Conduct a DuPont decomposition of Lucent’s ROE for each quarter of 1998, 1999 and 2000

Conduct a DuPont decomposition of Lucent’s ROE for each quarter of 1998, 1999 and 2000

LUCENT TECHNOLOGIES

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

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 accompani

 

1. Conduct a DuPont decomposition of Lucent’s ROE for each quarter of 1998, 1999 and 2000 (December 1999 is fiscal year 2000’s first quarter).

 

 

2. What factors contributed to the differences in Lucent’s performance between those quarters?

 

 

3. 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.

 

 

4. Does the explanation for the earnings shortfall provided by Lucent’s managers make sense in light of your analysis?

 

 

5.. Based on your analysis:

 

1. a) When might you have determined that Lucent would be unable to maintain its streak of record earnings?

 

1. b) Do you think the class-action lawsuits have merit?

 

1. c) Would you expect Lucent’s earnings to ‘recover’ by the second quarter of 2000?

 

1. d) What obstacles are there to Lucent’s recovery?