Agere's Musical Chairs

Tough times call for tough measures. That much was evident from Agere Systems (NYSE: AGR) earnings call yesterday (see Agere Reports, Reorganizes).

Not only did the company post a loss of $375 million, or 23 cents a share, it also announced a new phase in its restructuring plan that will see the number of sites it occupies in the U.S. cut from nine to two, and a further 1,400 workers removed from the payroll. Virtually no employee at the company will be unaffected by the reorganization.

The financials seem pretty bad in light of the fact that Agere was in the black this time last year with quarterly revenues of $1.36 billion. Now its quarterly revenues are down to $537 million, as demand for its components has dried up. And with the industry downturn expected to last a while yet, Agere is orchestrating a strategy that will allow it to break even on only $700 million of quarterly revenues.

The company has already cut thousands of jobs and sold off several facilities, including its FPGA (field-programmable gate array) business, which went to Lattice Semiconductor Corp. (see Lattice to Buy Agere FPGAs).

Now it intends to consolidate its locations, by combining the integrated circuit and optoelectronics manufacturing operations in Reading and Breinigsville, Pa., into its Allentown, Pa., facility. It also plans to move about half of its New Jersey product development workforce, which is currently in multiple locations, to Allentown. "This will allow us to optimize design and manufacturing synergies and more rapidly introduce integrated solutions to the market," said Agere's CEO John Dickson, in a prepared statement.

The remaining research and development workforce will be consolidated at a new location somewhere in central New Jersey.

More than 2,700 workers will be affected in Pennsylvania, and about 300 of them will lose their jobs, as they fail to find a chair to sit on in the new locations.

Agere is also seeking a buyer for its Orlando, Fla., plant, which makes CMOS chips for a variety of applications, including networking. The plant will be sold as a going concern, with the hope that its 1,100 employees will move with it. The company has already been in talks with potential buyers, it says.

At the end of the consolidation, Agere will total approximately 10,000 employees, down from its peak of 18,500. And it will occupy only two million square feet in the two states, down by about 50 percent.

Of course, stockholders like layoffs and consolidation because they reduce burn rate. And they reacted in the same way as they did when Agere announced 4,000 job cuts back in June 2001, sending the stock up initially (see Agere's Good Bad News).

But while the measures will cut the burn rate in the long run, how soon will those effects be felt?

Analysts, including Jim Jungjohann of CIBC World Markets, think that Agere will meet its target to break even at $700 million quarterly revenues, but not before 2003. He rates Agere as a Buy.

But company executives seemed less sure. "I really can't say when we will see the cost savings from restructuring," they said on the conference call yesterday. "It depends on how fast revenues ramp and how quickly we get through the process of restructuring."

Nor would Agere's management team rule out the possibility of further cutbacks if things failed to pick up.

Agere's parent, Lucent Technologies Inc. (NYSE: LU), which owns 58 percent of Agere's stock, earlier this week reiterated its commitment to the spinoff (see Can Lucent Make It?).

— Pauline Rigby, Senior Editor, Light Reading
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