The following is an excerpt from Lucent
Technologies’ Management’s Discussion and
Analysis of Financial Condition and Results
of Operations:
Executive Summary
We design and deliver the systems, software
and services that drive next-generation communications
networks. Backed by Bell Labs
research and development, we use our
strengths in mobility, optical, access, data and
voice networking technologies, as well as
services, to create new revenue-generating
opportunities for our customers, while
enabling them to quickly deploy and better
manage their networks. Our customer base
includes communications service providers,
governments and enterprises worldwide.
We have three segments organized
around the products and services we sell.
The reportable segments are Integrated Network
Solutions (“INS”), Mobility Solutions
(“Mobility”) and Lucent Worldwide Services
(“Services”). INS provides a broad range
of software and wireline equipment related
to voice networking (primarily consisting
of switching products, which we sometimes
refer to as convergence solutions, and voice
messaging products), data and network
management (primarily consisting of access
and related data networking equipment
and operating support software) and optical
networking. Mobility provides software and
wireless equipment to support radio access
and core networks. Services provides deployment,
maintenance, professional and managed
services in support of both our product
offerings as well as multi-vendor networks.
Beginning in fiscal 2001, the global
telecommunications market deteriorated,
resulting from a decrease in the competitive
local exchange carrier market and a significant
reduction in capital spending by established
service providers.This trend intensified
during fiscal 2002 and continued into fiscal
2003. Reasons for the market deterioration
included general economic slowdown, network
overcapacity, customer bankruptcies,
network build-out delays and limited availability
of capital.
We believe that the market for telecommunications
equipment has stabilized
and is starting to grow in certain areas. The
growing demands of enterprises and consumers
for additional services tailored to
their needs is creating the need for a new
convergence of networks, technologies and
applications.
1. Using the Consolidated Balance
Sheets for Lucent Technologies for
September 30, 2004 and 2003, prepare
a common-size balance sheet.
2. Evaluate the asset, debt, and equity
structure of Lucent Technologies, as
well as trends and changes found on
the common-size balance sheet.
3. What concerns would investors and
creditors have based on only this
information?
4. What additional financial and nonfinancial
information would investors
and creditors need to make investing
and lending decisions for Lucent
Technologies?
compose a 500-750-word paper in
APA format that includes your answers to questions 2-4
LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in Millions, Except per Share Amounts)
September 30, September 30,
2004 2003
Assets
Cash and cash equivalents $ 3,379 $ 3,821
Marketable securities 858 686
Receivables 1,359 1,511
Inventories 822 632
Other current assets 1,813 1,213
Total current assets 8,231 7,863
Marketable securities 636 —
Property, plant, and equipment, net 1,376 1,593
Prepaid pension costs 5,358 4,659
Goodwill and other acquired intangibles, net 434 188
Other assets 928 1,608
Total assets $ 16,963 $ 15,911
Liabilities
Accounts payable $ 872 $ 1,072
Payroll and benefit-related liabilities 1,232 1,080
Debt maturing within one year 1 389
Other current liabilities 2,361 2,393
Total current liabilities 4,466 4,934
Postretirement and postemployment benefit liabilities 4,881 4,669
Pension liabilities 1,874 2,494
Long-term debt 4,837 4,439
Liability to subsidiary trust issuing preferred securities 1,152 1,152
Other liabilities 1,132 1,594
Total liabilities 18,342 19,282
Commitments and contingencies
8.00% redeemable convertible preferred stock — 868
Shareowners’ Deficit
Preferred stock—par value .00 per share; authorized shares:
250; issued and outstanding: none — —
Common stock—par value $.01 per share;Authorized shares:
10,000; 4,396 issued and 4,395 outstanding shares as of
September 30, 2004,and 4,170 issued and 4,169
outstanding shares as of September 30, 2003 44 42
Additional paid-in capital 23,005 22,252
Accumulated deficit (20,793) (22,795)
Accumulated other comprehensive loss (3,635) (3,738)
Total shareowners’ deficit (1,379) (4,239)
Total liabilities, redeemable convertible preferred stock
and shareowners’ deficit $ 16,963 $ 15,911
See notes to consolidated financial statements.
