20-F 1 d278833d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

¨

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    

For the fiscal year ended December 31, 2011

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-11130

 

 

 

LOGO

(Exact name of Registrant as specified in its charter)

N/A

(Translation of Registrant’s name into English)

Republic of France

(Jurisdiction of incorporation or organization)

3 avenue Octave Gréard

75007 Paris, France

(Address of principal executive offices)

Frank MACCARY

Telephone Number 33 (1) 40 76 10 10

Facsimile Number 33 (1) 40 76 14 05

3 avenue Octave Gréard

75007 Paris, France

(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing one ordinary share, nominal value 2 per share*

  New York Stock Exchange

 

* Listed, not for trading or quotation purposes, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

2,325,383,328 ordinary shares, nominal value 2 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

    Yes  ¨    No  x

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

    Yes  ¨    No  x

Note — checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

    Yes  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    x   Accelerated filer    ¨    Non-accelerated filer    ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

 

Item 17    ¨

  Item 18    ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

    Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

1   SELECTED FINANCIAL DATA      1   
  1.1    Condensed consolidated income statement and statement of financial position data      2   
  1.2    Exchange rate information      3   
2   ACTIVITY OVERVIEW      5   
  2.1    Networks Segment      5   
  2.2    Software, services and solutions
(S3) Segment
     6   
  2.3    Enterprise Segment      7   
3   RISK FACTORS      9   
  3.1    Risks relating to the business      9   
  3.2    Legal risks      15   
  3.3    Risks relating to ownership of our ADSs      16   
4   INFORMATION ABOUT THE GROUP      17   
  4.1    General      17   
  4.2    History and development      18   
  4.3    Structure of the main consolidated companies as of December 31, 2011      23   
  4.4    Real estate and equipment      24   
  4.5    Material contracts      26   
5   DESCRIPTION OF THE GROUP’S ACTIVITIES      27   
  5.1    Business organization      27   
  5.2    Networks Segment      28   
  5.3    Software, solutions and services (S3) Segment      33   
  5.4    Enterprise Segment      34   
  5.5    Marketing and distribution of our products      35   
  5.6    Competition      35   
  5.7    Technology, research and development      36   
  5.8    Intellectual property      37   
  5.9    Sources and availability of materials      37   
  5.10    Seasonality      38   
  5.11    Our activities in certain countries      38   
  5.12    Environmental matters      38   
  5.13    Human resources      39   
6   OPERATING AND FINANCIAL REVIEW AND PROSPECTS      43   
  6.1    Overview of 2011      51   
  6.2    Consolidated results of operations for the year ended December 31, 2011 compared to the year ended December 31, 2010      53   
  6.3   Results of operations by business segment for the year ended December 31, 2011 compared to the year ended December 31, 2010      57   
  6.4   Consolidated results of operations for the year ended December 31, 2010 compared to the year ended December 31, 2009      59   
  6.5   Results of operations by business segment for the year ended December 31, 2010 compared to the year ended December 31, 2009      64   
  6.6   Liquidity and capital resources      66   
  6.7   Contractual obligations and off-balance sheet contingent commitments      69   
  6.8   Outlook for 2012      73   
  6.9   Qualitative and quantitative disclosures about market risks      73   
  6.10   Legal matters      74   
  6.11   Research and development – expenditures      78   
7   CORPORATE GOVERNANCE      81   
  7.1   Chairman’s corporate governance report      81   
  7.2  

Compensation and long-term incentives

     106   
  7.3   Regulated agreements commitments and related party transactions      129   
  7.4   Alcatel Lucent Code of Conduct      131   
  7.5   Major differences between our corporate governance practices and NYSE requirements       131   
8   INFORMATION CONCERNING OUR CAPITAL      133   
  8.1   Share capital and diluted capital      133   
  8.2   Authorizations related to the capital      134   
  8.3   Use of authorizations      136   
  8.4   Changes in our capital over the last five years      136   
  8.5   Purchase of Alcatel Lucent shares by the company      137   
  8.6   Outstanding instruments giving right to shares      138   
9   STOCK EXCHANGE AND SHAREHOLDING      141   
  9.1   Listing      141   
  9.2   Trading over the last five years      141   
  9.3   Shareholder profile      142   
  9.4   Breakdown of capital and voting rights      144   
  9.5   Employees and management’s shareholding      148   
  9.6   Other information on the share capital      150   
  9.7   Trend of dividend per share over five years      151   
  9.8   General Shareholders’ Meeting      151   
 

 


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SELECTED FINANCIAL DATA

 

1     SELECTED FINANCIAL DATA

 

 

Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. IFRS, as adopted by the European Union, differs in certain respects from the International Financial Reporting Standards issued by the International Accounting Standards Board. However, our consolidated financial statements presented in this document in accordance with IFRS would be no different if we had applied International Financial Reporting Standards issued by the International Accounting Standards Board. As permitted by U.S. securities laws, we no longer provide a reconciliation of our net income and shareholders’ equity as reflected in our consolidated financial statements to U.S. GAAP.

