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AS FILED WITH THE SEC ON AUGUST 13, 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 June 30, 2002
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 July 31, 2002, 3,432,688,763 common shares were outstanding.
2
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 Nine months ended
June 30, June 30,
2002 2001 2002 2001
------- ------- -------- --------
Revenues $ 2,949 $ 5,886 $10,044 $16,139
Costs 2,298 5,057 8,156 14,144
------- ------- ------- -------
Gross margin 651 829 1,888 1,995
Operating expenses:
Selling, general and administrative 871 2,046 2,992 6,049
Research and development 480 793 1,625 2,775
Business restructuring charges and asset impairments, net 1,602 541 1,464 2,715
------- ------- ------- -------
Total operating expenses 2,953 3,380 6,081 11,539
Operating loss (2,302) (2,551) (4,193) (9,544)
Other income (expense), net (261) (179) 242 (296)
Interest expense 107 115 284 395
------- ------- ------- -------
Loss from continuing operations before income taxes (2,670) (2,845) (4,235) (10,235)
Provision (benefit) for income taxes 5,329 (967) 4,782 (3,394)
------- ------- ------- -------
Loss from continuing operations (7,999) (1,878) (9,017) (6,841)
Income (loss) from discontinued operations, net (27) (1,360) 73 (1,673)
------- ------- ------- -------
Loss before extraordinary item and cumulative effect of
accounting changes (8,026) (3,238) (8,944) (8,514)
Extraordinary gain, net - - - 1,154
Cumulative effect of accounting changes, net - - - (38)
------- ------- ------- -------
Net loss (8,026) (3,238) (8,944) (7,398)
Preferred stock dividends and accretion (42) - (124) -
------- ------- ------- -------
Loss applicable to common shareowners $(8,068) $(3,238) $(9,068) $(7,398)
======= ======= ======= =======
Loss per common share - basic and diluted
Loss from continuing operations $ (2.34) $ (0.55) $ (2.67) $ (2.01)
Net loss applicable to common shareowners $ (2.35) $ (0.95) $ (2.65) $ (2.18)
Weighted average number of common shares
outstanding - basic and diluted 3,428.5 3,405.2 3,422.5 3,396.9
See Notes to Consolidated Financial Statements.
3
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
June 30, September 30,
2002 2001
-------- ------------
ASSETS
Cash and cash equivalents $ 4,556 $ 2,390
Short-term investments 867 -
Receivables, less allowance of $517 at June 30, 2002, and $634 at September
30, 2001 2,245 4,594
Inventories 1,981 3,646
Contracts in process, net of progress billings of $9,824 at June 30, 2002,
and $7,841 at September 30, 2001 230 1,027
Deferred income taxes, net - 2,658
Other current assets 1,287 1,788
-------- --------
Total current assets 11,166 16,103
Property, plant and equipment, net 2,519 4,416
Prepaid pension costs 4,945 4,958
Deferred income taxes, net - 2,695
Goodwill and other acquired intangibles, net of accumulated amortization of $617
at June 30, 2002, and $832 at September 30, 2001 367 1,466
Other assets 2,364 2,724
Net long-term assets of discontinued operations - 1,302
-------- --------
Total assets $ 21,361 $ 33,664
======== ========
LIABILITIES
Accounts payable $ 1,245 $ 1,844
Payroll and benefit-related liabilities 1,058 1,500
Debt maturing within one year 173 1,135
Other current liabilities 4,240 5,285
Net current liabilities of discontinued operations - 405
-------- --------
Total current liabilities 6,716 10,169
Postretirement and postemployment benefit liabilities 5,127 5,481
Long-term debt 3,237 3,274
Company-obligated 7.75% mandatorily redeemable convertible preferred
securities of subsidiary trust 1,750 -
Deferred income taxes, net 11 152
Other liabilities 1,753 1,731
-------- --------
Total liabilities 18,594 20,807
Commitments and contingencies
8.00% redeemable convertible preferred stock 1,847 1,834
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; 3,433,270,277 issued and 3,432,603,658
outstanding shares at June 30, 2002, and 3,414,815,908 issued and
3,414,167,155 outstanding shares at September 30, 2001 34 34
Additional paid-in capital 20,468 21,702
Accumulated deficit (19,216) (10,272)
Accumulated other comprehensive loss (366) (441)
-------- --------
Total shareowners' equity 920 11,023
-------- --------
Total liabilities, redeemable convertible preferred stock and
shareowners' equity $ 21,361 $ 33,664
======== ========
See Notes to Consolidated Financial Statements.
4
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Nine months ended
June 30,
2002 2001
------- --------
Operating Activities
Net loss $(8,944) $(7,398)
Less: Income (loss) from discontinued operations 73 (1,673)
Extraordinary gain - 1,154
Cumulative effect of accounting changes - (38)
------- -------
Loss from continuing operations (9,017) (6,841)
Adjustments to reconcile loss from continuing operations to net cash used in
operating activities, net of effects of dispositions of businesses and
manufacturing operations:
Non-cash portion of business restructuring charges 434 2,636
Asset impairment charges 837 -
Depreciation and amortization 1,189 1,955
Provision for bad debts and customer financings 829 1,950
Deferred income taxes 5,285 (3,072)
Net pension and postretirement benefit credit (719) (820)
Gains on sales of businesses (583) (56)
Other adjustments for non-cash items 287 375
Changes in operating assets and liabilities:
Decrease in receivables 2,008 3,790
Decrease (increase) in inventories and contracts in process 1,870 (369)
Decrease in accounts payable (592) (673)
Changes in other operating assets and liabilities (1,782) (1,810)
------- -------
Net cash provided by (used in) operating activities from continuing
operations 46 (2,935)
------- -------
Investing Activities
Capital expenditures (312) (1,102)
Purchases of short-term investments (865) -
Dispositions of businesses and manufacturing operations 2,543 2,494
Other investing activities 108 (43)
------- -------
Net cash provided by investing activities from continuing operations 1,474 1,349
------- -------
Financing Activities
Issuance of company-obligated 7.75% mandatorily redeemable convertible
preferred securities of subsidiary trust 1,750 -
(Repayments of) proceeds from credit facilities (1,000) 4,800
Net repayments of other short-term borrowings (45) (2,065)
Payment of preferred stock dividends (73) -
Other financing activities (3) (97)
------- -------
Net cash provided by financing activities from continuing operations 629 2,638
Effect of exchange rate changes on cash and cash equivalents 28 (25)
------- -------
Net cash provided by continuing operations 2,177 1,027
Net cash used in discontinued operations (11) (209)
------- -------
Net increase in cash and cash equivalents 2,166 818
Cash and cash equivalents at beginning of year 2,390 1,467
------- -------
Cash and cash equivalents at end of period $ 4,556 $ 2,285
======= =======
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
1. BASIS OF PRESENTATION
Lucent Technologies Inc.'s ("Lucent" or the "Company") unaudited consolidated
financial statements reflect all adjustments (consisting of normal recurring
accruals) that the Company considered necessary for a fair presentation of
results of operations, financial position and cash flows as of and for the
periods presented.
The consolidated financial statements are prepared in conformity with generally
accepted accounting principles. Management is required 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. Among other things, estimates are used in
accounting for long-term contracts, allowances for bad debts and customer
financings, inventory obsolescence, restructuring reserves, product warranty,
depreciation, employee benefits, income taxes, contingencies and loss reserves
for discontinued operations. Estimates and assumptions are periodically reviewed
and the effects of any material revisions are reflected in the consolidated
financial statements in the period that they are determined to be necessary.
The Company believes that adequate disclosures are made to keep the information
presented from being misleading. The results for the periods presented are not
necessarily indicative of the results for the full year and should be read in
conjunction with the audited consolidated financial statements included in
Lucent's Current Report on Form 8-K, filed on June 17, 2002, for the year ended
September 30, 2001.
Certain reclassifications were made to conform to the current period
presentation.
2. BUSINESS RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS, NET
Due to the continuing decline and uncertainty in the telecommunications market,
Lucent committed to additional restructuring actions to align the business with
market opportunities. As a result, Lucent recorded net business restructuring
charges and asset impairments of $808 in the three months ended June 30, 2002.
