million. (see Financial Condition)
Net cash provided by operating activities of $139 million in the prior year
quarter was primarily due to net income from continuing operations (adjusted for
non-cash items) of $1,622 million offset in part by increases in receivables of
$196 million and inventories and contracts in process of $297 million, decrease
in accounts payable of $684 million and changes in operating assets and
liabilities of $306 million.
Investing Activities
Net cash provided by investing activities was $1,909 million in the current
quarter, which primarily consisted of the cash proceeds received from the sale
of the power systems business offset in part by capital expenditures of $548
million.
Net cash provided by investing activities was $107 million in the prior year
quarter which primarily consisted of proceeds from the sales of investments of
$702 million offset by $508 million of capital expenditures.
Financing Activities
Net cash provided by financing activities in the current quarter of $1,577
million is primarily from borrowings of short-term debt which largely consisted
of commercial paper issuances and the transfer of $500 million of notes
receivable with recourse that was accounted for as a secured borrowing.
Net cash provided by financing activities in the prior quarter of $305 million
was primarily from the proceeds from issuances of common stock related to the
exercise of stock options offset by repayments of long-term debt.
FINANCIAL CONDITION
Total assets as of December 31, 2000 increased $1,249 million, or 2.6%, from
September 30, 2000 largely due to increases in cash and cash equivalents and
inventories, offset by decreases in receivables. Cash and cash equivalents
increased $2,347 million primarily as a result of the proceeds received at the
end of the quarter from the sale of the power systems business. Receivables
decreased $2,272 million, or 23.8% largely as a result of lower sales volume and
the sale of $615 million of receivables. Inventories increased $1,202 million,
or 21.2% primarily as a result of anticipated sales to customers that were not
fully realized in the first fiscal quarter of 2001.
Total liabilities increased $1,673 million, or 7.4%, from September 30, 2000.
This increase was primarily due to increases in debt maturing within one year
which largely consisted of issuances of commercial paper and $500 million of
short-term debt in connection with the transfer of customer 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
LIQUIDITY AND CAPITAL RESOURCES
The Company is currently negotiating new credit facility arrangements with
certain financial institutions. It is expected that the facilities will consist
of (1) a 364 day facility of $2.0 billion, which replaces an existing $2.0
billion credit facility which expires on February 22, 2001 and (2) a 364 day
facility of $2.5 billion, which is anticipated to be initially available to
Lucent and assumable by Agere upon the consummation of its IPO. In addition,
Lucent expects to amend its existing $2.0 billion five year facility terminating
in February 2003 to contain provisions similar to the 364 day facilities. These
facilities are expected to be secured by the Company's assets including a pledge
by Lucent of its shares of Agere common stock. Some of our other existing and
future financings and obligations are expected to be similarly secured. Lucent
expects that these credit facilities and some of the other financings and
obligations will include customary financial covenants that require Lucent to
have minimum net worth, minimum earnings before interest, income taxes,
depreciation and amortization, and satisfy a ratio test based on a minimum
level of current assets (until the Distribution), and also include customary
restrictive covenants. After consummation of the expected Agere IPO and the
assumption of $2.5 billion of Lucent debt by Agere, the pledge of Agere's shares
held by Lucent will be released if Lucent is in compliance with all of these
covenants. Also, the Distribution is subject to Lucent being in compliance with
these covenants at the time of Distribution and Lucent having generated $2.5
billion of additional funds or reduction in debt from non-operating sources,
either through a debt/equity exchange in connection with the IPO or from other
sources.
At December 31, 2000, Lucent maintained approximately $4.8 billion in credit
facilities including $0.8 billion of foreign subsidiary credit facilities, of
which a portion is used to support Lucent's commercial paper program. At
December 31, 2000, approximately $0.4 billion was drawn by foreign subsidiaries
and the remaining $4.4 billion was undrawn.