On November 30, 2006, historical Alcatel and Lucent Technologies Inc., since renamed Alcatel-Lucent USA Inc. (“Lucent”), completed a business combination pursuant to which Lucent became a wholly owned subsidiary of Alcatel.

As a result of the purchase accounting treatment of the Lucent business combination required by IFRS, our results for 2011, 2010, 2009, 2008 and 2007 included several negative, non-cash impacts of purchase accounting entries.

On October 19, 2011, Alcatel-Lucent announced that it had received a binding offer of U.S. $ 1.5 billion from a company owned by the Permira funds for the acquisition of its Genesys business. The closing of the deal was completed on February 1, 2012. As a result of this transaction, our 2011, 2010, 2009, 2008 and 2007 financial results pertaining to the Genesys business are treated as discontinued operations.

 

 

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1

 

SELECTED FINANCIAL DATA

1.1 CONDENSED CONSOLIDATED INCOME STATEMENT AND STATEMENT OF FINANCIAL POSITION DATA

 

 

1.1     CONDENSED CONSOLIDATED INCOME STATEMENT AND STATEMENT OF FINANCIAL POSITION DATA

 

     For the year ended December 31,  
(In millions, except per share data)    2011  (1)      2011      2010      2009      2008      2007  

Income Statement Data

                                                     
Revenues      U.S.$19,884         15,327         15,658         14,841         16,636         17,470   
Income (loss) from operating activities before restructuring costs, impairment of assets, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments      326         251         (70)         (384)         (112)         (764)   
Restructuring costs      (263)         (203)         (371)         (598)         (561)         (856)   
Income (loss) from operating activities      152         117         (377)         (744)         (5,358)         (4,306)   
Income (loss) from continuing operations      947         730         (325)         (666)         (5,247)         (4,128)   
Net income (loss)      1,484         1,144         (292)         (504)         (5,173)         (3,477)   
Net income (loss) attributable to equity holders of the parent      1,421         1,095         (334)         (524)         (5,215)         (3,518)   
Earnings per ordinary share                                                      
Net income (loss) before discontinued operations attributable to the equity holders of the parent per share                                                      
• basic (2)      U.S.$0.39         0.30         (0.16)         (0.30)         (2.34)         (1.85)   
• diluted (3)      U.S.$0.36         0.28         (0.16)         (0.30)         (2.34)         (1.85)   
Dividend per ordinary share (4)      -         -         -         -         -         -   
Dividend per ADS (4)      -         -         -         -         -         -   
     At December 31,  
(In millions)    2011  (1)      2011      2010      2009      2008      2007  
Statement of Financial Position Data                                                      
Total assets      U.S.$31,398         24,203         24,876         23,896         27,373         33,794   
Marketable securities and cash and cash equivalents      5,803         4,473         5,689         5,570         4,593         5,271   
Bonds, notes issued and other debt - Long-term part      5,565         4,290         4,112         4,179         3,998         4,565   
Current portion of long-term debt and short-term debt      427         329         1,266         576         1,097         483   
Capital stock      6,034         4,651         4,637         4,636         4,636         4,635   
Equity attributable to the equity owners of the parent after appropriation (5)      5,000         3,854         3,545         3,740         4,633         11,187   
Non controlling interests      969         747         660         569         591         515   

 

(1) Translated solely for convenience into dollars at the noon buying rate of 1.00 = U.S.$1.2973 on December 30, 2011.
(2) Based on the weighted average number of shares issued after deduction of the weighted average number of shares owned by our consolidated subsidiaries at December 31, without adjustment for any share equivalent:
  – ordinary shares: 2,265,024,193 in 2011, 2,259,877,263 in 2010, 2,259,696,863 in 2009, 2,259,174,970 in 2008 and 2,255,890,753 in 2007.
(3) Diluted earnings per share takes into account share equivalents having a dilutive effect after deduction of the weighted average number of share equivalents owned by our consolidated subsidiaries. Net income is adjusted for after-tax interest expense related to our convertible bonds. The dilutive effect of stock option plans is calculated using the treasury stock method. The number of shares taken into account is as follows:
  – ordinary shares: 2,865,930,999 in 2011, 2,259,877,263 in 2010, 2,259,696,863 in 2009, 2,259,174,970 in 2008 and 2,255,890,753 in 2007.
(4) Under French company law, payment of annual dividends must be made within nine months following the end of the fiscal year to which they relate. Our Board of Directors has announced that it will propose not to pay a dividend for 2011 at our Annual Shareholders’ Meeting to be held on June 8, 2012.
(5) Amounts presented are net of dividends distributed. Equity attributable to equity owners of the parent before appropriation was 3,854, 3,545 million, 3,740 million, 4,633 million and 11,187 million as of December 31, 2011, 2010, 2009, 2008 and 2007 respectively and dividends proposed or distributed amounted to 0 million as of December 31, 2011, 2010, 2009, 2008 and 2007.

 

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SELECTED FINANCIAL DATA

1.2 EXCHANGE RATE INFORMATION

 

1.2     EXCHANGE RATE INFORMATION

 

The table below shows the average noon buying rate of euro for each year from 2007 to 2011. As used in this document, the term “noon buying rate” refers to the rate of exchange for the euro, expressed in U.S. dollars per euro, as certified by the Federal Reserve Bank of New York for customs purposes.