The charges were primarily comprised of further headcount reductions, facility
consolidation and asset write-downs, $335 of which will result in future cash
outlays. Included in the net asset write-downs were net charges for inventory of
$43, which were included in costs. The components of the net charges included:
o net employee separation charges of $358 for approximately 7,000
employees, of which $124 is expected to impact cash. The remainder of
the charge was for pension termination benefits of $101 for certain U.S.
employees expected to be funded through Lucent's pension assets and $133
for pension, postretirement and postemployment benefit curtailment
charges (see Employee separations below for additional information on
headcount reductions);
o charges for facility closings of $159, including $41 related to new
plans and $118 for revisions to prior plans. The revisions were due to
changes in estimates as to the amount and timing of expected sublease
rental income as a result of changes in the current commercial real
estate market;
o contract settlements and other liabilities of $52 and other asset
write-downs of $169. The charge for asset write-downs is net of $41 of
reversals primarily for adjustments to estimates for inventory charges
from prior plans. Since Lucent's restructuring program is an aggregation
of many individual plans that are currently being executed, actual costs
have differed from estimated amounts and the individual plans may be
different in the future. Asset write-downs were primarily for inventory,
property, plant and equipment, goodwill, and capitalized software
largely associated with additional product exits in certain switching,
access and optical networking products in the Integrated Network
Solutions ("INS") segment; and
o a loss of approximately $70 related to business dispositions, including
the enterprise professional services business. The loss was included in
business restructuring as the disposition of these businesses were
contemplated as part of Lucent's overall restructuring program.
In addition to the net charge recorded in the three months ended June 30, 2002,
the nine months ended June 30, 2002, included a net reversal of business
restructuring charges and asset impairments of $128, including net charges for
inventory of $10 reflected in costs. The net reversal included:
o a $110 gain realized from the sale of the billing and customer care
business. The gain was included in business restructuring as this
business disposition was contemplated as part of Lucent's overall
restructuring program;
o a net reversal for existing plans of $304, which consisted of $82 of
additional charges primarily related to changes in estimated inventory
provisions for certain existing restructuring plans and reversals of
reserves for existing plans of $386. The reversal included revised
estimates of $119, primarily for settling certain purchase commitments
for amounts lower than originally planned, $126 for employee separation
costs, $77 for excess inventory reserves and other reserve reductions of
$64. The reversal of employee
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
separation reserves was due to higher than assumed attrition rates,
which reduced the number of employees to be terminated by 1,700. In
addition, although reasonable cost estimates were used upon the initial
recording of the charge, the actual severance cost per person was lower
than the original estimates upon the execution of many plans covering
many countries. In establishing the initial charge for inventory, Lucent
included an estimate of amounts relating to products rationalized or
discontinued that were not required to fulfill existing customer
obligations. To the extent the fulfillment of those customer obligations
differed from amounts estimated, additional inventory charges or reserve
reductions were required; and
o charges for new plans of $286, which included employee separation
charges for approximately 1,600 employees of $62, net of a
postemployment benefit curtailment credit of $21, lease termination fees
and other contractual obligations under operating leases associated with
additional facility consolidations of $82, contract settlements of $8,
other liabilities of $23 and asset write-downs of $111. Asset
write-downs are primarily for property, plant and equipment associated
with the disposition of a manufacturing operation.
Employee separations
Including the additional 7,000 headcount reductions discussed above, the total
voluntary and involuntary employee separations associated with the employee
separations net charge recorded in fiscal 2001 and through the nine months ended
June 30, 2002, were 45,700. As of June 30, 2002, approximately 37,500 were
completed, with approximately 1,500 completed in the three months ended June 30,
2002. The completed and future employee separations affect all business groups
and geographic regions. Approximately two-thirds of these separations were
related to management employees and were involuntary. Lucent expects that the
majority of the remaining separations will be completed by the end of the first
fiscal quarter of 2003. In addition, since December 31, 2000, 15,500 of employee
separations were achieved through attrition and divestitures of businesses.
Lucent continues to evaluate the current restructuring reserve as plans are
being executed. As a result, there may be additional charges/reversals. This
table displays the activity of the restructuring reserve for the nine months
ended June 30, 2002, the balance at June 30, 2002, and the components of the net
charges for the nine months ended June 30, 2002:
September 30, Net charges/ June 30, 2002
2001 reserve (reversals) Deductions reserve
----------- ------------ ---------- -------
Restructuring costs
Employee separations $ 588 $ 294 (a) $ (641)(a) $ 241
Contract settlements 610 (38) (300) 272
Facility closings 296 217 (83) 430
Other 125 14 (70) 69
------ ------ ------- ------
Total restructuring costs $1,619 $ 487 $(1,094)(b) $1,012
------ ------ ------- ------
Asset write-downs
Property, plant and equipment 121
Capitalized software 58
Inventory 53 (c)
Other 1
------
Total asset write-downs 233
Net gain on sales (40)
------
Total net charges/(reversals) for
business restructuring $ 680
------
Impairment of goodwill and other assets $ 837
-------
Total $1,517
=======
- ---------
(a) Includes non-cash charges of $120 of pension termination benefits to
certain U.S. employees expected to be funded through Lucent's pension
assets, $142 pension and postretirement benefit curtailment cost and
$21 postemployment benefit curtailment credit.
(b) Includes cash payments of $811 for the nine months ended June 30,
2002, and other non-cash settlements.
(c) At June 30, 2002, the reserves for inventory related restructuring
were $235.
Impairment of goodwill and other assets
The continued and more recent sharp decline in the telecommunications market
prompted an assessment of all key assumptions underlying our goodwill valuation
judgments, including those relating to short and longer-term growth rates. As a
result of our analysis, we determined that an impairment charge of $837 was
required because the forecasted undiscounted cash flows was less than the book
values of the goodwill and other intangible assets of certain businesses. The
charge was measured on the basis of comparison of estimated fair values with
corresponding book
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
values and relates primarily to goodwill recorded in connection with our
September 2000 acquisition of Spring Tide. Fair values were determined on the
basis of discounted cash flows. After the impairment, total goodwill and other
acquired intangibles at June 30, 2002 was $367, primarily related to the
remaining goodwill and other acquired intangibles for Spring Tide and Yurie
Systems, Inc.
3. INCOME TAXES
Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes" ("SFAS 109") requires that a valuation allowance be established
when it is "more likely than not" that all or a portion of deferred tax assets
will not be realized. A review of all available positive and negative evidence
needs to be considered, including a company's performance, the market
environment in which the company operates, the utilization of past tax credits,
length of carryback and carryforward periods, existing contracts or sales
backlog that will result in future profits, etc.
It further states that forming a conclusion that a valuation allowance is not
needed is difficult when there is negative evidence such as cumulative losses in
recent years. Therefore, cumulative losses weigh heavily in the overall
assessment. As a result of the review undertaken at June 30, 2002, Lucent
concluded that it was appropriate to establish a full valuation allowance for
its net deferred tax assets. Throughout fiscal year 2002, we also established
valuation allowances for future tax benefits with relatively short carryforward
periods related to foreign tax credits, state and foreign net operating losses
and capital losses. As a result, the valuation allowance for deferred tax assets
increased from $742 at September 30, 2001, to approximately $7,500 at June 30,
2002. In addition, Lucent expects to provide a full valuation allowance on
future tax benefits until it can sustain a level of profitability that
demonstrates its ability to utilize the assets. For additional information see
APPLICATION OF CRITICAL ACCOUNTING POLICIES in Management's Discussion and
Analysis of Results of Operations and Financial Condition.
4. DISCONTINUED OPERATIONS
On June 1, 2002, Lucent completed its spin-off of Agere Systems Inc. ("Agere")
by distributing its remaining 37.0 million shares of Agere Class A common stock
and 908.1 million shares of Agere Class B common stock to Lucent's common
shareowners of record on May 3, 2002. Each Lucent shareowner received one share
of Agere Class A common stock for every 92.768991 shares of Lucent's common
stock held and one share of Agere Class B common stock for every 3.779818 shares
of Lucent's common stock held. The historical carrying amount of the net assets
transferred to Agere of $1,183 was recorded as a stock dividend reflected in
additional paid-in capital.
The income (loss) from discontinued operations includes the results of
operations for Lucent's former power systems business through the date of sale
of December 29, 2000, and Agere through the initial measurement date of March
31, 2001. The income (loss) on disposal of Agere includes Lucent's share of
Agere's net losses from the initial measurement date through the spin-off date.
