Lucent Debt Rating Lowered

S&P cites the company's slumping sales, as its core customers continue to put off buying new communications equipment

On Sept. 13, 2002, Standard and Poor's Ratings Services lowered its corporate credit rating on Lucent Technologies (LU ) to 'B' from 'B+', following Lucent's announcement earlier in the day that sales in the September 2002 quarter would be approximately 20%-25% below the $2.95 billion reported for the June period. The outlook remains negative.

The Murray Hill, N.J.-based company had not earlier provided guidance for the quarter. The negative outlook reflects Standard & Poor's belief that plans of the major supplier of communications equipment for service providers to return to net profitability by the September 2003 quarter may not be achieved, in light of accelerating marketplace stresses. Lucent had $5.3 billion of combined debt and preferred stock outstanding at June 30, 2002.

The ratings on Lucent Technologies reflect very challenging market conditions, as the company's core customer base continues to defer purchases of new communications equipment.

Lucent stated that its sales for the September 2002 quarter would be in the $2.2 billion-$2.35 billion range. Lucent expects to report a pro forma net loss for the quarter of about 45 cents per share, or about $1.5 billion, including the effect of the write-down of a customer account receivable and Lucent's inability to recognize tax benefits on losses. The company had had generated sales of $5.2 billion in the September 2001 quarter.

Revenues for the last few quarters have been below the company's expectations, challenging Lucent's ability to achieve a cost structure that would permit a return to profitability. Communications carriers continue to defer capital expenditures and reconfigure their networks to use their substantial existing equipment inventories, in light of slack demand and the challenged financial positions of some network operators.

Due to the continued severe decline in its revenues, Lucent plans to take another restructuring charge in its December 2002 quarter. This change is intended to permit breakeven operations on revenues in the $2.5 billion-$3 billion range, a level that is well above expected September performance. Earlier cost-reduction actions had been targeted to permit net income breakeven on quarterly revenues below $3.5 billion, by the September 2003 quarter. Some progress has been seen from those actions, as the company's pro forma losses from operational sources in the June 2002 quarter had been trimmed from the March 2002 level.

Financial flexibility remains sufficient for the company's intermediate-term operational needs, with $5.4 billion cash at June 30, 2002. In addition, it currently has full availability in its $1.5 billion revolving credit facility. The facility matures in February 2003. Lucent was in compliance with all revolving credit facility covenants in the June quarter and expects to remain in compliance in the September quarter.

If Lucent cannot achieve a cost structure that permits a return to profitability, ratings could be lowered.

From Standard & Poor's CreditWire

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