 

Year    Average rate  (1)
2011    U.S.$ 1.4002
2010    U.S.$ 1.3209
2009    U.S.$ 1.3955
2008    U.S.$ 1.4695
2007    U.S.$ 1.3797

 

(1) The average of the noon buying rate for euro on the last business day of each month during the year.

The table below shows the high and low noon buying rates expressed in U.S. dollars per euro for the previous six months.

 

Period    High      Low  
March 2012 (through March 16)      U.S.$ 1.3320         U.S.$ 1.3025   
February 2012      U.S.$ 1.3463         U.S.$ 1.3087   
January 2012      U.S.$ 1.3192         U.S.$ 1.2682   
December 2011      U.S.$ 1.3463         U.S.$ 1.2926   
November 2011      U.S.$ 1.3803         U.S.$ 1.3244   
October 2011      U.S.$ 1.4164         U.S.$ 1.3281   
September 2011      U.S.$ 1.4283         U.S.$ 1.3449   

On March 16, 2012, the noon buying rate was 1.00 = U.S.$1.3171.

 

 

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1

 

SELECTED FINANCIAL DATA

1.2 EXCHANGE RATE INFORMATION

 

 

 

 

 

 

 

 

 

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ACTIVITY OVERVIEW

2.1 NETWORKS SEGMENT

 

2    ACTIVITY OVERVIEW

 

Effective July 20, 2011, we reorganized our Group activities. Please refer to Section 5.1 “Business organization” of the document for details about the changes.

The charts below set forth the three operating segments that comprised our organization in 2011: Networks, S3 (Software, Services and Solutions) and Enterprise. In 2011, our Networks segment was organized into four businesses: IP, Optics, Wireless and Wireline. According to independent industry analysis, in 2011, we were able to maintain or grow our market position in key next-generation technologies, such as IP/MPLS, LTE and WDM. We were also able to maintain our leadership position in areas such as CDMA, submarine optics, VDSL2 and mobile backhaul.

2.1    NETWORKS SEGMENT

IP

 

Position    Activities    Market positions
A world leader and privileged partner of service providers, enterprises and governments in transforming their networks to an all-IP (Internet Protocol) architecture.    Central focus is on the IP intelligent router market. Our technology allows service providers to enrich the end-user experience which creates sustainable value.   

·   #2 in IP/MPLS service provider edge routers with 23% market share in 2011 (1)

 

·   #1 in mobile backhaul with 25% market share in the first half of 2011 (1)

 

(1) Infonetics

OPTICS

 

Position    Activities    Market positions
As a leader in optical networking, we help more than 1,000 service providers and large strategic industries to transform their transmission infrastructures in the framework of a High Leverage Network™, ensuring reliable transport of data at the lowest cost per bit and enabling new revenue generating services and applications.    By leveraging Bell Labs innovations, we design, manufacture and market optical networking equipment to transport information over fiber optic connections over long distances on land (terrestrial) or under sea (submarine), as well as for short distances in metropolitan and regional areas. The portfolio also includes microwave wireless transmission equipment.   

·   #2 in terrestrial optical networking with 16% market share based on revenues in 2011 (1)

 

·   #2 in WDM long haul with 17% market share based on revenues in 2011 (1)

 

·   #1 in submarine optical networking with estimated 35-40% market share (revenues) 2011 (2)

 

·   #1 in packet microwave transmission with 53% market share for 12 months ending October 31, 2011 (1)

 

(1) Dell’Oro

 

(2) Alcatel-Lucent estimate

WIRELESS

 

Position    Activities    Market positions
One of the world’s leading suppliers of wireless communications infrastructure across a variety of technologies.   

Activities focus on wireless product offerings for 2G (GSM/GPRS/EDGE, CDMA), 3G (UMTS/HSPA/EV-DO) and 4G networks (LTE).

 

As a key element to our portfolio, lightRadio™ was launched as a platform that provides operators a converged Radio Access Network (RAN) that enables capacity upgrades more quickly and cost effectively.

  

·   #1 in CDMA with 37% market share in 2011 (1)

 

·   #5 in GSM/GPRS/EDGE Radio Access Networks with 7% market share based on revenues in 2011 (1)

 

·   #4 in W-CDMA Radio Access Networks with 10% market share based on revenues in 2011 (1)

 

·   #2 in LTE with 24% market share in 2011 (1)

 

(1) Dell’Oro

 

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ACTIVITY OVERVIEW

2.1 NETWORKS SEGMENT

 

 

WIRELINE

 

Position    Activities    Market positions
We are one of the worldwide leaders in the fixed broadband access market, supporting the largest deployments of video, voice and data services over broadband. We are the largest global supplier of digital subscriber line (or DSL) technology and the second largest GPON supplier(1). We are also a leading supplier of communications products that deliver innovative voice and multimedia services with quality, reliability, scalability, and security across a variety of devices and fixed, mobile, and converged networks.    Our family of IP-based fixed access products provides support for both DSL and fiber, allowing service providers to extend fiber- and copper-based broadband access to the customer’s premise or to use them in highly optimized combinations. Our IP Multimedia Subsystem (IMS) activities are focused on the delivery of session control, media gateway control, media gateway, and session border control, integrated into meaningful solutions for service providers.   