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Agere and power systems revenues $307 $ 814 $1,247 $ 3,303
==== ======= ====== =======
Loss from discontinued operations (net of taxes) $ - $ - $ - $ (151)
Income (loss) on disposal of Agere (27) (1,360) 73 (1,522)
---- ------- ------ -------
Total income (loss) from discontinued operations(a) $ (27) $(1,360) $ 73 $(1,673)
===== ======= ====== =======
- -------
(a) Net of tax provision of $1 and $133 for the three months ended June 30,
2002 and 2001, respectively, and tax provision of $34 and $146 for the nine
months ended June 30, 2002 and 2001, respectively.
In connection with the spin-off of Agere, the Company re-measured its pension
and postretirement plans on June 1, 2002. The actuarial assumptions used were
the same as those assumptions used at September 30, 2001. The re-measurement is
not expected to have a material effect on our results of operations. In
addition, included in discontinued operations for the three months ending June
30, 2002, are pension termination benefit charges of $57, relating to business
restructuring actions taken by Agere prior to the spin-off.
Subject to final adjustment, which is not expected to be materially different,
the prepaid pension and postretirement liability amounts transferred to Agere on
June 1, 2002, were $216 and $89, respectively.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
The net assets of Agere as of September 30, 2001 were as follows:
Current assets $4,022
Current liabilities 4,427 (a)
------
Net current liabilities of discontinued operations $ 405
Long-term assets $2,625
Long-term liabilities 1,323 (b)
------
Net long-term assets of discontinued operations $1,302
======
- -------
(a) Includes $2,500 of short-term debt assumed by Agere on April 2, 2001, and
$565 of reserves associated with Lucent's share of Agere's estimated future
losses through the spin-off date.
(b) Amount is shown net of the minority interest in the net assets of Agere of
$1,026.
5. BUSINESS DISPOSITIONS AND SALE OF MANUFACTURING OPERATIONS
On May 31, 2002, Lucent completed its agreement with Solectron Corporation to
sell certain manufacturing equipment and inventory for approximately $100,
subject to post closing adjustments, and commenced a three-year supply agreement
with Solectron for certain optical networking products. Due to continuing market
uncertainties, Lucent and Solectron are currently in discussions that may result
in changes to these agreements.
On February 28, 2002, Lucent completed the sale of its billing and customer care
business to CSG Systems International, Inc. for approximately $260, subject to
certain post closing purchase price adjustments. The transaction resulted in a
gain of $110 and was included in business restructuring charges and asset
impairments, net for the nine months ended June 30, 2002.
On November 16, 2001, Lucent completed the sale of its optical fiber business
("OFS") to The Furukawa Electric Co., Ltd. for approximately $2,300, of which
$173 was in CommScope, Inc. common stock. The transaction resulted in a gain of
$523, which was included in other income (expense) in the nine months ended June
30, 2002. 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. Lucent and Corning are discussing whether a
portion of the proceeds may be paid in Corning common stock, and if so, under
what terms. This transaction, which is subject to approval by Lucent's partners
in the joint ventures, foreign governmental approvals and other customary
closing conditions, is expected to close during the fourth quarter of fiscal
2002.
6. SHORT-TERM INVESTMENTS
During the three months ended June 30, 2002, Lucent purchased debt securities of
$865; primarily consisting of treasury bills and notes and mortgage backed
funds, with original maturities greater than three months and with maturities
less than one year. These investments are of investment grade quality and are
not subject to significant market risk. These investments are designated as
available-for-sale, and are recorded at fair value, which approximates their
cost. Any unrealized holding gains or losses are excluded from net loss and are
reported as a component of comprehensive loss.
7. INVENTORIES
June 30, September 30,
2002 2001
-------- -------------
Completed goods $1,171 $2,023
Work in process 122 432
Raw materials 688 1,191
------ ------
Inventories $1,981 $3,646
====== ======
8. DEBT
June 30, September 30,
2002 2001
-------- -------------
Revolving credit facilities $ - $1,000
Other 173 135
------ ------
Debt maturing within one year 173 1,135
Long-term debt 3,237 3,274
Company-obligated 7.75% mandatorily
redeemable convertible preferred
securities of subsidiary trust 1,750 -
------ ------
Total debt $5,160 $4,409
====== ======
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
On March 19, 2002, Lucent Technologies Capital Trust I ("the trust") completed
the sale of 1,750,000 7.75% cumulative convertible trust preferred securities
for an initial price of $1,000 per share for an aggregate amount of $1,750.
Lucent owns all of the common securities of the trust. The trust used the
proceeds to purchase 7.75% convertible subordinated debentures issued by Lucent
due March 15, 2017, which represent all of the trust's assets. Since the trust
preferred securities are being treated as debt, the distributions on the
securities are included in interest expense. The terms of the trust preferred
securities are substantially the same as the terms of the debentures. Lucent may
redeem the debentures, in whole or in part, for cash at premiums ranging from
103.88% beginning March 20, 2007, to 100.00% on March 20, 2012, and thereafter.
To the extent Lucent redeems debentures, the trust is required to redeem a
corresponding amount of trust-preferred securities. Lucent has irrevocably and
unconditionally guaranteed, on a subordinated basis, the payments due on the
trust preferred securities to the extent Lucent makes payments on the debentures
to the trust. In connection with this transaction, Lucent incurred approximately
$46 of expenses that are deferred and are being amortized over the life of the
debentures.
Holders of trust preferred securities are entitled to receive quarterly cash
distributions commencing June 15, 2002. The ability of the trust to pay
dividends depends on the receipt of interest payments on the debentures. Lucent
has the right to defer payments of interest on the debentures for up to 20
consecutive quarters. If Lucent defers the payment of interest on the
debentures, the trust will defer the quarterly distributions on the trust
preferred securities for a corresponding period. Deferred interest accrues at an
annual rate of 9.25%. Each trust preferred security is convertible at the option
of the holder into 206.6116 shares of Lucent common stock, which takes into
account the adjustment of the Agere spin-off and subject to additional
adjustment under certain circumstances.
9. 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.
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net loss $(8,026) $(3,238) $(8,944) $(7,398)
Other comprehensive loss:
Foreign currency translation adjustments 71 (69) 111 (117)
Reclassification adjustments to foreign currency translation for
sale of foreign entities (6) - (6) (3)
Unrealized holding (losses) gains on investments (1) 87 (20) (34)
Reclassification adjustments for realized gains and impairment losses
on investments 19 3 - 46
Cumulative effect of accounting change - - - 11
Unrealized losses and reclassification adjustments on derivative
instruments - (5) (10) (4)
------- ------- ------- -------
Comprehensive loss $(7,943) $(3,222) $(8,869) $(7,499)
======= ======= ======= =======
10. 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. Amounts applicable to common shareowners reflect
the dividends and accretion on the redeemable convertible preferred stock.
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Loss per common share basic and diluted:
Loss from continuing operations $(2.34) $(0.55) $(2.67) $(2.01)
Income (loss) from discontinued operations (0.01) (0.40) 0.02 (0.50)
Extraordinary gain - - - 0.34
Cumulative effect of accounting changes - - - (0.01)
------ ------ ------ ------
Net loss applicable to common shareowners $(2.35) $(0.95) $(2.65) $(2.18)
====== ====== ====== ======
Dividends declared per common share $ - $ 0.02 $ - $ 0.06
====== ====== ====== ======
Weighted average number of common shares - basic and
diluted (in millions) 3,428.5 3,405.2 3,422.5 3,396.9
Potential common shares were excluded from the calculation of diluted loss per
share because their
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
effect would reduce the loss per share from continuing operations. In addition,
most stock options were excluded from the calculation of diluted loss per share
because their exercise price was greater than the average market price of the
common shares.
Three months ended Nine months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Potential common shares excluded from the calculation of diluted
loss per share (in millions):(a)
Redeemable convertible preferred stock 591.6 - 591.6 -
Company-obligated 7.75% mandatorily redeemable convertible preferred
securities of subsidiary trust(b) 361.6 - 136.4 -
Stock options 3.6 13.8 8.1 35.6
----- ----- ----- -----
Total 956.8 13.8 736.1 35.6
===== ===== ===== =====
Stock options excluded from the calculation of diluted loss per share
because the exercise price was greater than the average market price
of the common shares (in millions)(a) 372.3 611.6 532.9 455.1
===== ===== ===== =====
- -------
(a) Adjusted to reflect the spin-off of Agere.
