Fluent Essays

AT&T spun off its research and development division (the former BellLaboratories) in April of 1996, and the newly independent company - renamed LucentTechnologies - was an instant hit with investors. The companys stock became the mostwidely held in the United States, and over the following 3 years and 9 months its priceincreased 892\%.1 This remarkable price appreciation tracked a series of steadilyincreasing earnings that exceeded analyst expectations. Lucent, in fact, had beaten thoseexpectations in each of its 15 quarters of operations (Zacks, 2000).Lucent Technologies manufactures, sells and services voice and datacommunications systems and software. By the end of its fiscal-year 1999, Lucentgenerated over thirty-eight billion dollars in annual revenues, employed over 150,000people, and had offices in more than ninety countries worldwide.On October 26, 1999, Lucent issued a press release describing record earnings forboth the quarter and the fiscal year ended September 30, 1999 (Lucent, 1999a). Lucentsrevenues were up 23 percent, and earnings were up 50 percent from the fourth quarter ofthe previous year. For the fiscal year, Lucents revenues and earnings were up 20 and 46percent respectively. Lucents chairman and CEO, Richard McGinn, described the resultssaying: Lucent enters the new millennium with momentum. This was the strongestquarter and the strongest year in Lucents history.The report of these record results was accompanied by another press release. Thissecond announcement outlined a realignment of Lucent into four core businesses. Thisrealignment was, in the words of McGinn, ...intended to mirror the way we areapproaching customers today - with converged network solutions. We are sharpening ourfocus on high-growth areas - such as data networking, optical networking, wirelesssemiconductors, e-business and professional services - while speeding our growth ininternational markets. And, we will also be aligning our management structure toincrease productivity and accelerate our response to customer needs (Lucent, 1999b).Over the ensuing days and weeks, Lucents share price soared. Climbing steadilyfrom $59 7/8 on October 25, 1999, it traded at prices over $82 during December 1999,and closed at $72 3/8 on January 5, 2000.On January 6, however, Lucent filed a Form 8-K with the U.S. Securities andExchange Commission. Form 8-Ks are used to report material events, and Lucentsevent was that first quarter earnings for the quarter ended December 31, 1999 would besignificantly below expectations. Lucent reported that its revenue from Service ProviderNetworks was down 2\%. A result, company executives said, that was caused by thedomino effect of unanticipated customer shifts to new optical systems and themanufacturing deployment and capacity problems that ensued. Indeed, analysts estimatedthat Lucent lost up to $1 billion in sales because of production delays, delivery problemsand cancelled orders during the quarter (Dow Jones, 1/20/00).1 Lucents beta as reported by Yahoo Finance was 1.6 on January 6, 2000.EXHIBIT 1LUCENT TECHNOLOGIESSelected Earnings Per Share DataFor the Quarters Ended:Dec-99 Sep-99 Jun-99 Mar-99 Dec-98Earnings Per Share 0.36 0.31 0.26 0.17 0.52Analyst Expected Earnings Per Share 0.43 0.29 0.23 0.15 0.50Difference (0.07) 0.02 0.03 0.02 0.02\% Surprise -16.28\% 6.90\% 13.04\% 13.33\% 5.00\%Although Richard McGinn, said the company expected its problems to beresolved by the end of the second quarter, and Lucents Chief Financial Officer, DonPeterson described the shortfall as a bump in the road, (Burns, 1/27/00) the response ofinvestors was harsh. The companys stock price fell from $72 3/8 to $52. Erasing in thatsingle day, more than $80 billion in market capitalization and a years worth of gains.Furthermore, a number of class action lawsuits were filed on behalf of investors who hadpurchased Lucents stock between October 27, 1999 and January 6, 2000 (PRNewswire,1/20/00). The suits claimed that Lucent violated Sections 10(b) and 20(a) of theSecurities Act of 1934 by issuing a series of materially false and misleading statementsthat failed to disclose the weaker-than-expected performance in a timely fashion.REQUIRED1. Conduct a DuPont decomposition of Lucents ROE by quarter. What factorscontributed to the differences in Lucents performance between those quarters?2. Evaluate the seasonally adjusted