Dateline Lucent

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By stevegso
August 29, 2001

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Dateline Lucent

January 24, 2001 Lucent announces seven-point restructuring plan.

"As we said in December, fiscal year 2001 will be a transition and rebuilding year for Lucent," said Schacht. "With this announcement, we are outlining a comprehensive set of actions to rebuild the company for long-term, sustainable profitability," said Henry Schacht. "We are moving swiftly to implement these actions company-wide. They will serve as the foundation for putting Lucent back on track." "With today's seven-point plan, we believe that we have the right tools and plans in place to enable us to achieve improved sequential performance in revenues and earnings every quarter of fiscal 2001."

Lucent will take a business restructuring reserve and a one-time charge in the range of $1.2 billion to $1.6 billion in the second fiscal quarter of 2001 as part of its business restructuring program. Lucent is taking the charge to reduce the number of jobs in the business, eliminate some product lines as a result of our portfolio review and make the associated asset write-downs and facility consolidations.

Henry Schacht announced that he is cutting head count by 10,000. To the media Henry said "our goal is to do it once, do it right and get on with life."

March 7, 2001 The Faux COO

"I am now the chief operating officer, I've been on the job for about four weeks, before that I was the chief procurement officer for Lucent," he told those at the gathering. One explanation is that he is still learning the ropes about public speaking. "He has a very important job in terms of his responsibilities to the supply chain," says a Lucent spokesman. "But clearly it was a misunderstanding in terms of the way his responsibilities were conveyed to the community there."

April 4, 2001. Bankruptcy Rumor.

Chapter 11 rumors are absolutely false," said Bill Price, director of corporate media relations at the Murray Hill-based company. "They are ridiculous and (are) pushing people into a panic that does not exist." Share price falls 30% then recovers somewhat after the statement. "We have the financial flexibility to execute our turnaround," Price said. "Nothing has changed."

Chief financial officer Deborah Hopkins said market rumors that the company is on the verge of filing for bankruptcy are "baseless and irresponsible". "Let me be very clear, our 6.5 billion dollar lines of credit provide the financial resources and the financial flexibility to execute our turnaround plan."

April 24, 2001 Lucent's 2Q Earnings Announcement.

Henry Schacht provides forward looking guidance for 3Q saying "despite market conditions, we expect modest sequential improvement on the top line and, as we've said previously (Jan 24, 2000), we expect greater sequential improvement on the bottom line from the 37 cents pro forma loss per share we reported this quarter, as we feel the full impact of the business restructuring program in the third and fourth fiscal quarters of 2001." Restructuring charge increased to $2.7 billion instead of the $1.2 to $1.6 b they provided guidance for in the 1Q.

May 6, 2001 CFO Hopkins Departure.

"Deb was an important member of the senior team at a critical time for Lucent. She put a strong financial team in place and helped lay the foundation for many of the systems and financial improvements we saw last quarter" said Henry Schacht. "We thank her for her contributions and wish her well in her new endeavors."

Hopkins said, "Now that Lucent's restructuring program and the required financing are in place, it's the natural time for me to leave and pursue other opportunities. I'm proud of what I accomplished while I was at Lucent and I wish the company well."

She is most remembered for her quote I'm sitting on a gold mine here." OK she said we're. How prophetic that turned out to be as shareholders got the gold mineshaft.

May 30, 2000 Lu Alcatel merger talks end.

Lucent went looking for love in all the wrong places. Henry said "we were focused on restructuring, then we lost focus during the negotiations and now we're focused again."

June 5, 2001 SuperComm Show Announcement

Henry Schacht reiterated Lucent's positive quarter-over-quarter revenue growth at an analyst meeting at the Supercomm show in Atlanta. He said that based on the latest review of sales, the company will show a "modest sequential growth" in revenue from the $5.92 billion in the fiscal second quarter. Lucent also expects to see "greater sequential improvement" over the 37-cent per-share operating loss in the second quarter, which marked a 2-cent per-share improvement from the first-quarter loss.

June 6, 2001 Lu Offers Buyout

Lu offers buyout package to over 10,000 employees and sets acceptance deadline of July 10.