(b) Had these securities been outstanding for the entire nine months ended
June 30, 2002, the amount of shares excluded from the calculation for
each period would have been 361.6 common shares.
11. OPERATING SEGMENTS
Lucent designs and delivers networks for the world's largest communications
service providers through two customer-focused operating segments, Integrated
Network Solutions ("INS") and Mobility Solutions ("Mobility"). These reportable
segments are managed separately. The INS segment focuses on global, wireline
service providers, including long distance carriers, traditional local telephone
companies and Internet service providers, and provides offerings comprising a
broad range of switching, access, and optical networking products. The Mobility
segment focuses on global wireless service providers and offers products 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 supports its 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 each
reportable segment, as well as an allocation of costs and operating expenses,
which are not managed at a segment level, but are related to the products or
services sold to its customers. Operating income (loss) for reportable segments
excludes the following:
o goodwill and other acquired intangibles amortization;
o business restructuring and asset impairments;
o the results of the optical fiber business through the date of its sale;
o the results from billing and customer care software products through the
date of its sale, messaging products and other smaller units;
o certain personnel costs and benefits, including a portion of those related
to pension and postretirement benefits and differences between the actual
and standard allocated benefit rates;
o 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; and
o certain other general and miscellaneous costs and expenses not directly
used in assessing the performance of the operating segments.
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 segment operating income (loss).
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
The following tables present revenues and operating income (loss) by reportable
segment and a reconciliation of the segment's operating income (loss) to
consolidated operating loss.
Three months Nine months
ended June 30, ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
External Revenues
INS $ 1,411 $ 3,654 $ 5,086 $ 9,644
Mobility 1,451 1,483 4,498 4,192
------- ------- ------- -------
Total reportable segments 2,862 5,137 9,584 13,836
Optical fiber business - 521 114 1,620
Other 87 228 346 683
------- ------- ------- -------
Total external revenues $ 2,949 $ 5,886 $10,044 $16,139
======= ======= ======= =======
Operating income (loss)
INS $ (541) $ (697) $ (1,892) $(3,651)
Mobility 152 (996) 183 (1,477)
------- ------- ------- -------
Total reportable segments (389) (1,693) (1,709) (5,128)
Goodwill and other acquired intangibles amortization (75) (233) (218) (743)
Business restructuring and asset impairments, net(a) (1,645) (684) (1,517) (3,394)
Optical fiber business - 179 (68) 513
Unallocated personnel costs and benefits 371 705 1,190 1,878
Shared services such as general corporate functions (393) (631) (1,239) (1,997)
Other (171) (194) (632) (673)
------- ------- ------- -------
Total operating loss $(2,302) $(2,551) $(4,193) $(9,544)
======= ======= ======== =======
(a) For the three months ended June 30, 2002, business restructuring and asset
impairments, net include a $808 net business restructuring charge and a
$837 impairment charge primarily related to goodwill recorded in connection
with the September 2000 acquisition of Spring Tide. For the nine months
ended June 30, 2002, business restructuring and asset impairments, net
include a $680 net business restructuring charge and the $837 impairment
charge noted above.
Results by reportable segment include service revenues of $630 and $2,132 for
the three and nine months ended June 30, 2002, and $1,137 and $3,163 for the
three and nine months ended June 30, 2001, respectively. Service costs were $549
and $1,752 for the three and nine months ended June 30, 2002, and $934 and
$2,825 for the three and nine months ended June 30, 2001, respectively.
12. 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 securities, 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 June 30, 2002, 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 four paragraphs, beyond that provided for at June 30,
2002, would not be material to the 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 pending in U.S. District
Court in New Jersey captioned In re Lucent Technologies Inc. Securities
Litigation. 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. Lucent is defending this
action vigorously. Lucent made a motion to dismiss the complaint, which was
denied in June 2002, and the case is proceeding with discovery.
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
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
investment to employees participating in the plans despite the fact that Lucent
allegedly knew it was experiencing significant business problems. The August
action was dismissed without prejudice on June 12, 2002. The July action is in
the discovery stage. Lucent is defending the action vigorously. The case is
pending in the U.S. District Court in New Jersey and is captioned Reinhart et
al. v. Lucent Technologies.
In March 2002, Lucent was named as a defendant in a case captioned In re Winstar
Communications Securities Litigation, pending in U.S. District Court for the
Southern District of New York. The case is a putative class action on behalf of
purchasers of common stock of Winstar Communications, Inc. ('Winstar'), which
filed for bankruptcy in April 2001, against several former officers and
directors of Winstar, Winstar's outside auditors, and Lucent. In addition, in
April 2002, a case captioned Preferred Life Insurance Co. of New York et al. v.
Lucent Technologies Inc. was filed in New Jersey state court against Lucent.
The plaintiffs in the New Jersey case are institutional investors, many of
which are affiliated with each other, that purchased the common stock of
Winstar. In both actions, the plaintiffs claim that Lucent caused or contributed
to money lost by the plaintiffs in connection with their investments in Winstar
stock. In the New York action, the plaintiffs claim that Lucent violated federal
securities laws in connection with plaintiffs' purchases of Winstar stock.
Lucent has moved to dismiss the claims in the New York action during June 2002.
In the New Jersey action, the plaintiffs claim that Lucent committed common law
fraud, negligent misrepresentation, conspiracy to commit fraud and aiding and
abetting fraud in connection with plaintiffs' purchases of Winstar stock. Both
cases are in the early stages, and Lucent intends to defend the cases
vigorously. Lucent is also a defendant in an adversary proceeding filed in U.S.
Bankruptcy Court in Delaware by Winstar and Winstar Wireless, Inc. in connection
with the bankruptcy of Winstar and various related entities. The complaint
asserts claims for breach of contract and fraudulent inducement against Lucent
and seeks monetary damages and injunctive relief, as well as costs and expenses
associated with litigation. Lucent filed a motion to dismiss certain of the
claims asserted by plaintiffs. However, the plaintiffs have indicated to the
court that they intend to file an amended complaint. Lucent intends to defend
the case vigorously.
Lucent and certain current and former officers and directors of Lucent are
defendants in a proceeding in Texas state court captioned Obtek, et al. v.
Lucent Technologies Inc., et al., for alleged violation of federal securities
laws, the Texas Securities Act and other claims. The court has denied a motion
to dismiss the claims against individual defendants and has set a trial date for
February 2003. The case is currently proceeding with discovery. Lucent is
defending this action vigorously.
Sparks, et al. v. AT&T and Lucent Technologies Inc. et al., is a class action
lawsuit filed in 1996 in Illinois state court under the name of Crain v. Lucent
Technologies. The complaint seeks damages on behalf of present and former
customers based on a claim that the AT&T Consumer Products business (which
became part of Lucent in 1996) and Lucent had defrauded and misled customers who
leased telephones, resulting in payments in excess of the cost to purchase the
telephones. Similar consumer class actions pending in various state courts have
been stayed pending the outcome of the Sparks case and, in July 2001, the
Illinois court certified a nationwide class of plaintiffs. Lucent filed pretrial
motions for, among other things, decertification of the class and summary
judgment in Lucent's favor. On July 29, 2002, the judge denied Lucent's motions,
and set trial to begin on August 5, 2002.
After extensive negotiations subsequent to Lucent's July 23, 2002 earnings
release, a settlement proposal was submitted to the court on August 9, 2002, to
settle the litigation for up to $300 in cash plus pre-paid calling cards
redeemable for minutes of long distance service. The settlement will be reviewed
by the court and must be approved before the settlement becomes final. Lucent
and AT&T deny they have defrauded or misled their customers, but have decided
to settle this matter to avoid the uncertainty of litigation and the diversion
of resources and personnel that the continuation of pursuing this matter would
require. The class claimants will apply for reimbursement from the settlement
fund, and will be required to demonstrate their entitlement through a claims
form to be provided to a claims administrator. Depending upon the number of
claims submitted and accepted, the actual cost of the settlement to the
defendants may be less than the stated amount, but it is not possible to
estimate the amount at this time.
