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LUCENT TECHNOLOGIES Clark M. Wheatley School of Accounting - Florida International University BA242B - University Park, Miami, FL 33199 AT&T spun...

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2. Evaluate the seasonally adjusted change (i.e., quarter i in year t to quarter i in year t-1) in Lucent's: Sales, Accounts Receivable, Inventory and Gross Margin for the five quarterly periods: December 1998 through December 1999. Be sure to include an evaluation of the Footnote disclosures regarding Lucent's inventories in your examination. Does the explanation for the earnings shortfall provided by Lucent's managers make sense in light of your analysis?

LUCENT TECHNOLOGIES Clark M. Wheatley School of Accounting - Florida International University BA242B – University Park, Miami, FL 33199 AT&T spun off its research and development division (the former Bell Laboratories) in April of 1996, and the newly independent company - renamed Lucent Technologies - was an instant hit with investors. The company's stock became the most widely held in the United States, and over the following 3 years and 9 months its price increased 892%. 1 This remarkable price appreciation tracked a series of steadily increasing earnings that exceeded analyst expectations. Lucent, in fact, had beaten those expectations in each of its 15 quarters of operations (Zacks, 2000). Lucent Technologies manufactures, sells and services voice and data communications systems and software. By the end of its fiscal-year 1999, Lucent generated over thirty-eight billion dollars in annual revenues, employed over 150,000 people, and had offices in more than ninety countries worldwide. On October 26, 1999, Lucent issued a press release describing record earnings for both the quarter and the fiscal year ended September 30, 1999 (Lucent, 1999a). Lucent's revenues were up 23 percent, and earnings were up 50 percent from the fourth quarter of the previous year. For the fiscal year, Lucent's revenues and earnings were up 20 and 46 percent respectively. Lucent's chairman and CEO, Richard McGinn, described the results 1  Lucent's  beta  as reported by  Yahoo Finance  was 1.6 on January 6, 2000.
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saying: "Lucent enters the new millennium with momentum. This was the strongest quarter and the strongest year in Lucent's history." The report of these record results was accompanied by another press release. This second announcement outlined a realignment of Lucent into "four core businesses." This realignment was, in the words of McGinn, ". ..intended to mirror the way we are approaching customers today - with converged network solutions. We are sharpening our focus on high-growth areas - such as data networking, optical networking, wireless semiconductors, e-business and professional services - while speeding our growth in international markets. And, we will also be aligning our management structure to increase productivity and accelerate our response to customer needs" (Lucent, 1999b). Over the ensuing days and weeks, Lucent's share price soared. Climbing steadily from $59 7/8 on October 25, 1999, it traded at prices over $82 during December 1999, and closed at $72 3/8 on January 5, 2000. On January 6, however, Lucent filed a Form 8-K with the U.S. Securities and Exchange Commission. Form 8-Ks are used to report "material events," and Lucent's "event" was that first quarter earnings for the quarter ended December 31, 1999 would be significantly below expectations. Lucent reported that its revenue from Service Provider Networks was down 2%. A result, company executives said, that was caused by the domino effect of unanticipated customer shifts to new optical systems and the manufacturing deployment and capacity problems that ensued. Indeed, analysts estimated that Lucent lost up to $1 billion in sales because of production delays, delivery problems and cancelled orders during the quarter (Dow Jones, 1/20/00).  
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1 DuPont Analysis
Decomposing the ROE can be done through Dupont Analysis
ROE = Profit Margin * Total Asset Turnover * Equity multiplier
Profit Margin
Total Asset Turnover
Equity Multiplier

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