change (i.e., quarter i in year t to quarter i inyear t-1) in Lucents: Sales, Accounts Receivable, Inventory and Gross Margin for thefive quarterly periods: December 1998 through December 1999. Be sure to include anevaluation of the Footnote disclosures regarding Lucents inventories in yourexamination. Does the explanation for the earnings shortfall provided by Lucentsmanagers make sense in light of your analysis?3. Based on your analysis:a) When might you have determined that Lucent would be unable to maintain itsstreak of record earnings?b) Do you think the class-action lawsuits have merit?c) Would you expect Lucents earnings to recover by the second quarter of 2000?What obstacles to Lucents earnings recovery present themselves?EXHIBIT 2SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549-------------------------------------------FORM 8-KCURRENT REPORTPURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934Date of Report (Date of earliest event reported):January 6, 2000-------------------------------------------------------------Lucent Technologies Inc.----------------------------------Item 5. Other Events.On January 6, 2000, Lucent Technologies Inc. announced that, based onpreliminary estimates for its first fiscal quarter of 2000 ended December 31,1999, the company expects to report revenues in the range of $9.8 to $9.9billion for the quarter, flat with the prior year period.(1) The company expectsearnings per share for the quarter to be in the range of 36 to 39 cents comparedto 48 cents for the year-ago quarter.(2)The company attributed the lower than expected revenue and earnings for thefirst fiscal quarter to several factors, including:-- faster than anticipated shifts in customers purchases toLucents newest 80-channel DWDM optical product line andgreater than expected demand for OC-192 capability on the80-channel systems, which resulted in near-term manufacturingcapacity and deployment constraints;-- changes in implementation plans by a number of customersinside and outside the United States, which led to delays innetwork deployments by enterprises and service providers;-- lower software revenues, reflecting an acceleration in thecontinuing trend by service providers to acquire software moreevenly throughout the year. In the past, these purchasesoccurred primarily in the quarter ending December 31; and-- preliminary results show lower than anticipated gross marginsthis quarter from ramp-up costs associated with introducingand implementing new products and lower software revenues.The information provided in this Form 8-K is based on preliminary financialresults, which are subject to further review and adjustment, and containsforward-looking statements based on current expectations, forecasts andassumptions that involve risks and uncertainties that could cause actualoutcomes and results to differ materially. These risks and uncertainties includeprice and product competition, dependence on new product development, relianceon major customers, customer demand for our products and services, the abilityto successfully integrate acquired companies, control of costs and expenses,international growth, general industry and market conditions, growth rates andgeneral domestic and international economic conditions, including interest rateand currency exchange rate fluctuations. For a further list and description ofsuch risks and uncertainties, see the discussion in Lucents Form 10-K for thefiscal year ended September 30, 1999 in Item 1 in the section entitled X.OUTLOOK, A. Forward Looking Statements and the remainder of the X. OUTLOOKsection.---------(1) All items in both the 1999 and 2000 periods include the results of recentmergers with International Network Services and Excel Switching.