Lucent is a party to various separation and distribution agreements, which
provide for contribution from formerly affiliated third parties for a portion of
any liability (including any settlement) in this case. However, Lucent would
remain responsible for a majority of any such liability or settlement. As a
result, Lucent recognized a $162 charge recorded in other income (expense),
which is net of expected third party contributions.
Other Commitments
On July 17, 2002, Lucent and Agere amended the purchase agreement between them,
dated as of February 1, 2001, pursuant to which, among other things, Lucent had
agreed to purchase $2,800 in products from Agere over a three year period ending
January 31, 2004. Under the amendment, Lucent's first year purchases of $411
through January 31, 2002, are deemed to be full satisfaction of its initial
year's $800 obligation under the original agreement. In addition, Lucent has
agreed, for an extended period that ends on September 30, 2006, provided Agere
is competitive with other potential suppliers as to price, delivery interval and
technological merit, to purchase 90% of its requirements for products it
currently purchases from Agere and 60%
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
of its requirements for other products that Agere can supply. At a minimum,
Lucent has also agreed to purchase $250 of products from Agere during the fiscal
year ended September 30, 2002, $188 of which were purchased as of June 30, 2002.
Lucent has also agreed to proceed first with Agere on all joint product
development projects where Agere meets Lucent's criteria. Lucent has also agreed
to transfer certain patents, patent applications and patent license agreements
to Agere.
Lucent has exited certain of its manufacturing operations and has increased its
use of contract manufacturers. Except for systems integration and final assembly
of its wireless products and systems integration, assembly and testing for
selected optical products, it is currently using a sole-source supplier for a
majority of the switching and wireless product lines and another sole-source
supplier for the optical product line. In addition, several other contract
manufacturers produce the majority of other products. Lucent is generally not
committed to unconditional purchase obligations, except for a commitment that
requires annual purchases of certain wireless components ranging from $275 to
$425 over the next three years. However, Lucent is exposed to short-term
purchase commitment levels. These short-term commitment levels are evaluated and
established on a quarterly basis. As a result, any sudden and significant
changes in forecasted demand requirements could adversely affect its results of
operations and cash flows.
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.
Additional information and background on Lucent's environmental liabilities and
obligations are set forth in the footnotes to Lucent's consolidated financial
statements for the year ended September 30, 2001. 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. Although Lucent believes that its reserves are adequate, there can be
no assurance that the amount of capital expenditures and other expenses that
will be required relating to remedial actions and compliance with applicable
environmental laws will not exceed the amounts reflected in Lucent's reserves or
will not have a material adverse effect on Lucent's financial condition, results
of operations or cash flows. Any possible loss or range of possible loss that
may be incurred in excess of that provided for at June 30, 2002, cannot be
reasonably estimated.
13. RECENT PRONOUNCEMENTS
Lucent is currently evaluating the impacts of SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144") and SFAS No. 146, "Accounting for
Exit or Disposal Activities" ("SFAS 146") 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 effective with the first
quarter of fiscal 2003, except SFAS 146, which will be effective with the second
quarter of fiscal 2003.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142
under which pre-existing goodwill will no longer be amortized. Identifiable
intangible assets will continue to be amortized over their useful lives. The
criteria for recognizing an intangible asset have also been revised. As a
result, the Company is in the process of reassessing the classification and
useful lives of its previously acquired goodwill and other intangible assets.
SFAS 142 also requires that goodwill be tested for impairment initially within
one year of adoption and at least annually thereafter. If an impairment loss
exists as a result of the transitional goodwill impairment test, the
implementation of SFAS 142 could result in a one-time charge to earnings as a
cumulative effect of accounting change. The goodwill impairment test is a
two-step process that requires goodwill to be allocated to reporting units which
are reviewed by its segment managers. In the first step, the fair value of the
reporting unit is compared with the carrying value of the reporting unit. If the
fair value of the reporting unit is less than the carrying value of the
reporting unit, goodwill impairment may exist, and the second step of the test
is performed. In the second step, the implied fair value of the goodwill is
compared with the carrying value of the goodwill and an impairment loss will be
recognized to the extent that the carrying value of the goodwill exceeds the
implied fair value of the goodwill. As of June 30, 2002, there was approximately
$259 of net goodwill primarily within the INS segment that will be subject to
this new pronouncement and will no longer be amortized.
In June 2001, the FASB issued SFAS 143, which establishes accounting standards
for recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the future costs of retiring a tangible long-lived
asset will be recorded as a liability at their present value when the retirement
obligation arises, and will be amortized to expense over the life of the asset.
Lucent is in the process of identifying assets with retirement obligations,
including leased properties that contractually obligate the Company to remove
leasehold improvements and restore the properties to the original condition.
The Company does not expect that SFAS 143 will materially affect our
consolidated financial statements.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
In August 2001, the FASB issued SFAS 144, which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
discontinued operations. SFAS No. 144 supersedes SFAS No. 121 and the accounting
and reporting provisions of Accounting Principles Board Opinion No. 30 ("APB
30") for the disposal of a segment of a business. SFAS No. 144 retains the basic
principles of SFAS No. 121 for long-lived assets to be disposed of by sale or
held and used and modifies the accounting and disclosure rules for discontinued
operations.
In July 2002, the FASB issued SFAS 146, which addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force ("EITF") has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146
revises the accounting for certain lease termination costs and employee
termination benefits, which are generally recognized in connection with
restructuring activities.
14. STOCK OPTION EXCHANGE OFFER
On April 22, 2002, Lucent commenced a voluntary offer to eligible employees to
exchange certain outstanding stock options to purchase shares of Lucent common
stock, including all stock options issued during the six-month period ended
April 22, 2002, for Lucent's promise to grant a new stock option on or about
November 25, 2002. Employees who participated in the offer tendered stock
options to purchase an aggregate of 213.2 million shares of Lucent common stock,
which have been cancelled, in exchange for Lucent's promises to grant new stock
options to purchase up to an aggregate of 123.2 million shares of Lucent common
stock. The exercise price of the new stock options will be at least equal to the
fair market value of Lucent's common stock on the date of grant.
15
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
Since beginning our restructuring program during the quarter ended March 31,
2001, we have realigned 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 decided to sell or otherwise lease
certain of our manufacturing facilities and make greater use of contract
manufacturers. We assessed 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 product lines; merged
certain technology platforms; consolidated development activities; eliminated
management positions and eliminated many duplications in marketing functions and
programs and centralized our sales support functions, 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. We initiated actions to close facilities and reduce
the workforces in about 40 of the approximately 60 countries in which we
operated at the end of fiscal 2000. Due to continuing market declines, we have
committed to additional restructuring actions that resulted in a net business
restructuring charge of $808 million in the current quarter. These restructuring
actions were designed to enable us to achieve earnings per share ("EPS")
breakeven at a quarterly revenue level of $3.5 billion with a gross margin rate
in the low 30 percent range. Additional restructuring actions are being
developed to further reduce our EPS breakeven to below the $3.5 billion
quarterly revenue level during fiscal 2003, which will likely result in a
restructuring charge in the fourth fiscal quarter of 2002. We generally expect
to complete each restructuring plan within 12 months of committing to it.
MARKET ENVIRONMENT AND STRATEGIC DIRECTION
During fiscal 2001, the global telecommunications market deteriorated,
reflecting a significant decrease in the competitive local exchange carrier
market and a significant reduction in capital spending by established service
providers. This trend has continued during the first nine months of fiscal 2002
and is expected to continue at least throughout calendar 2002. We estimate that
large service providers continue to reduce their calendar year-over-year capital
spending budgets by more than 20%, primarily in the wireline market. Reasons for
this reduction include the economic slowdown, network overcapacity, customer
bankruptcies, network build-out delays and limited capital availability. As a
result, our sales and results of operations have been adversely affected.
During this prolonged market downturn, we have concentrated on the things we can
control, such as working closely with our customers to position the full breadth
of our products and services, significantly reducing our cost structure,
reducing our breakeven revenue figure and improving our balance sheet. However,
if capital investment levels continue to decline, or if the telecommunications
market does not improve or improves at a slower pace than we anticipate, our
revenues and profitability will continue to be adversely affected. In addition,
if our sales volume and product mix does not improve, or we do not continue to
realize cost reductions or reduce inventory related charges, our gross margin
percentage may not improve as much as we have targeted, resulting in lower than
expected results of operations.