"Our top executives are not eligible for this," Price said, because the company wants to retain the talent needed to execute the turnaround outlined by chief executive officer Henry B. Schacht in January. "The voluntary offer is part of our effort to accelerate the restructuring" because the market for Lucent's fiber optic and communications gear has softened, Price said. "This is a good program for our employees and a good program for Lucent."

June 8, 2001

Ben Verwaayen Vice Chairman says "the telecom market may suffer for another 12-18 months until operators have cut their debt burdens."

July 10, 2000 Company Divides into Two Business Lines

In an e-mail Henry informs everyone that Lucent will restructure into two business lines consolidating the five business units. One will be the Integrated Network Solutions group and the Mobility Solutions Group.

Deadline for accepting the buyout plan and a little over 8500 accepted the package.

July 12, 2001 All Hands Meeting

Henry Schacht tells employees in a meeting that Lucent will make a profit in the first quarter of FY2002? Henry also announced that Lucent will require another round of job cuts at all levels and that the senior executive levels will be cut 25% to 30% also which is a loss of 105 jobs.

"Henry Schacht has informed our employees today that we do expect some further forced job reductions due to current market conditions as well as the more streamlined nature of our business model," said Lucent spokeswoman Mary Ward. "We haven't decided of what these reductions are yet but we expect to complete the process quickly."

July 20, 2001 Non-Frequent Flier Award

Lucent unloads an airplane. As of this quarter, executives can use the jets only if "there is no viable commercial alternative," said Bill Price, a company spokesman. "We're moving ahead with consolidation plans, including reducing the cost of aviation," Price said. One of the 8,500 senior employees who took an early retirement package last week was Don Green, who ran the hangar. Green could not be reached yesterday.

Lucent's airport facility also has a conference room, lockers, shower's, sleeping rooms for crew and two kitchens, one for staff, one for high-end in-flight catering. An investment banker who has flown on Lucent's corporate jets said, "You could order the food to the level you desire it." The hangar is not opulent, Price said. "It's clean, it's modern and the crew is polite and courteous," he said.

July 24, 2001 Lu 3Q Earnings Results

Top Line Revenues decrease.

"Driven by the momentum created by the cumulative effect of our seven-point restructuring plan and Phase II, when it is approved, we expect to return to profitability and positive cash flow during fiscal year 2002," said Schacht. "As we've said, fiscal year 2001 is a transition and rebuilding year for Lucent. The name of the game is to create a new, leaner, faster company."

For the fourth fiscal quarter of 2001, Lucent expects to deliver sequential improvement on the bottom line, but due to market uncertainties, the company is no longer providing guidance for the top line. What's that??? The continued improvement to top and bottom line prediction is now canceled after only two quarters???. Henry, on Jan 24, the beginning of the 2Q, you said each and every quarter for the rest of the year.

Schacht said. "However, we intend to go deeper with a new phase of our restructuring to reshape Lucent for future growth and profitability even more quickly."

"Given the overall market, we feel that we are holding our own," said CFO Frank D'Amelio, but he added that Lucent "can't quantify its improvement, yet." As such, D'Amelio did not give any earnings or loss forecast for Lucent's fourth quarter.

Lucent does give guidance for 4Q write-offs though. It will "result in the company recording a charge in the range of $7 billion to $9 billion in the fourth fiscal quarter of 2001 related to the headcount reductions, product rationalizations and the associated asset write-offs. Approximately $2 billion of the charge will be cash-related.

Henry Schacht announced that an additional 15,000-20,000 further forced job reductions are required due to current market conditions as well as the more streamlined nature of our business model.

July 30, 2001 Golf Course

We are recouping more than our initial investment in the golf complex," said Kathleen Fitzgerald, Lucent's spokeswoman. She then told the NY Times ""We'll only use the course for customer entertainment." But Lucent has not entirely left the fairways. As part of the sales agreement, Lucent executives have the right to play the course. In fact, Lucent recently canceled memberships at two other golf clubs in order to make the most of its Hamilton Farm privileges.

August 1, 2001 Convertible Preferred Share Placement

Lucent places 9% of the company in private hands for a net of $1.83 b. They call it Convertible Preferred Shares to make it palatable. Offers a hefty 8% dividend.