Read more: Acc 230 Lucent Technologies Case?
To prepare a common-size balance sheet for Lucent Technologies, you will need to express each asset, liability, and equity item as a percentage of the total assets. Here's how you can do it:
1. Calculate the total assets for each year by adding up all the asset items. For September 30, 2004, the total assets are $16,963 million, and for September 30, 2003, the total assets are $15,911 million.
2. Calculate the percentage of each asset item by dividing the value of that item by the total assets and multiplying by 100. This will give you the common-size percentage for each item.
For example, to calculate the common-size percentage for cash and cash equivalents for September 30, 2004:
Common-size percentage = (Cash and cash equivalents / Total assets) x 100
= ($3,379 million / $16,963 million) x 100
= 19.90%
Repeat this calculation for each asset item to prepare the common-size balance sheet for both years.
To evaluate the asset, debt, and equity structure of Lucent Technologies and analyze the trends and changes found on the common-size balance sheet, you can consider the following points:
- Asset Structure: Look at the composition of assets and their proportional representation in the common-size balance sheet. Pay attention to the proportions of different asset categories such as cash, marketable securities, receivables, inventories, and property, plant, and equipment. Analyze how these proportions have changed over time and whether any specific asset category has seen significant growth or decline.
- Debt Structure: Examine the liabilities section of the common-size balance sheet. Pay attention to the proportions of different liability categories such as accounts payable, payroll and benefit-related liabilities, debt maturing within one year, postretirement and postemployment benefit liabilities, pension liabilities, long-term debt, and other liabilities. Analyze how these proportions have changed over time and whether the company is taking on more debt or reducing its debt levels.
- Equity Structure: Analyze the equity section of the common-size balance sheet, including the common stock, additional paid-in capital, accumulated deficit, and accumulated other comprehensive loss. Look for any changes in the composition of equity and whether the company has been able to generate positive retained earnings or if it has accumulated a deficit.
- Trends and Changes: Compare the common-size balance sheet for both years to identify any significant trends or changes. Look for any shifts in the asset, debt, and equity structure that may indicate improvements or concerns. Analyze the growth or decline of specific asset or liability categories and consider the implications for the company's financial health and performance.
Based on only this information, investors and creditors may have some concerns. Some potential concerns could include:
1. Accumulated deficit and negative equity: Lucent Technologies has accumulated deficits in both years, and the shareowners' deficit has increased from -4,239 million to -1,379 million. This may raise concerns about the company's ability to generate profits and sustain its operations.
2. Debt levels: The long-term debt has increased from 4,439 million to 4,837 million, and there is also additional debt maturing within one year. This may raise concerns about the company's ability to meet its debt obligations and manage its financial leverage.
3. Declining marketable securities: The marketable securities have declined from 686 million to 636 million. This may raise concerns about the company's liquidity position and ability to generate cash from its investments.
Investors and creditors would need additional financial and non-financial information to make investing and lending decisions for Lucent Technologies. Some of the information they may require includes:
- Profitability ratios such as gross profit margin, operating profit margin, and net profit margin to assess the company's ability to generate profits.
- Liquidity ratios such as current ratio and quick ratio to evaluate the company's ability to meet its short-term obligations.
- Debt ratios such as debt-to-equity ratio and interest coverage ratio to assess the company's financial leverage and ability to cover interest payments.
- Cash flow statement to understand the company's cash flow from operating, investing, and financing activities.
- Management's discussion and analysis of financial condition and results of operations to gain insights into the company's strategic initiatives, market outlook, and risks.
- Industry and market analysis to evaluate the competitive landscape and growth prospects for Lucent Technologies.
- Comparative analysis with competitors to benchmark the company's financial performance and position.
These additional financial and non-financial information will provide a more comprehensive understanding of Lucent Technologies' financial health, performance, and prospects, enabling investors and creditors to make informed investing and lending decisions.