The significant slowdown in capital spending in our target markets has created
uncertainty as to the level of demand in those markets. In addition, the level
of demand can change quickly and can vary over short periods of time, including
from month to month. As a result of the uncertainty and variations in our
markets, accurately forecasting future results, earnings and cash flow is
increasingly difficult.
We restructured our operations into distinct wireline and wireless units, and
began to target the large service providers in each segment, which we believe
offer 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. INS
primarily sells and services core switching, 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 primarily
sells and services wireless products to wireless service providers. Both
segments offer network management and application and service delivery products.
We support these two new segments through a number of
16
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated 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
affect our financial condition and results of operations.
Most of our sales are generated from complex contractual arrangements, which
require significant revenue recognition judgments, particularly in the areas of
multiple element arrangements and collectibility. Revenue from contracts with
multiple element arrangements, such as those including installation and
integration services, are recognized as each element is earned based on
objective evidence of the relative fair values of each element and when there
are no undelivered elements that are essential to the functionality of the
delivered elements. We have determined that most of our equipment can be
installed by the customer or a third party, and as a result, revenue may be
recognized upon delivery of the equipment in those situations, provided all
other revenue recognition criteria are met. The assessment of collectibility is
particularly critical in determining whether revenue should be recognized in the
current market environment. As part of the revenue recognition process, we
determine whether trade and notes receivables are reasonably assured of
collection based on various factors, including our ability to sell these
receivables and whether there has been deterioration in the credit quality of
our customers that could result in our being unable to collect or sell the
receivables. In situations where we have the ability to sell the receivable,
revenue is recognized to the extent of the value we could reasonably expect to
realize from the sale. We will defer revenue and related costs if we are
uncertain as to whether we will be able to sell or collect the receivable. We
will defer revenue and recognize costs when we determine that the collection or
sale of the receivable is unlikely. For sales generated from long-term
contracts, primarily those related to customized network solutions and network
build-outs, we generally use the percentage of completion method of accounting.
In connection therewith, we make important judgments in estimating revenue and
cost and in measuring progress towards completion. These judgments underlie our
determinations regarding overall contract value, contract profitability and
timing of revenue recognition. Revenue and cost estimates are revised
periodically based on changes in circumstances; any losses on contracts are
recognized immediately. We also sell products through multiple distribution
channels, including resellers and distributors. For products sold through these
channels, revenue is generally recognized when the reseller or distributor sells
the product to the end user. The total amount of deferred income, including
deferrals relating to collectibility concerns, at June 30, 2002, was $653
million.
We are required to estimate the collectibility of our trade receivables and
notes receivable. A considerable amount of judgment is required in assessing the
realization of these receivables, including the current creditworthiness of each
customer and related aging of the past due balances. Our provisions for bad debt
and customer financing during fiscal 2001 and for the nine months ended June 30,
2002, amounted to $2.2 billion and $829 million, respectively. Our June 30,
2002, reserves included in the $2.2 billion of trade receivables was $517
million and there were approximately $790 million of reserves on the $1.2
billion of drawn commitments under our customer financing program. We evaluate
specific accounts when we become aware of a situation where a customer may not
be able to meet its financial obligations due to a deterioration of its
financial viability, credit ratings or bankruptcy. The reserve requirements are
based on the best facts available to us and reevaluated and adjusted as
additional information is received. Our reserves also are determined by using
percentages applied to certain aged receivable categories. (Refer to LIQUIDITY
AND CAPITAL RESOURCES - Customer finance commitments for additional discussion
on procedures performed related to customer financing.) Significant increases in
reserves have been recorded in recent periods and may occur in the future due to
the current market environment. In addition, we currently have approximately
$640 million of net assets included in receivables, contracts in process and
other assets from long-term projects that have been winding down in Saudi
Arabia. We have concluded that these net assets are realizable based on our
contractual rights and past collection history.
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. Our reserve requirements generally increase as our
projected demand requirements decrease due to market conditions, technological
and product life cycle changes as well as longer than previously expected usage
periods. We have experienced significant changes in required reserves in recent
periods due to changes in strategic direction, such as discontinuances of
product lines as well as declining market conditions. As a result, we incurred
inventory charges of $2.4 billion and approximately $350 million during fiscal
2001 and the nine months ended June 30, 2002, respectively. Inventories of $2.0
billion at June 30, 2002, are net of reserves of approximately $1.5 billion. It
is possible that significant changes in required inventory reserves may continue
to occur in the future if there is a further decline in market conditions and if
additional
17
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
restructuring actions are taken.
We currently have significant deferred tax assets resulting from tax credit
carryforwards, anticipated net operating losses and other deductible temporary
differences, which will reduce taxable income in future periods. We established
a full valuation allowance for our remaining deferred tax assets and recognized
a $5.9 billion charge during the current quarter. We had previously provided
valuation allowances only for future tax benefits resulting from foreign tax
credits, most state and foreign net operating losses and capital losses with
relatively short carryforward periods. We believed it was more likely than not
that the remaining net deferred tax assets of $5.2 billion at March 31, 2002
would be realized principally based upon forecasted taxable income, generally
within the twenty-year R&D credit and net operating loss carryforward periods,
giving consideration to substantial benefits realized to date through our
restrucuturing program. SFAS No. 109 requires a valuation allowance be
established when it is "more likely than not" that all or a portion of deferred
tax assets will not be realized and that it is difficult to conclude that a
valuation allowance is not needed when there is negative evidence such as
cumulative losses in recent years. Therefore, cumulative losses weigh heavily in
the overall assessment. We identified several significant developments which we
considered in determining the need for a full valuation allowance recorded in
the current quarter, including the continuing and more recent severe market
decline, uncertainty and lack of visibility in the telecommunications market as
a whole, a significant decrease in sequential quarterly revenue levels, a
decrease in sequential earnings after several quarters of sequential improvement
and the necessity for further restructuring and cost reduction actions to attain
profitability. As a result of our assessment, we increased our total valuation
allowance on deferred tax assets to approximately $7.5 billion resulting in the
$5.9 billion charge. We expect to record a full valuation allowance on future
tax benefits until we can sustain an appropriate level of profitability and
until such time, we would not expect to recognize any significant tax benefits
in our future results of operations.
We currently have intangible assets, including goodwill and other acquired
intangibles of $367 million, primarily within the INS segment, and capitalized
software development costs of $820 million. The determination of related
estimated useful lives and whether these assets are impaired involves
significant judgments based upon short- and long-term projections of future
performance. Certain of these forecasts reflect assumptions regarding our
ability to successfully develop and ultimately commercialize acquired
technology. Changes in strategy and/or market conditions may result in
adjustments to recorded asset balances. For example, we had taken significant
impairment charges, including $4.1 billion related to goodwill and other
acquired intangibles and $362 million related to capitalized software under our
restructuring program during fiscal 2001. The continued and more recent sharp
decline in the telecommunications market prompted an assessment of all key
assumptions underlying our goodwill valuation judgments, including those
relating to short and longer-term growth rates. As a result of our analysis, we
determined that an impairment charge of $837 million was required because the
forecasted undiscounted cash flows was less than the book values of certain
businesses. The charge was measured on the basis of comparison of estimated fair
values with corresponding book values and relates primarily to goodwill recorded
in connection with our September 2000 acquisition of Spring Tide. Fair values
were determined on the basis of discounted cash flows. Goodwill and other
acquired intangibles at June 30, 2002 primarily relates to the remaining $113
million of goodwill and other acquired intangibles for Spring Tide and the
remaining $128 million balance of goodwill and other acquired intangibles
relating to our acquisition of Yurie Systems, Inc., which provides Asynchronous
Transfer Mode access equipment. We have concluded that this amount is realizable
based upon projected undiscounted cash flows through 2006. Due to uncertain
market conditions and potential changes in our strategy and product portfolio,
it is possible that forecasts used to support our intangible assets may change
in the future, which could result in additional non-cash charges that would
adversely affect our results of operations and financial condition.
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, which
are usually updated on an annual basis at the beginning of each fiscal year. 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 due to
changes in the assumptions. Our current assumptions include a 7% discount rate,
a 9% expected return on plan assets and a 4.5% rate of compensation increase.