(2) All earnings per share amounts reported in this Form 8-K are diluted EPSfigures.SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.LUCENT TECHNOLOGIES INC.By: /s/ JAMES S. LUSKName: James S. LuskSenior Vice President and ControllerDate: January 7, 2000EXHIBIT 3LUCENT TECHNOLOGIESConsolidated Balance SheetsFor the Quarters Ended:Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97AssetsCash $ 2 ,219 $ 1,816 $ 1,495 $ 792 $ 940 $ 685 $ 1,099 $ 969 $ 1,225 $ 1,350Receivables 1 0,143 10,438 9,486 8,752 9,185 6,939 5,792 5,576 6,295 5,373Less Allowance 381 362 393 349 346 390 374 369 344 352Inventory 5,380 5,048 5,179 4,332 3,778 3,081 2,973 2,874 2,604 2,926Contracts in Process, net 1,164 1,103 1,338 1,106 1,060 1,259 1,405 1,332 1,214 1,046Deferred Taxes, net 1,504 1,583 1,784 1,632 1,620 1,623 1,554 1,477 1,469 1,333Other Current Assets 1,168 1,943 1,528 1,160 768 491 482 481 449 473Total Current Assets $ 2 1,578 $ 21,931 $ 20,810 $ 1 7,774 $ 17,351 $ 1 4,078 $ 13,305 $ 12,709 $ 13,256 $ 12,501Property & Equipment (net) 6,986 6,847 6,257 5,751 5,645 5,403 4,957 4,805 4,729 5,147Accumulated Depreciation 7,693 7,445 7,274 6,935 6,886 6,382 6,253 6,132 6,121 6,407Pre-paid Pension Costs 6,078 6,485 6337 6,210 6,068 3,754 3,597 3,462 3,322 3,172Deferred Taxes, net - - - - - 750 832 1,002 1,120 1,262Capitalized Software Development Costs 506 470 412 346 306 298 289 279 246 293Other Assets 3,486 3,002 3,340 2,759 2,271 2,437 2,299 2,407 2,079 1,436Total Assets $ 3 8,634 $ 38,735 $ 37,156 $ 3 2,840 $ 31,641 $ 2 6,720 $ 25,279 $ 24,664 $ 24,752 $ 23,811Liabilities and Shareholders EquityAccounts Payable $ 2 ,162 $ 2,878 $ 2,705 $ 2,410 $ 2,468 $ 2,040 $ 1,727 $ 1,659 $ 1,496 $ 1,931Payroll and Benefit Liabilities 1,321 2,300 2,001 1,724 1,857 2,511 2,354 2,048 2,178 2,178Post-retirement and Post-employment Benefit Liabilities 103 137 169 184 186 187 194 195 221 239Debt Maturing within One Year 2,672 2,864 3,080 3,185 3,763 2,231 2,423 1,898 1,757 2,538Other Current Liabilities 3,659 3,599 4,001 4,059 4,167 3,459 3,498 3,618 4,310 3,852Total Current Liabilities $ 9 ,917 $ 11,778 $ 11,956 $ 1 1,562 $ 12,441 $ 1 0,428 $ 10,196 $ 9,418 $ 9,962 $ 10,738Post-retirement and Post-employment Benefit Liabilities 6,013 6,615 6,533 6,471 6,413 6,380 6,286 6,249 6,136 6,073Long Term Debt 3,832 3,812 3,712 3,716 2,404 2,409 1,899 1,918 1,945 1,665Other Liabilities 2,793 2,908 2,552 2,040 1,946 1,969 1,976 2,043 2,038 1,948Total Liabilities $ 2 2,555 $ 25,113 $ 24,753 $ 2 3,789 $ 23,204 $ 2 1,186 $ 20,357 $ 19,628 $ 20,081 $ 20,424Common Stock $ 32 $ 31 $ 30 $ 27 $ 13 $ 13 $ 13 $ 13 $ 6 $ 6Additional Paid-in Capital 9,032 7,763 7,339 4,996 4,706 4,468 4,251 4,076 3,717 3,047Guaranteed ESOP Obligations (30) (33) (34) (34) (49) (49) (63) ( 63) (77) (77)Retained Earnings 7,296 6,105 5,240 4,384 3,565 1,364 1,028 1,314 1,298 602Accumulated Other Comprehensive Income or Loss (251) (244) (172) (322) (198) (262) (307) ( 304) (273) (191)Total Shareholders Equity $ 1 6,079 $ 13,622 $ 12,403 $ 9,051 $ 8,437 $ 5,534 $ 4,922 $ 5,036 $ 4,671 $ 3,387Total Liabilities and Shareholders Equity $ 3 8,634 $ 38,735 $ 37,156 $ 3 2,840 $ 31,641 $ 2 6,720 $ 25,279 $ 24,664 $ 24,752 $ 23,811EXHIBIT 4LUCENT TECHNOLOGIESConsolidated Statements of Income*For the Quarters Ended:Dec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97Total Revenues $ 9,905 $ 10,575 $ 9,315 $ 8,220 $ 9,842 $ 8,574 $ 7,642 $ 6,184 $ 8,724 $ 6,933Cost of Sales 5,259 5,706 4,834 4,327 4,630 4,443 4,087 3,436 4,519 3,873Gross Margin 4,646 4,869 4,481 3,893 5,212 4,131 3,555 2,748 4,205 3,060Selling, General and Administrative Expenses 1,908 2,251 1,984 1,902 1,937 1,972 1,673 1,501 1,555 1,608Research and Development 978 1,131 1,141 1,139 1,013 1,050 1,002 932 829 835Total Operating Expenses 2,886 3,382 3,125 3,041 2,950 3,022 2,675 2,433 2,384 2,443Operating Income 1,760 1,487 1,356 852 2,262 1,109 880 315 1,821 617Other Income (Expense), net 66 92 19 (65) 116 (43) (17) 31 14 51Interest Expense 98 114 119 95 78 71 63 58 79 72Income Before Taxes 1,728 1,465 1,256 692 2,300 995 800 288 1,756 596Income Tax Expense 553 493 427 235 777 348 282 102 632 227Net Income $ 1,175 $ 972 $ 829 $ 457 $ 1,523 $ 647 $ 518 $ 186 $ 1,124 $ 369* Excludes one-time events and the cumulative effect of accounting changesEXHIBIT 5Notes to Consolidated Financial StatementsSupplementary Balance Sheet InformationDec-99 Sep-99 Jun-99 Mar-99 Dec-98 Sep-98 Jun-98 Mar-98 Dec-97 Sep-97InventoriesFinished Goods 3062.00 2946.00 2917.00 2281.00 1777.00 1578.00 1594.00 1463.00 1291.00 1611.00Work in Process 2318.00 2102.00 2262.00 2051.00 2001.00 1503.00 1379.00 1411.00 1313.00 1315.00Total Inventories 5380.00 5048.00 5179.00 4332.00 3778.00 3081.00 2973.00 2874.00 2604.00 2926.00EXHIBIT 6LUCENT TECHNOLOGIESCommon Stock Price(Adjusted for Splits)01020304050607080904/1/967/1/9610/1/961/1/974/1/977/1/9710/1/971/1/984/1/987/1/9810/1/981/1/994/1/997/1/9910/1/991/1/00April 1996 through January 2000$ Price per ShareI need help with question number 2 above.