On December 21, 2000, Moody's Investors Service lowered Lucent's credit rating
on senior unsecured long-term debt from A2 to A3 and Standard & Poor's lowered
its rating from A to BBB+. Moody's lowered its commercial paper rating from
Prime-1 to Prime-2 and Standard & Poor's lowered its commercial paper rating
from A-1 to A-2. On January 24, 2001 Moody's lowered the senior unsecured
long-term debt from A3 to Baa1. On February 12, 2001, Moody's lowered Lucent's
credit rating on senior unsecured long-term debt from Baa1 to Baa3 and Standard
& Poor's lowered its rating from BBB+ to BBB-. Also on that date, Moody's
lowered its commercial paper rating from Prime-2 to Prime-3 and Standard &
Poor's lowered its rating from A-2 to A-3. All of the ratings have negative
outlooks. Lucent believes that it will have sufficient capital resources to
fulfill its own operational and capital needs, as well as to extend credit to
customers when appropriate, although there can be no assurance that this will
occur.
Future financings will be arranged to meet Lucent's requirements with the
timing, amount and form of issue depending on the prevailing market and general
economic conditions. Lucent's lower credit ratings may make commercial paper
and certain other short-term borrowings unavailable or of limited availability
to Lucent. Based upon the timely completion of the new credit facilities
currently being negotiated, Lucent anticipates that borrowings under its bank
credit facilities, short- and long-term debt financings, receivable
securitizations, and the proceeds from the planned IPO of Agere Systems will be
adequate to satisfy its future cash requirements, although there can be no
assurance that this will be the case.
Notes Receivable and Financial Guarantees
Lucent's 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. Lucent has increasingly
provided or arranged long-term financing for customers, and continually monitors
and reviews the creditworthiness of such arrangements. As market conditions
permit, Lucent's 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 Lucent to reduce the
amount of its commitments and free up additional financing capacity.
18
Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
As of December 31, 2000, Lucent had made commitments or entered into agreements
to extend credit to certain customers for an aggregate of approximately $5.7
billion. In addition, Lucent is finalizing an agreement with a customer to
extend $1.6 billion of credit. Excluding amounts that are not available because
the customer has not yet satisfied the conditions precedent for borrowing, at
December 31, 2000, approximately $2.3 billion in loan commitments was undrawn
and available for borrowing and approximately $1.8 billion had been advanced and
was outstanding. As part of the revenue recognition process, Lucent determines
whether the notes receivable under these contracts are reasonably assured of
collection based on various factors, among which is the ability of Lucent to
sell these notes.
In addition, Lucent had made commitments to guarantee customer debt of about
$1.8 billion at December 31, 2000. Excluding amounts not available for guarantee
because conditions precedent have not been satisfied, approximately $860 million
of guarantees was undrawn and available and about $740 million was outstanding
on December 31, 2000.
Lucent will continue to provide or commit to financing where appropriate for its
business. The ability of Lucent to arrange or provide financing for its
customers will depend on a number of factors, including Lucent's capital
structure, credit rating and level of available credit, and its continued
ability to sell or transfer commitments and drawn-down borrowings on acceptable
terms. Lucent believes that it will be able to access the capital markets on
terms and in amounts that will be satisfactory to Lucent and that it will be
able to obtain bid and performance bonds, to arrange or provide customer
financing as necessary, and to engage in hedging transactions on commercially
acceptable terms, although there can be no assurance that this will be the case.
RISK MANAGEMENT
Lucent is exposed to market risk from changes in foreign currency exchange rates
and, to a lesser extent, changes in interest rates that could impact its results
of operations and financial condition. Lucent manages its exposure to these
market risks through its regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. Lucent
uses derivative financial instruments as risk management tools and not for
trading purposes. In addition, derivative financial instruments are entered into
with a diversified group of major financial institutions in order to manage
Lucent's exposure to nonperformance on such instruments.
Certain securities held in Lucent's equity and investment portfolio are subject
to equity price risk. Lucent generally does not hedge its equity price risk and
as of December 31, 2000, Lucent had no outstanding hedge instruments associated
with this risk.