These are consistent with the prior year assumptions except that the discount
rate was reduced by one-half of a percent due to current market conditions.
Compared with the prior year interim period, our net pension and postretirement
benefit credit has been reduced by $101 million to $719 million in the nine
months ended June 30, 2002. Holding all other assumptions constant, a one-half
percent increase or decrease in the discount rate would increase or decrease
annual fiscal 2002 pre-tax income by approximately $125 million. Likewise, a
one-half percent increase or decrease in the expected return on plan assets
would increase or decrease annual fiscal 2002 pre-tax income by $200 million.
Subsequent to June 30, 2002, the estimated accumulated benefit obligation
("ABO") related to the management employees' pension plan has at times exceeded
the fair value of its plan assets. If the ABO exceeds the fair value of the plan
assets at September 30, 2002, we will be required to establish a minimum
liability for the difference and record a direct
18
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
charge to equity to the extent the minimum liability exceeds the unrecognized
prior service cost. However, this charge would not impact our results of
operations.
During fiscal 2001 and fiscal 2002, we recorded significant charges in
connection with our restructuring program. The related reserves reflect many
estimates, including those pertaining to separation costs, inventory,
settlements of contractual obligations and proceeds from asset sales.
We reassess the reserve requirements to complete each individual plan under
our restructuring program at the end of each reporting period. Actual
experience has been and may continue to be different from these estimates.
For example, we reflected a net reversal of $222 million for plans existing
as of September 30, 2001, and have reflected charges of $942 million for
new plans. As of June 30, 2002, and September 30, 2001, liabilities
associated with our restructuring program were $1 billion and $1.6
billion, respectively. For more information, see Note 2 to the unaudited
consolidated financial statements.
We are subject to proceedings, lawsuits and other claims, including proceedings
under laws and government regulations related to securities, 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 is based on a careful analysis of each individual issue
with the assistance of outside legal counsel. 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. For more
information, see Note 12 to the unaudited consolidated financial statements.
The impact of changes in the estimates and judgments pertaining to revenue
recognition, receivables and inventories is directly reflected in our segments'
operating income (loss). Although any charges related to our net deferred tax
assets and goodwill and other acquired intangibles are not reflected in the
segment results, the long-term forecasts supporting the realization of those
assets and changes in them are significantly affected by the actual and expected
results of each segment. Generally, the changes in estimates related to pension
and postretirement benefits, our restructuring program and litigation will not
affect our segment results, although execution of the restructuring plans by
each segment may cause related changes in the estimates.
We have discussed the application of these critical accounting policies with our
board of directors and Audit and Finance Committee. There was no initial
adoption of any accounting policies during the nine months ended June 30, 2002.
CONSOLIDATED RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED JUNE 30, 2002,
VERSUS THREE AND NINE MONTHS ENDED JUNE 30, 2001
Revenues
The following table presents our U.S. and non-U.S. revenues and the approximate
percentage of total revenues (dollars in millions):
Three months ended June 30, Nine months ended June 30,
----------------------------------- --------------------------------
2002 2001 % change 2002 2001 % change
---- ---- -------- ---- ---- ---------
U.S. $2,051 $3,817 (46.3%) $ 6,710 $10,638 (36.9%)
Non-U.S. 898 2,069 (56.6%) 3,334 5,501 (39.4%)
------ ------ ------- -------
Total revenues $2,949 $5,886 (50.0%) $10,044 $16,139 (37.8%)
====== ====== ====== ======= ======= ======
Percentage of total revenues Percentage of total revenues
------------------------------------ -----------------------------------
U.S. 69.5% 64.8% 66.8% 65.9%
Non-U.S. 30.5% 35.2% 33.2% 34.1%
Continued reductions in capital spending by large service providers, primarily
affecting our INS segment, and business dispositions were the primary reasons
why the interim fiscal 2002 revenues were lower than the similar periods of the
prior year. The revenue decline resulting from business dispositions was $644
million for the three months ended June 30, 2002, and $1.8 billion for the nine
months ended June 30, 2002. The optical fiber business ("OFS"), which was sold
during the first fiscal quarter of 2002, accounted for approximately 80% and 85%
of the revenue decline associated with business dispositions for the three and
nine months ended June 30, 2002, respectively. The impact of product
rationalizations and discontinuances under our restructuring program has not had
a significant effect on our overall trend of revenues.
19
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Gross Margin
The following table presents our gross margin and the percentage to total
revenues (dollars in millions):
Three months ended Nine months ended
June 30, June 30,
---------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- -----
Gross margin $ 651 $ 829 $1,888 $1,995
Gross margin rate 22.1% 14.1% 18.8% 12.4%
Changes in gross margin rate in the current interim fiscal periods as compared
with the prior interim periods primarily resulted from:
o the gross margin rate was higher in the current interim fiscal year
periods as a result of significantly lower inventory related charges as
compared with the prior interim fiscal year periods. These charges
primarily resulted from weak market conditions that caused a sudden and
significant decrease in demand for our products. As a result of lower
inventory levels from our strategy of focusing on large service providers
and improved inventory management, we reduced the amount of these charges
in the current interim fiscal year periods. In addition, the prior interim
fiscal year periods were adversely affected by higher warranty costs due
to certain product performance issues not occurring in the current interim
periods. These two factors improved gross margin rates by about 14 points
for the three months ended June 30, 2002, and about 9 points for the nine
months ended June 30, 2002;
o gross margin includes a net charge of $43 million and $53 million for the
three and nine months ended June 30, 2002, respectively, and $143 million
and $679 million for the three and nine months ended June 30, 2001,
respectively, for inventory charges associated with product line
rationalizations and product line discontinuance under our restructuring
program. The decrease in these net charges resulted in about a 1 point
improvement in the gross margin rate for the three months ended June 30,
2002 and a 4 point improvement for the nine months ended June 30, 2002;
o we reduced our fixed costs in response to the deterioration of global
telecommunications market conditions, however, when combined with
significantly lower revenue volumes, our fixed costs resulted in about a 4
point decline in the gross margin rate for the three months ended June 30,
2002 and about a 3 point decline for the nine months ended June 30, 2002;
and
o the sale of OFS negatively affected gross margin as a percentage of
revenues by approximately 3 points for the three and nine months ended
June 30, 2002.
To maintain or improve our current gross margin level depends upon market
pricing, as well as our ability to improve sales volume and product mix, limit
inventory related charges, continue cost reductions and market and product
rationalization work, and introduce new products.
Operating Expenses
The following table presents our operating expenses (dollars in millions):
Three months ended June 30, Nine months ended June 30,
----------------------------- -------------------------------
2002 2001 % change 2002 2001 % change
------- ------- -------- ------- -------- --------
Selling, general and administrative ("SG&A")
expenses, excluding the following two items: $ 610 $ 936 (34.8%) $1,945 $ 3,356 (42.0%)
Provision for bad debts and customer
financings 186 877 (78.8%) 829 1,950 (57.5%)
Amortization of goodwill and other acquired
intangibles 75 233 (67.8%) 218 743 (70.7%)
------ ------ ------ ----- ------- ------
Total SG&A 871 2,046 (57.4%) 2,992 6,049 (50.5%)
R&D 480 793 (39.5%) 1,625 2,775 (41.4%)
Business restructuring charges and asset
impairments, net 1,602 541 196.1% 1,464 2,715 (46.1%)
------ ------ ------ ----- ------- ------
Operating expenses $2,953 $3,380 (12.6%) $6,081 $11,539 (47.3%)
====== ====== ====== ====== ======= ======
SG&A expenses
Excluding provisions for bad debts and customer financings and amortization of
goodwill and other acquired intangibles, SG&A expenses decreased by 35% and 42%
during the three and nine month periods, respectively, primarily from headcount
reductions under our restructuring program and other cost savings initiatives
that limited discretionary spending.
20
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Provision for bad debts and customer financings
Many of our customers have been negatively affected by the continued decline in
telecommunications market conditions. This has resulted in a decline in the
creditworthiness of certain customers resulting in some having to file for
bankruptcy or having been declared insolvent. As a result, we have provided
reserves for certain trade and notes receivable and sold others at significant
discounts in the interim periods presented. We may have to record additional
reserves or write-offs in the future.
