Optical/IP Networks

Lucent's Hopes Dimming

Shares of Lucent Technologies Inc. (NYSE: LU) tumbled as the company issued a slew of announcements surrounding the release of its quarterly earnings today.

The upshot? Lucent missed forecasts for the quarter, and executives now say the company's future depends on its ability to revamp its complex credit arrangements with its creditors, as previously reported in Light Reading (see Lucent: Devil in the Details?). The company also announced the details of an another anticipated sharp layoff (see Large Lucent Layoff Looms).

Lucent's shares dropped 1.27 (16.08%) to 6.63 in afternoon trading.

The earnings announcement, including the admission by officials that they would have to go back to the banks to renegotiate Lucent's debt, cast more doubt on the long-term survival of the company.

"This is a complicated and finely textured announcement," said CEO Henry Schacht in a conference call with analysts this morning.

Indeed: Besides the less-than-stellar quarterly financials (see Lucent Reports on Q3), which included a net loss of $3.25 billion, Lucent announced the long-awaited sale of its Optical Fiber solutions business, the outsourcing of two manufacturing plants, and a new phase of its restructuring plan that could delay the spinoff of Agere Systems (NYSE: AGR) and cost 20,000 employees their jobs.

Here are the highlights:

  • Fiber group sold for $2.7 billion. Lucent has agreed to take $2.5 billion in cash and securities from Furukawa Electric Co. Ltd. and CommScope Inc. (NYSE: CTV) in return for its Optical Fiber Solutions Group in Norcross, Ga., and associated plants in Germany, Brazil, and Russia. Additionally, Corning Inc. (NYSE: GLW) has offered Lucent $225 million cash for Lucent's controlling interests in two fiber optic companies in China. The deals are expected to close by September, subject to various financial and regulatory approvals.

  • Facilities leased. Lucent has leased its manufacturing facilities in Columbus, Ohio, and Oklahoma City to contract manufacturer Celestica (NYSE, Toronto: CLS) for a sum between $550 and $650 million. The move was expected (see Planting for the Future) and includes a $10 billion, five-year supply agreement for Celestica's purchase of Lucent gear.

  • Losses announced. Lucent reported third-quarter 2001 revenues of $5.82 billion, down sequentially 21 percent from the same time last year and 1 percent from $5.92 billion in the second quarter. Gross margins were 16 percent of revenues from continuing operations, down 1 percent sequentially and 26 percent from last year's figure.

    Lucent's prepared statement says that "including loss from discontinued operations, Lucent's as-reported results for the quarter were a net loss of $3.25 billion, or a loss of 95 cents per basic and diluted share." The company's dividend has been discontinued.

    Lucent claims sales are up in optical networking, flat to down "a bit" in wireless, and down in circuit switching. The company says it's avoided deeper losses by focusing on worldwide carriers. Indeed, even though U.S. sales decreased 14 percent sequentially, Lucent says international sales represented 39 percent of total revenue this quarter, driven largely by "strong performances in Europe and China." Lucent now claims a 3 percent increase in backlogged orders.

    More restructuring planned. Lucent says the "Phase I" restructuring it announced earlier this year, including layoffs of roughly 10,500 people, has improved its balance sheet.

    But it's not enough. Despite cash in hand of $2.3 billion (which Lucent says offsets its drawing $2.3 billion on its $4 billion credit facility), the company won't return to profitability, execs say, unless Lucent is restructured even more. Schacht's team proposes trimming the product groups to focus on two areas only -- Mobility Solutions and Integrated Network Solutions, cutting products and associated expenses in the process. Additionally, 10,000 to 20,000 more jobs will be cut, including a 25 percent to 30 percent executive management reduction.

If this materializes, Lucent could exceed rival Nortel Networks Corp. (NYSE/Toronto: NT) in suffering the industry's largest and deepest cuts yet. Worst case, Lucent's staff will be down 35,000 since January, roughly 33 percent of the workforce. But Lucent execs say the cuts are vital to getting the firm back on track.

They also emphasize that the company needs to get approval before it can implement "Phase II" of its restructuring plan. The existing covenants won't allow Lucent to take the $7 billion to $9 billion restructuring charge in the fourth quarter that would come with cuts so deep. Because of this, the terms must be renegotiated.

Execs seem confident they can do this without suffering legal or tax repercussions. "We have legal opinion that leads us to think we can achieve this," Schacht said today. He acknowledged, however, that the change of plan could postpone the spinoff of Agere, originally set for September, by at least six months.

But analysts seemed increasingly skeptical that the company can make the necessary covenant adjustments. "What's to stop me from buying your debt and effectively selling the company?" said one analyst on the conference call.

"We have every confidence we can do this," Schacht said.

Others wanted more information for their financial models, claiming that Lucent couldn't possibly project a 2002 return to profitability unless it had evidence in its numbers.

But Schacht refused to give any more specific guidance, except to say that the break-even point wouldn't depend on significant revenue growth, but instead on the modified covenants.

- Mary Jander, Senior Editor, Light Reading

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