Lucent uses derivative financial instruments, including foreign exchange forward
and option contracts and interest rate swap agreements to manage changes in
foreign exchange rates and interest rates that may affect the eventual cash
flows in foreign currencies or underlying financial instruments. The Company
believes that its hedge activities achieve hedge effectiveness by creating a
relationship whereby the gains and losses on its derivative instruments
counterbalance the changes in value of the designated assets, liabilities and
forecasted transactions being hedged.
19
Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Effective October 1, 2000, Lucent adopted SFAS 133 - "Accounting for Derivative
Instruments and Hedging Activities" and its corresponding amendments under SFAS
No. 138. The adoption of SFAS 133 resulted in a cumulative after-tax reduction
in net loss of $30 million (net of tax of $17 million) and an $11 million credit
to other comprehensive income (OCI) in the first quarter of fiscal year 2001.
The reduction in net loss is primarily attributable to derivatives not
designated as hedging instruments, including foreign currency embedded
derivatives, equity warrants and other derivatives(for further description see
Note 4).
Lucent has not changed its policy regarding how exposures are managed since the
year ended September 30, 2000. Lucent continuously monitors all of its foreign
currency exposures. Lucent cannot predict whether it will incur foreign exchange
losses in the future; however, if significant foreign exchange losses are
experienced, they could have a material adverse effect on the results of
operations, financial condition and cash flows of Lucent.
While Lucent hedges certain foreign currency transactions, the decline in value
of non-U.S. dollar currencies may, if not reversed, adversely affect Lucent's
ability to contract for product sales in U.S. dollars because Lucent's products
may become more expensive to purchase in U.S. dollars for local customers doing
business in the countries of the affected currencies.
Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost-effective manner, Lucent, from time to time, enters into interest rate swap
agreements in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed-upon notional amounts. Lucent had no
material interest rate swap agreements in effect at December 31, 2000 or
September 30, 2000.
OTHER INFORMATION
On November 21, 2000, Lucent announced that it had identified an issue impacting
revenue in the fourth fiscal quarter of 2000. The Company informed the SEC and
initiated a review by its outside counsel and outside auditors. In late
December, the Company announced the results of the review, which resulted in
certain adjustments to fourth fiscal quarter results. Lucent also informed the
SEC and is cooperating fully with the SEC's review of these matters.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this report contain forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industries in which Lucent operates, management's beliefs, and
assumptions made by management. In addition, other written or oral statements
that constitute forward-looking statements may be made by or on behalf of
Lucent. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecast in
such forward-looking statements. Lucent undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
20
Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Future Factors include increasing price, products and services competition by
U.S. and non-U.S. competitors, including new entrants; rapid technological
developments and changes and the Company's ability to continue to introduce
competitive new products and services on a timely, cost-effective basis; the mix
of products and services; the availability of manufacturing capacity, components
and materials; the ability to recruit and retain talent; the achievement of
lower costs and expenses; credit concerns in the emerging service provider
market; customer demand for the Company's products and services; the ability to
successfully integrate the operations and business of acquired companies; timely
completion of the proposed IPO and distribution of Lucent's remaining shares of
Agere; the timely completion of the new credit facilities being negotiated; the
successful implementation of the strategic reorganization; U.S. and non-U.S.
governmental and public policy changes that may affect the level of new
investments and purchases made by customers; changes in environmental and other
U.S. and non-U.S. governmental regulations; protection and validity of patent
and other intellectual property rights; reliance on large customers and
significant suppliers; the ability to supply customer financing; technological,
implementation and cost/financial risks in the use of large, multiyear
contracts; the Company's credit ratings; the outcome of pending and future
litigation and governmental proceedings and continued availability of financing,
financial instruments and financial resources in the amounts, at the times and
on the terms required to support the Company's future business. These are
representative of the Future Factors that could affect the outcome of the
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general U.S. and
non-U.S. economic conditions, including interest rate and currency exchange rate
fluctuations and other Future Factors.
For a further description of Future Factors that could cause actual results to
differ materially from such forward-looking statements, see the discussion in
Lucent's Form 10-K for the year ended September 30, 2000 - Item 1. section VIII.