·   #1 in broadband access with 37% DSL market share based on revenues in 2011(1)

 

·   #1 in VDSL2 with 44% market share revenues in 2011(1)

 

·   #2 in GPON based on revenue with 24% market share in 2011(1)

 

·   #4 in IMS Core (session control) revenue, with 15% market share in 2011 (2)

 

(1) Dell’Oro

 

(2) Infonetics

2.2    SOFTWARE, SERVICES AND SOLUTIONS (S3) SEGMENT

SERVICES

 

Position    Activities    Market positions
A world leader in supplying services for telecommunications service providers and strategic industries (transportation, energy and public sector), with expertise in consulting, design integration, operations management and maintenance of complex, multi-vendor end-to-end telecommunications networks; includes services to transform networks to next-generation Wireless and converged, all IP platforms, that are efficient, intelligent and optimized to deliver new services, content and applications.    Activities focus on supplying complete offerings for networks’ entire life cycle: consultation, integration, migration and transformation, deployment, outsourcing and maintenance.   

   #3 in overall Services market, over the rolling four quarters ending Q3’11(1)(2)

 

   Managed Services deals in 100+ networks covering 250 million subscribers(3)

 

   #2 in OSS/BSS integration over the rolling four quarters ending Q3’11(1)

 

(1) Analysys Mason

 

(2) IDC

 

(3) Alcatel-Lucent estimates

 

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ACTIVITY OVERVIEW

2.2 SOFTWARE, SERVICES AND SOLUTIONS (S3) SEGMENT

 

NETWORK APPLICATIONS

 

Position    Activities    Market positions
Our Network Applications combine software, services and network hardware to address key customer challenges and opportunities. Solutions includes Advanced Communications, Mobile Commerce, Payment and Charging, Customer Experience and Application Enablement.    Activities focus on the development and sale of solutions that combine software, services and partnerships to address key service provider market opportunities.    ·     Customer Experience solutions for
over 150 of the world’s leading service
providers (1)

 

·    98 IMS customer projects including 8
of the top 10 global operators based
on 2011 rankings (1)

 

·    200+ Subscriber Data Management
deployments with over one billion
subscribers (1)

 

·    190+ Payment customers including
8 of the top 10 global mobile operators
based on 2011 rankings (1)

 

·    Motive’s Customer Experience
Management solutions are deployed by
almost 200 customers around the
world (1)

 

(1) Alcatel-Lucent

2.3     ENTERPRISE SEGMENT

 

Position    Activities    Market positions

A world leader in communications and network solutions for businesses of all sizes, serving more than 250,000 customers worldwide.

   Supply end to end products, solutions and services for small, medium, large and extra-large companies to improve conversations and collaboration across employees, customers and partners.    ·     #2 in Europe Middle East and Africa
(EMEA) in enterprise telephony in
2011 (1)

 

·    #3 in EMEA in managed LAN Switches
for the twelve months ended
October 31, 2011 based on
revenues (2)

 

·    2011 leader in Unified
Communications & Collaboration Magic
Quadrant (3)

 

   2011 leader in Corporate Telephony
Magic Quadrant (3)

 

(1) Dell’Oro

 

(2) Infonetics

 

(3) Gartner

 

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ACTIVITY OVERVIEW

2.3 ENTERPRISE

 

 

 

 

 

 

 

 

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RISK FACTORS

3.1 RISKS RELATING TO THE BUSINESS

 

3    RISK FACTORS

 

 

Our business, financial condition or results of operations could suffer material adverse effects due to any of the following risks. We have described the specific risks that we consider material to our business but the risks described below are not the only ones we face. We do not discuss risks that would

generally be equally applicable to companies in other industries, due to the general state of the economy or the markets, or other factors. Additional risks not known to us or that we now consider immaterial may also impair our business operations.

 

 

3.1    RISKS RELATING TO THE BUSINESS

 

We adopted a new strategic focus in 2009, shifting our resources to support that focus. If our strategic plan is not aligned with the direction our customers take as they invest in the evolution of their networks, customers may not buy our products or use our services.

We adopted a new strategic plan as of January 1, 2009, when we initiated a strategic transformation and realignment of our operations in support of that plan. The transformation includes a change in the composition of our spending on research and development as we accelerate the shift in our investments from mature technologies that previously generated significant revenue for us toward certain next-generation technologies. Our choices of specific technologies to pursue and those to de-emphasize may prove to be inconsistent with our customers’ investment spending.

The telecommunications industry fluctuates and is affected by many factors, including the economic environment, decisions by service providers and other customers that buy our products and services regarding their deployment of technology and their timing of purchases and roll-out, as well as demand and spending for communications services by businesses and consumers.

