Lucent returns to drawing board

Lucent’s restructuring is far from over. In reporting a large third-quarter loss and a 21% drop in revenue from continuing operations, the troubled vendor said it would cut another 15,000 to 20,000 jobs and delay the spinoff of Agere Systems.

Designed to get the company to positive cash flow during fiscal year 2002, the second phase of Lucent’s planned restructuring will shrink Lucent’s work force to about 59,000 workers--a number that includes the employees lost in the sales of the fiber unit and manufacturing operations. Lucent began the year with 106,000 workers.

Lucent officials say the restructuring also would reduce annual operating expenses by $2 billion, improve working capital by $1 billion, and cut the vendor’s capital spending rate by $750 million. Lucent also expects a fourth-quarter charge of $7 billion to $9 billion to cover the layoffs, production rationalizations and asset write-offs.

But implementing the “Phase II” restructuring plan hinges on renegotiating Lucent’s February credit agreements with lenders, particularly a clause that does not allow the potential $7 billion to $9 billion restructuring charge.

“We’re not asking for more money,” said Lucent Chairman and CEO Henry Schacht. “We’re asking for the flexibility needed to accomplish Phase II.”

The terms of any amendments to Lucent’s debt covenants are expected to delay the spinoff of Agere Systems for up to six months, Lucent management said, and as a result the company may explore alternatives, such as a secondary public offering of Agere shares.

In related announcements, Lucent’s board of directors voted to immediately end paying shareholders a dividend. The dividend would have normally been paid on Sept. 1. As a result, Lucent expects to free up about $68 million in cash each quarter.

Lucent also said that it is selling its optical fiber solutions business for $2.75 billion to Furukawa Electric of Tokyo and Corning. Corning will pay $225 million in cash for Lucent’s interests in two joint ventures in China, and Furukawa will buy the rest of the fiber operation. CommScope, a manufacturer of coaxial cable, has agreed to enter into one or more joint ventures with Lucent to operate the optical fiber solutions acquisition.

Up to $250 million of Furukawa’s $2.525 billion payment may come in the form of CommScope securities. Lucent management indicated it would monetize its position quickly if that were the case.

Lucent is entering an agreement with Celestica to outsource its manufacturing operations in Columbus, Ohio, and Oklahoma City. Celestica will pay $550 million to $650 million to purchase the Columbus plant and to lease the Oklahoma facility. Celestica also becomes Lucent’s primary manufacturer of switching, access and wireless networking systems products for five years--a deal that could be worth as much as $10 billion.

Based on today’s report, Standard & Poor’s said it might cut Lucent’s “BB-plus” corporate credit rating--S&P’s highest junk grade--by as many as two notches.

Standard & Poor’s said the cash Lucent expects from the fiber cable transaction will be materially less than had been previously anticipated, “especially since the proceeds will largely be offset by the cash portion of the planned restructuring charge, until Lucent realizes the benefits of this action.”

For its third fiscal quarter ending June 30, 2001, Lucent posted revenue of $5.82 billion, compared with $7.41 billion in the year-ago quarter. Product revenues in the U.S. dropped 38% year-over-year, while sales outside the U.S. increased 14%.

Including a $684 million one-time charge, Lucent recorded a loss of $1.89 billion--55¢ per share--compared to net income of $286 million, or 9¢ a share, in the same quarter last year.

Earnings from continuing operations dropped to a loss of 35¢ per share, significantly more than the average analyst estimate of 21¢ per share, according to First Call/Thomson Financial.

For the current quarter, Lucent expects sequential improvement to the bottom line, but officials said they could not provide revenue guidance, citing “market uncertainties.”