OUTLOOK and Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition - Forward-Looking Statements.
21
Form 10-Q - Part I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
European Monetary Union--Euro
Several member countries of the European Union have established fixed conversion
rates between their existing sovereign currencies and the Euro and have adopted
the Euro as their new single legal currency. The legacy currencies will remain
legal tender in the participating countries for a transition period until
January 1, 2002. During the transition period, cashless payments can be made in
the Euro. Between January 1, 2002 and July 1, 2002, the participating countries
will introduce Euro notes and coins and withdraw all legacy currencies so that
they will no longer be available.
Lucent has in place a joint European-United States team representing affected
functions within the Company. This team is evaluating Euro-related issues
affecting the Company that include its pricing/marketing strategy, conversion of
information technology systems and existing contracts.
The Euro conversion may affect cross-border competition by creating cross-border
price transparency.
Lucent will continue to evaluate issues involving introduction of the Euro as
further accounting, tax and governmental legal and regulatory guidance is
available. Based on current information and Lucent's current assessment, Lucent
does not expect that the Euro conversion will have a material adverse effect on
its business or financial condition.
22
Form 10-Q - Part II
Part II - Other Information
Item 1. Legal Proceedings
Since early January 2001, Lucent has been served with at least five derivative
complaints in Chancery Court in the State of Delaware. The actions were filed by
individual Lucent shareholders against the current members of Lucent's Board of
Directors, a former director and a current officer. The actions are
substantially similar to each other and make claims for breach of the fiduciary
duty of good faith and other fiduciary duties allegedly owed to the Company. The
actions seek damages against the defendants and in favor of Lucent, as well as
costs and expenses associated with litigation for the individual plaintiffs.
Lucent expects all of these derivative complaints to be consolidated in a single
action. These actions are in the early stages and the Company is unable to
determine their potential impact on the Consolidated Financial Statements.
Lucent is aware of several purported shareholder class actions that have been
filed against the Company and certain of its current and former officers for
alleged violations of federal securities laws in addition to the purported
shareholder class actions described in the Company's Annual Report on Form 10-K
for fiscal year 2000. The claims and relief sought in these newly-filed actions
are substantially similar to the claims and relief sought in the purported class
actions previously described in the Annual Report and, as with those actions,
Lucent is unable to determine their potential impact on the Consolidated
Financial Statements. Lucent intends to defend these actions vigorously.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit Number
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the current quarter to
furnish company press releases.
Current Report on Form 8-K dated and filed December 28, 2000 was
filed pursuant to Item 9 (Regulation FD Disclosures).
Current Report on Form 8-K dated December 21, 2000 and filed
December 22, 2000 was filed pursuant to Item 5 (Other Events).
Current Report on Form 8-K dated and filed November 21, 2000 was
filed pursuant to Item 5 (Other Events) and Item 7 (Financial
Statements, Pro Forma Financial Information and Exhibits).
Current Report on Form 8-K dated November 13, 2000 and filed
November 15, 2000 was filed pursuant to Item 5 (Other Events)
and Item 7 (Financial Statements, Pro Forma Financial
Information and Exhibits).
Current Report on Form 8-K dated and filed November 15, 2000 was
filed pursuant to Item 9 (Regulation FD Disclosures).
Current Report on Form 8-K dated October 23 and filed October
24, 2000 was filed pursuant to Item 9 (Regulation FD
Disclosures).
Current Report on Form 8-K dated October 23 and filed October
24, 2000 was filed pursuant to Item 9 (Regulation FD
Disclosures).
Current Report on Form 8-K dated October 10, 2000 and filed
October 12, 2000 was filed pursuant to Item 5 (Other Events) and
Item 7 (Financial Statements, Pro Forma Financial Information
and Exhibits).
23
Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Lucent Technologies Inc.
Registrant
Date February 14, 2001
/s/ Mark R. White
------------------------------
Mark R. White
Senior Vice President and Controller
(Principal Accounting Officer)
24
Form 10-Q
Exhibit Index
Exhibit
Number
(27) Financial Data Schedule