Spending trends in the global telecommunications industry were mixed in 2011 where the surge in smartphone penetration, mobile data and all-IP network transformation led to increased spending in wireless and IP while the macroeconomic environment and political unrest in some regions, negatively impacted spending. Overall uncertain economic conditions should prevail in 2012. Actual market conditions could be very different from what we expect and are planning for due to the uncertainty that exists about the strength of the recovery in the global economy. Moreover, market conditions could vary geographically and across different technologies, and are subject to substantial fluctuations. Conditions in the specific industry segments in which we participate may be weaker than in other segments. In that case, the results of our operations may be adversely affected.

If capital investment by service providers and other customers that buy our products and services is weaker than we anticipate, our revenues and profitability may be adversely affected. The level of demand by service providers and other customers that buy our products and services can change quickly and can vary over short periods of time, including

from month to month. As a result of the uncertainty and variations in the telecommunications industry, accurately forecasting revenues, results and cash flow remains difficult.

In addition, our sales volume as well as product and geographic mix will affect our gross margin. Therefore, if reduced demand for our products results in lower than expected sales volume, or if we have an unfavorable product or geographic mix, we may not achieve the expected gross margin rate, resulting in lower than expected profitability. These factors may fluctuate from quarter to quarter.

Our business requires a significant amount of cash, and we may require additional sources of funds if our sources of liquidity are unavailable or insufficient to fund our operations.

Our working capital requirements and cash flows have historically been, and they are expected to continue to be, subject to quarterly and yearly fluctuations, depending on a number of factors. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected. Factors which could lead us to suffer cash flow fluctuations include:

 

 

the level of sales and profitability;

 

 

the effectiveness of inventory management;

 

 

the collection of receivables;

 

 

the timing and size of capital expenditures;

 

 

costs associated with potential restructuring actions; and

 

 

customer credit risk.

We derive our capital resources from a variety of sources, including the generation of positive cash flow from on-going operations, the issuance of debt and equity in various forms, and banking facilities, including our revolving credit facility of 1.4 billion maturing in April 2012 (with an extension until April 5, 2013 for an amount of 837 million) and on which we have not drawn. Our ability to draw upon these resources is dependent upon a variety of factors, including our customers’ ability to make payments on outstanding accounts receivable; the perception of our credit quality by lenders and investors; our ability to meet the financial covenant for our revolving credit facility; and debt and equity market conditions generally. Given current conditions, access to the debt and equity markets may not be relied upon at any time. Based on our current view of our business and capital resources and the overall market environment, we believe we have sufficient

 

 

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RISK FACTORS

3.1 RISKS RELATING TO THE BUSINESS

 

 

resources to fund our operations. If, however, the business environment were to materially worsen, or the credit markets were to limit our access to bid and performance bonds, or our customers were to dramatically pull back on their spending plans, our liquidity situation could deteriorate. If we cannot generate sufficient cash flow from operations to meet cash requirements in excess of our current expectations, we might be required to obtain supplemental funds through additional operating improvements or through external sources, such as capital market proceeds, asset sales or financing from third parties. We cannot provide any assurance that such funding will be available on terms satisfactory to us. If we were to incur high levels of debt, this would require a larger portion of our operating cash flow to be used to pay principal and interest on our indebtedness. The increased use of cash to pay indebtedness could leave us with insufficient funds to finance our operating activities, such as Research and Development expenses and capital expenditures, which could have a material adverse effect on our business.

Our ability to have access to the capital markets and our financing costs will be, in part, dependent on Standard & Poor’s, Moody’s or similar agencies’ ratings with respect to our debt and corporate credit and their outlook with respect to our business. Our current short-term and long-term credit ratings, as well as any possible future lowering of our ratings, may result in higher financing costs and reduced access to the capital markets. We cannot provide any assurance that our credit ratings will be sufficient to give us access to the capital markets on acceptable terms, or that once obtained, such credit ratings will not be reduced by Standard & Poor’s, Moody’s or similar rating agencies.

Credit and commercial risks and exposures could increase if the financial condition of our customers declines.

A substantial portion of our sales are to customers in the telecommunications industry. Some of these customers require their suppliers to provide extended payment terms, direct loans or other forms of financial support as a condition to obtaining commercial contracts. We have provided and in the future we expect that we will provide or commit to financing where appropriate for our business. Our ability to arrange or provide financing for our customers will depend on a number of factors, including our credit rating; our level of available credit; and our ability to sell off commitments on acceptable terms. More generally, we expect to routinely enter into long-term contracts involving significant amounts to be paid by our customers over time. Pursuant to these contracts, we may deliver products and services representing an important portion of the contract price before receiving any significant payment from the customer. As a result of the financing that may be provided to customers and our commercial risk exposure under long-term contracts, our business could be adversely affected if the financial condition of our customers erodes. Over the past few years, certain of our customers have sought protection under the bankruptcy or reorganization laws of the applicable jurisdiction, or have experienced financial difficulties. Similar to 2010, in 2011 there appeared to be fewer instances where our customers experienced such difficulties. We cannot predict how that situation may evolve in 2012, when we expect uncertain economic conditions to continue. Upon the financial failure of a customer, we may experience losses on credit extended and

loans made to such customer, losses relating to our commercial risk exposure, and the loss of the customer’s ongoing business. If customers fail to meet their obligations to us, we may experience reduced cash flows and losses in excess of reserves, which could materially adversely impact our results of operations and financial position.