August 16, 2001 8-K filing

Henry Schacht, 23 days after announcing that $7 to $9 billion with $2 billion in cash required in write-offs will be required in the 4Q it will now need about $9.7 b, (let's call it $10 b) with $3 billion of that required in cash going to go out the door. This brings the expected write-offs to the $20 billion (before tax breaks) ball park estimate for Phase II. They will likely save some for 1Q and 2Q of FY 2002. Let's see, revised the estimate upward by 15% and upped the cash required by 50%.

August 24, 2001 Analyst Meeting

Henry said the Phase II plan "will get us to profitability and positive cash flow in 02 and will get us to industry metrics in 03". He continued with "we now have financing in place that more than covers, by a significant amount, the cash required, first to do the business restructuring and second, the cash required from operations to get us to cash breakeven". What was that second part again Henry?

Ebitda will be forced positive to accomplish the spin at the end of March. This special definition applies to the covenant definition of ebitda and allows it to become positive when the gaap ebitda will still be negative. It's financial manipulation to accomplish the spin in the allotted delay period of 6 months. Otherwise the spin would not be made for much longer.

Lu says they can breakeven on $4.75 b in a quarter. That presumably includes taking a pension credit in each quarter of half a billion dollars for the rest of FY2002 and beyond.

How are the numbers looking up for the fiscal year? Pro forma losses are $1.11 to date with consensus of -$0.21 for 4Q which is �$1.31 for the year. However, the estimates range from -$1.16 to -$1.43. There is no way they will come in under �21cents. More likely is the high side of the mean estimates. On a continuing basis, they are at -$2.50 ytd after excluding a one time gain (-$2.16 with it). Estimates for the fiscal year depend on how much of the $10 b they decide to take in the 4Q, so conservatively, middle of the road, it's put at - $2.50 bringing it in around �$5.00 for the year but could go higher. These are current estimates and are no more or less accurate than any of Lucent's predictions. While exposure to vendor financing is decreasing rapidly, they are not out of taking some more hits this quarter and the next. It is true that after this quarters one time restructuring charges the dollar size of these write-offs will get much smaller and thus margins will improve.

In my post Sunday I may have misstated when they will collect some payment for the two plants. Celestica is supposed to raise the $600 m cash by the end of September for the buy one/lease one plan, if so it will appear in this quarters results. The $2.75 b Furukawa/Corning money is supposed to be raised/paid by the end of 1Q FY2002 in December. In the meantime Lu is still going to raise a minimum of another $1 b between now and the end of the calendar year. Remember when there was speculation that these plants would bring in up to $900 m? Like fiber was worth $10 b and Agere was worth $100 b ?

FY2003- Henry said return to industry metrics, sometime in FY2003. He did not say when. D'Amelio put it this way. "FY2003 Financial Targets-our goal is to perform at these industry-leading levels, but the exact 03 timing will depend on the market conditions, obviously". He was referring to those numbers that have been reported here in various forms. After all, those guidance numbers are looking out about 18 months or more and about all you can infer from them is that they expect things to improve and they will meet whatever industry norms are in place 18 months from now because they will still be in business then. If you want to shave 5% off or add 5% to any of those numbers you will be just as correct. The point of the time line was to show that not even Lucent can get it right every time.

For FY 2002, aside from the break even and cash flow positive comments, again without a specific time frame. They expect that the second half of FY 2002 to be slightly up from the first half which they predict will be down 5 to 10% or flat and that their market share will be flat but Henry said it wouldn't surprise him if it was also down. So there is the closest thing to FY 2002 guidance investors are likely to get for now. No doubt there will be better visibility on revenues after the fiscal year ends and the results are discussed in October.

Note, there will be an accounting rule change going into effect in 2002 that will allow Lucent to show increased earnings so unless they point this out the results for Lucent and many others will be a sudden increase in earnings results.

I suspect this has a part in their saying they "will likely return to profitability one quarter before getting to cash flow positive."

The cash flow in Phase II will be a negative free cash flow of an estimated $1.5 b. Additionally, it will take another $2 b cash in a Business Restructuring Reserve which brings their total cash requirement to $3.5 b to implement Phase II. The BRR is cash that will flow out of their coffers to cover various expenses.