During the three and nine months ended June 30, 2002, the provisions included
approximately $83 million and $393 million, respectively, related to customer
financing with the balance for trade receivables. In addition, during the three
and nine months ended June 30, 2002, approximately 66% and 76% of the total
provisions were related to our INS customers and 30% and 24% were related to our
Mobility customers. The remaining balances were not related to our reportable
segments.
Provisions associated with two vendor finance projects, including One.Tel Ltd.,
accounted for a significant portion of the provision for the three months ended
June 30, 2001. The provision for the nine months ended June 30, 2001, included
provisions related to Winstar Communications, Inc., which filed for Chapter 11
protection on April 18, 2001.
Amortization of goodwill and other acquired intangibles
Amortization of goodwill and other acquired intangibles for the current interim
periods was significantly lower than the prior year interim periods due to the
write-down in fiscal 2001 of goodwill and other acquired intangibles, in
particular, the discontinuance of the Chromatis product portfolio in connection
with our restructuring program. As a result of the goodwill impairment charge in
the three months ended June 30, 2002 (see Note 2 to the unaudited consolidated
financial statements), amortization expense will be significantly lower in the
fourth fiscal quarter of 2002 as compared with the current fiscal quarter.
R&D
The decrease in R&D expenses for the three and nine months ended June 30, 2002,
as compared with the fiscal 2001 interim periods was primarily due to headcount
reductions and product rationalizations under our restructuring program.
During the nine months ended June 30, 2002, 55% of our R&D was attributable to
our INS segment and most of the remaining amounts were attributable to our
Mobility segment. The INS spending was primarily related to next-generation
products, including optical products for both long haul and metro networks,
multi-service switches that can handle both Internet protocol services and
multiple network traffic protocols, network operations software solutions, and
digital subscriber line products. The Mobility spending was primarily related to
next-generation Code Division Multiple Access ("CDMA") and Universal Mobile
Telecommunications System technology ("UMTS").
Business restructuring charges and asset impairments, net
During the three months ended June 30, 2002, we recorded in operating expenses
net business restructuring charges and asset impairments of $765 million , and
an impairment charge of $837 million primarily related to Spring Tide goodwill
(see Note 2 to the unaudited consolidated financial statements and APPLICATION
OF CRITICAL ACCOUNTING POLICIES). This compares to $541 million of net business
restructuring charges and asset impairments recorded during the three months
ended June 30, 2001.
In addition to the net charges discussed above, operating expenses for the nine
months ended June 30, 2002, included a net reversal of business restructuring
charges and asset impairments of $138 million. This compares to $2.7 billion of
net business restructuring charges and asset impairments recorded during the
nine months ended June 30, 2001. For additional information on the current
fiscal year progress see LIQUIDITY AND CAPITAL RESOURCES - Cash Requirements.
Other income (expense), net
The current quarter's other expense was largely related to a $162 million legal
settlement (see Note 12 to the unaudited consolidated financial statements),
investment write-downs of $64 million, primarily due to an other-than-temporary
write-down of our investment in Commscope, and a legal settlement with Vtech
(see Part II, Item 1. Legal Proceedings). Additionally, the nine months ended
June 30, 2002, included $581 million of gains from business dispositions,
primarily related to a $523 million gain realized from the sale of OFS, and
interest income related to a tax settlement of $73 million. Subsequent to June
30, 2002, our equity investment in Commscope has continued to devalue. If this
decline is considered other-than-temporary, we will incur an additional
impairment charge in the fourth fiscal quarter of 2002.
Other income (expense) for the three months ended June 30, 2001, consisted of
charges of approximately $72 million related to write-downs of certain equity
investments, a charge of approximately $42 million related to the write-off of
an embedded derivative asset due to the
21
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
credit risk and uncollectibility associated with One.Tel and other miscellaneous
write-offs, partially offset by interest income of $56 million. Other income
(expense) for the nine months ended June 30, 2001 primarily consisted of $277
million of write-downs of equity investments and the write-off associated with
One.Tel noted above, partially offset by interest income of $203 million.
Interest Expense
Interest expense for the three months ended June 30, 2002 decreased slightly as
compared with the prior year interim period. Lower interest expense resulted
from a significant reduction in short-term debt. This was partially offset by
interest related to our trust preferred securities, which were issued in March
2002. Due to the timing of the issuance, the trust preferred securities had a
lesser impact on interest expense for the nine months ended June 30, 2002.
Provision (Benefit) for Income Taxes
The following table presents our provision (benefit) for income taxes and the
related effective tax provision (benefit) rates (dollars in millions):
Three months ended June 30, Nine months ended June 30,
--------------------------- -----------------------------
2002 2001 2002 2001
---------- --------- -------- -------
Provision (benefit) for income taxes $5,329 $ (967) $4,782 $(3,394)
Effective tax provision (benefit)
rate 199.6% (34.0%) 112.9% (33.2%)
As discussed in more detail under "APPLICATION OF CRITICAL ACCOUNTING POLICIES",
the effective tax provision rate for the current quarter was significantly more
than the U.S. statutory rate due to a non-cash charge of $5.9 billion to provide
a full valuation allowance on our remaining net deferred tax assets at June 30,
2002. The effective tax benefit rate excluding this charge would have been
21.0%, which was substantially lower than the U.S. statutory rate primarily due
to the impact of certain non-tax deductible charges for business restructuring
and asset impairment charges on the pre-tax loss.
The effective tax benefit rate on a year to date basis excluding the $5.9
billion charge discussed above would have been 26.1% which is less than the U.S.
statutory rate due to the impact of certain non-tax deductible charges for
certain business restructuring and asset impairment charges on the pretax loss,
a $208 million charge for valuation allowances on foreign tax credit
carryforwards that arose due to recent net operating loss carrybacks under new
legislation and that are more likely than not to expire unused, offset by a $60
million favorable tax settlement and the tax impact from the gain on the sale of
our optical fiber business, which had a low effective tax rate due to
differences in the book and tax basis of the assets sold. The new legislation
extended the net operating loss carryback period from two to five years.
However, since the net operating loss carryforward provisions were not coupled
with foreign tax credit carryforward relief, the additional valuation allowances
were required. This change in the tax legislation resulted in a tax refund of
$616 million in April 2002. Also affecting the effective tax benefit rate were
non-deductible goodwill amortization and valuation allowances on certain state
net operating loss carryforwards, offset in part by research and development tax
credits and a low effective tax rate on the non-U.S. portion of the gain
realized from the sale of our billing and customer care business.
The effective tax benefit rates for the three and nine months ended June 30,
2001, were lower than the U.S. statutory rate, primarily from the impact of
non-tax deductible goodwill amortization and certain non-tax deductible charges
for business restructuring and related asset impairments on the pre-tax loss,
offset in part by research and development tax credits.
Loss from Continuing Operations
As a result of the above, loss from continuing operations and loss per common
share amounts are as follows (amounts in millions, except per share amounts):
Three months ended June 30, Nine months ended June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
-------- ------- ------- -------
Loss from continuing operations $(7,999) $(1,878) $(9,017) $(6,841)
Basic and diluted loss per common share from
continuing operations $ (2.34) $ (0.55) $ (2.67) $ (2.01)
Weighted average number of common shares outstanding -
basic and diluted 3,428.5 3,405.2 3,422.5 3,396.9
22
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Other
The income (loss) from discontinued operations during the three and nine months
ended June 30, 2002, relates to revised estimates of our share of the expected
loss on disposal of Agere Systems Inc. ("Agere") through the spin-off date of
June 1, 2002. The loss from discontinued operations during the three and nine
months ended June 30, 2001, relates to Agere and our power systems business (see
Note 4 to the unaudited consolidated financial statements).
During the nine months ended June 30, 2001, we realized 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.
Effective October 1, 2000, we recognized a net $38 million charge for the
cumulative effect of certain accounting changes. This was comprised of 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."
RESULTS OF OPERATIONS BY SEGMENT - THREE AND NINE MONTHS ENDED JUNE 30, 2002,
VERSUS THREE AND NINE MONTHS ENDED JUNE 30, 2001
INS
The following table presents external revenues, U.S. and non-U.S., and operating
loss (dollars in millions):
Three months ended June 30, Nine months ended June 30,
--------------------------------------------- -------------------------------------------
2002 2001