The Group’s U.S. pension and post-retirement benefit plans are large and have funding requirements that fluctuate based on how their assets are invested, the performance of financial markets worldwide, interest rates, medical price increases, and changes in legal requirements. These plans are costly, and our efforts to fund or control these costs may be ineffective.

Many former and current employees and retirees of the Group in the U.S. participate in one or more of our major defined benefit plans that provide post-retirement pension, healthcare, and group life benefits.

Volatility in discount rates and asset values will affect the funded status of our pension plans.

For purposes of calculating our funding requirements for our U.S. pension plans, the U.S. Internal Revenue Service provides a number of methods to use for measuring plan assets and for determining the discount rate to be applied. For measuring plan assets, we can choose between the fair market value at the valuation date or a smoothed fair value of assets (based on a prior period of time not to exceed two years, with the valuation date as the last date in the prior period). For determining the discount rate, we can opt for the spot discount rate at the valuation date (effectively, the average yield curve of the daily rates for the month preceding the valuation date) or a 24-month average of the rates for each time segment (any 24-month period as long as the 24-month period ends no later than five months before the valuation date). To measure the 2010 funding valuation, we selected the 2-year asset fair value smoothing method for the U.S. Management and U.S. Occupational Pension plans, and the 24-month average of the rates for each time segment for the month ended September 30, 2009 for the U.S. Management Pension plan and the 24-month average of the rates for each time segment for the month ending December 31, 2009 for the U.S. Occupational Pension plans. As a result of these choices, we will not have to make any funding contributions for both the 2010 and 2011 funding valuations (i.e. no contribution contemplated through at least 2013). With a few exceptions, we will be required to use these same methods for future funding valuations. We cannot assure you that the asset valuation and discount rate methodologies selected for the 2011 funding valuation will not result in required contributions after 2013.

 

 

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3.1 RISKS RELATING TO THE BUSINESS

 

Pension and post-retirement health plan participants may live longer than has been assumed, which would result in an increase in our benefit obligation.

For pension funding purposes, we use the mortality table issued by the Internal Revenue Service (IRS) which includes fifteen years of projected improvements in life span for active and former employees not yet receiving pension payments, and seven years for retirees receiving payments. This table determines the period of time over which we assume that benefit payments will be made. The longer the period, the larger the benefit obligation and the amount of assets required to cover that obligation. To estimate our future U.S. retiree healthcare plan obligations and for accounting purposes, we use the RP2000 Combined Health Mortality table with Generational Projection based on the U.S. Society of Actuaries Scale AA. As with pension benefits, longer lives of our participants would likely increase our retiree healthcare benefit obligation. We cannot be certain that the longevity of our participants in our retiree healthcare plans or pension plans will not exceed that indicated by the mortality table we currently use, or that future updates to these tables will not reflect materially longer life expectancies.

We may not be able to fund the healthcare costs of our formerly represented retirees with excess pension assets in accordance with Section 420 of the U.S. Internal Revenue Code.

We expect to fund our current healthcare costs for retirees who were represented by the Communications Workers of America and the International Brotherhood of Electrical Workers with transfers of excess pension assets from our Occupational – inactive pension plan in which these retirees are participants. Excess assets are defined by Section 420 of the U.S. Internal Revenue Code (the “Code”) as being those assets in excess of either 120% or 125% of the plan’s funding obligation, depending on the type of transfer selected. Excess assets are a function of the funded status of the specific plan involved. The provisions of Section 420 of the Code expire on December 31, 2013; however, Section 420 has been extended by Congress three times in the past. We can make no assurances that the Section 420 of the Code will be extended beyond December 31, 2013. Further, we can make no assurances that sufficient excess assets will be available for future transfers to cover all future healthcare costs beyond 2013 for these specific retirees.

Healthcare cost increases and an increase in the use of services may significantly increase our retiree healthcare costs.

Our current healthcare plans cap the subsidy we provide to those persons who retired after February 1990 and all future retirees, representing almost half of the retiree healthcare obligation, on a per capita basis. We may take steps in the future to reduce the overall cost of our current retiree healthcare plans, and the share of the cost borne by us, consistent with legal requirements and any collective bargaining obligations. However, cost increases may exceed our ability to reduce these costs. In addition, the reduction or elimination of U.S. retiree healthcare benefits by us has led to lawsuits against us. Any initiatives we undertake to control these costs may lead to additional claims against us.

Our financial condition and results of operations may be harmed if we do not successfully reduce market risks through the use of derivative financial instruments.

Since we conduct operations throughout the world, a substantial portion of our assets, liabilities, revenues and expenses are denominated in various currencies other than the euro and the U.S. dollar. Because our financial statements are denominated in euros, fluctuations in currency exchange rates, especially the U.S. dollar, or currencies linked to the U.S. dollar, against the euro, could have a material impact on our reported results.

We also experience other market risks, including changes in interest rates and in prices of marketable equity securities that we own. We may use derivative financial instruments to reduce certain of these risks. If our strategies to reduce market risks are not successful, our financial condition and operating results may be harmed.

An impairment of other intangible assets or goodwill would adversely affect our financial condition or results of operations.

