It brings me no pleasure to say it, but Tuesday came and went, and just as I predicted, the turnaround train failed to arrive at Lucent's
The story goes like this: Analysts thought Lucent would report growing its revenues by 2% in fiscal Q1 2006 compared with fiscal Q1 2005. It didn't; revenues declined by 12%. Analysts further thought Lucent would announce that it had more or less maintained its level of profitability, sufficient to record $0.04 per share in profits. It didn't -- exactly.
It's on the "exactly" front that the story starts to get complicated. No, Lucent did not report $0.04 per share under generally accepted accounting principles. Rather, it reported a $0.02-per-share loss under GAAP. Ordinarily, when a company promises X in profits and delivers instead Y in losses, you'd expect to see the stock take a shellacking. That didn't happen in Lucent's case. Why? Because the reason the company lost money rather than earned it was an honest-to-goodness one-time event -- it lost a court case against the creditors of its bankrupt former client Winstar, and it was ordered to pay damages sufficient to inflict a $0.06-per-share charge upon its earnings.
Earnings game aside .
But enough about the analysts and their guessing games. On to the numbers that matter.
Lucent suffered a massive decline in sales, yet there was one positive: At least its inventories didn't head in the opposite direction. In fact, over the past year, Lucent managed to shave 14% off its year-ago inventory numbers. Sure, accounts receivable inched up, but at least we know Lucent isn't stockpiling unwanted wares. It saw the sales weakness, and it reacted by cutting production in a timely manner.
That wasn't, however, good enough to keep the company's free cash flow production from taking a hit. Free cash outflows grew 54% over their year-ago levels, as Lucent burned through $553 million in cash. And as bad as that news was, in this Fool's view, the worse news is how the company spent so much of its cash: "primarily" for "payment of the company's fiscal 2005 employee incentive awards."
Incentives? Really? Lucent paid out half a billion dollars to reward its employees for boosting sales by 4% year over year in fiscal 2005, in the process reducing its profits by 41%?
Lucent shareholders are probably breathing a sigh of relief, just happy to know that their stock didn't sink yesterday. But they might think differently if they considered that $553 million, divvied up among shareholders rather than among Lucent employees, would have added a significant amount to Lucent's earnings yesterday. Just imagine how much greener Lucent's ticker would have been then.
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Fool contributor Rich Smith is neither long nor short shares of Lucent.