We have a significant amount of goodwill and intangible assets, including acquired intangibles, development costs for software to be sold, leased or otherwise marketed and internal use software development costs as of December 31, 2011. In connection with the combination between Alcatel and Lucent, a significant amount of additional goodwill and acquired intangible assets were recorded as a result of the purchase price allocation.

Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually, or more often, if an event or circumstance indicates that an impairment loss may have been incurred. Other intangible assets are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment whenever events such as product discontinuances, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be wholly recoverable.

Historically, we have recognized significant impairment charges due to various reasons, including some of those noted above as well as potential restructuring actions or adverse market conditions that are either specific to us or the broader telecommunications industry or more general in nature. For instance, we accounted for an impairment loss of 4.7 billion in 2008 related to a re-assessment of our near-term outlook, our decision to streamline our portfolio and our weaker than expected CDMA business.

Additional impairment charges may be incurred in the future that could be significant and that could have an adverse effect on our results of operations or financial condition. For example, in 2011 we performed an additional impairment test as of December 31, 2011, and the difference between the recoverable value and the carrying value of the net assets as of that date of our Wireline Networks Product Division was only slightly positive. Any material unfavorable change in any of the key assumptions used to determine the recoverable value of this Product Division could therefore cause us to have to account for an impairment charge in the future.

 

 

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RISK FACTORS

3.1 RISKS RELATING TO THE BUSINESS

 

 

We operate in a highly competitive industry with many participants. Our failure to compete effectively would harm our business.

We operate in a highly competitive environment in each of our businesses, competing on the basis of product offerings, technical capabilities, quality, service and pricing. Competition for new service provider and enterprise customers as well as for new infrastructure deployments is particularly intense and increasingly focused on price. We offer customers and prospective customers many benefits in addition to competitive pricing, including strong support and integrated services for quality, technologically-advanced products; however, in some situations, we may not be able to compete effectively if purchasing decisions are based solely on the lowest price.

We have a number of competitors, many of which currently compete with us and some of which are very large, with substantial technological and financial resources and established relationships with global service providers. Some of these competitors have very low cost structures. In addition, new competitors may enter the industry as a result of acquisitions or shifts in technology. These new competitors, as well as existing competitors, may include entrants from the telecommunications, computer software, computer services and data networking industries. We cannot assure you that we will be able to compete successfully with these companies. Competitors may be able to offer lower prices, additional products or services or a more attractive mix of products or services, or services or other incentives that we cannot or will not match or offer. These competitors may be in a stronger position to respond quickly to new or emerging technologies and may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to customers, prospective customers, employees and strategic partners.

Technology drives our products and services. If we fail to keep pace with technological advances in the industry, or if we pursue technologies that do not become commercially accepted, customers may not buy our products or use our services.

The telecommunications industry uses numerous and varied technologies and large service providers often invest in several and, sometimes, incompatible technologies. The industry also demands frequent and, at times, significant technology upgrades. Furthermore, enhancing our services revenues requires that we develop and maintain leading tools. We will not have the resources to invest in all of these existing and potential technologies. As a result, we concentrate our resources on those technologies that we believe have or will achieve substantial customer acceptance and in which we will have appropriate technical expertise. However, existing products often have short product life cycles characterized by declining prices over their lives. In addition, our choices for developing technologies may prove incorrect if customers do not adopt the products that we develop or if those technologies ultimately prove to be unviable. Our revenues and operating results will depend, to a significant extent, on our ability to maintain a product portfolio and service capability that is attractive to our customers; to enhance our existing products; to continue to introduce new products successfully and on a timely basis and to develop new or enhance existing tools for our services offerings.

The development of new technologies remains a significant risk to us, due to the efforts that we still need to make to achieve

technological feasibility; due – as mentioned above – to rapidly changing customer markets; and due to significant competitive threats.

Our failure to bring these products to market in a timely manner could result in a loss of market share or a lost opportunity to capitalize on new markets for emerging technologies, and could have a material adverse impact on our business and operating results.

We depend on a limited number of internal and external manufacturing organizations, distribution centers and suppliers. Their failure to deliver or to perform according to our requirements may adversely affect our ability to deliver our products, services and solutions on time and in sufficient volume, while meeting our quality, safety or security standards.

Our manufacturing strategy is built upon two primary sources of production: internal manufacturing locations and external manufacturing suppliers. The manufacturing equipment and common and custom-made test equipment in our internal manufacturing locations are owned by us. When we resort to external manufacturing, the primary owner of inventory, standard manufacturing equipment and common test equipment is the external manufacturer, but in the vast majority of cases we own the custom-made test equipment, which would allow us to change manufacturing locations more easily if this became necessary.

Our business continuity plans also involve the implementation of a regional sourcing strategy where economically feasible, to ensure there is a supply chain to support and optimize our supply and delivery within the given region. For both our internal and external manufacturing locations such plans include the capability to move to alternate locations for production in case of a disruption at a given facility. In addition, we perform audits in all facilities, internal and external, to identify the actions required to reduce our overall business disruption risk.

However, despite the above measures, we may not be able to mitigate entirely the disruption risks for all of our products and, depending on the nature of the disruptive event, we may be required to prioritize our manufacturing and as a result, the supply of some of our products may be more affected than that of others.

Sourcing strategies are developed and updated annually to identify primary technologies and supply sources used in the selection of purchased components, finished goods, services and solutions. We multisource a large number of component and material families that are standard for the industry to the largest extent possible. For a number of components and finished goods families, we use multiple, predefined sources which allow us to have access to additional inventories in case of a disruptive event or to satisfy increased end customer demand. On the other hand, supply chain risks may arise with respect to components that are single-sourced or that have a long lead-time for a variety of reasons, such as non-forecasted upside demand, discontinuance by the supplier, quality problems, etc, that may have an adverse impact on our ability to deliver our products. In addition, for certain specific parts, an alternative source may not be technologically feasible.

 

 

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3.1 RISKS RELATING TO THE BUSINESS

 

Despite the steps we have taken with respect to our manufacturing and sourcing strategies, our business continuity plans and our logistics network, we can provide no assurance that such steps will be sufficient to avoid any disruption in the various stages of our supply chain. A disruption in any of those stages may materially adversely affect our ability to deliver our products, services and solutions on time and in sufficient volume, while meeting our quality, safety or security standards.

Information system risks, data protection breaches, cyber-attacks and industrial espionage may result in unauthorized access to or modification of, misappropriation or loss of our intellectual property and confidential information that we own or that has been entrusted to us, as well as interruptions to the availability of our systems or the systems that we manage for third parties.

Valuable intellectual property essential to our business operations and competitiveness, as well as other confidential and proprietary information (our own and that of customers, suppliers and other third parties including our customers’ end customers) are stored in or accessible through our information systems, a large part of which is managed by a third party to whom we have outsourced a significant portion of our IT operations, as well as the network and information systems that we manage for or sell to third parties or for whose security and reliability we may otherwise be accountable. Unauthorized access to or modification of, misappropriation or loss of such information could have a material adverse effect on our business and results of operations.

Unauthorized third parties have targeted our information systems, using sophisticated attempts, referred to as advanced persistent threats, “phishing” and other attacks. We believe that such attempts to access our information systems have on one or more occasions been successful. We are taking corrective actions that we believe will substantially mitigate the risk that such attacks will materially impact our business or operations. We cannot rule out that there may have been other cyber attacks that have been successful and/or that have not been detected. Our business is also vulnerable to theft, fraud, trickery or other forms of deception, sabotage and intentional acts of vandalism by third parties as well as employees.

We have procedures in place for responding to known or suspected data breaches. In addition, we conduct periodic assessments of our system vulnerabilities and the effectiveness of our security protections and have undertaken and will continue to undertake information security improvement programs internally for our systems and with our suppliers and business partners. However, there is no guarantee that our existing procedures or the improvement programs will be sufficient to prevent future security breaches or cyber attacks. In addition, as we have outsourced a significant portion of our information technology operations, we are also subject to vulnerabilities attributable to such third parties. Information technology is rapidly evolving, the

techniques used to obtain unauthorized access or sabotage systems change frequently and the parties behind cyber attacks and other industrial espionage are believed to be sophisticated and well funded, and it is not commercially or technically feasible to mitigate all known vulnerabilities in a timely manner or to eliminate all risk of cyber attacks and data breaches. Unauthorized access to or modification of, misappropriation or loss of our intellectual property and confidential information could result in litigation and potential liability to customers, suppliers and other third parties, harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or damage our brand and reputation, which could materially adversely affect our business, results of operations or financial condition.

In addition, the cost and operational consequences of implementing further information system protection measures could be significant. We may not be successful in implementing such measures, which could cause business disruptions and be more expensive, time consuming and resource-intensive. Such disruptions could adversely impact our business.

We have outsourced a significant portion of our information technology (IT) systems and infrastructure, increasing our dependence on the reliability of external companies. Interruptions in the availability of the IT systems and infrastructure we rely upon could have material adverse effects on our operations.

Our business operations rely on complex IT systems, networks and other related infrastructure. We have outsourced a significant portion of our IT operations, increasing our reliance on the precautions taken by external companies to insure the reliability of those operations. Despite these precautions, IT operations, including those we have outsourced as well as those we manage ourselves, are susceptible to disruption from equipment failure, vandalism, natural disasters, power outages and other events. Although we have selected reputable companies to provide outsourced IT services, and have worked closely with them to identify risks and implement countermeasures and controls, we cannot be sure that interruptions will not occur in the availability of the IT services upon which we rely, with material adverse effects on our operations.

Many of our current and planned products are highly complex and may contain defects or errors that are detected only after deployment in telecommunications networks. If that occurs, our reputation may be harmed.

Our products are highly complex, and we cannot assure you that our extensive product development, manufacturing and integration testing is, or will be, adequate to detect all defects, errors, failures and quality issues that could affect customer satisfaction or result in claims against us. As a result, we might have to replace certain components and/or provide remediation in response to the discovery of defects in products that have been shipped.

 

 

 

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RISK FACTORS

3.1 RISKS RELATING TO THE BUSINESS

 

 

The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by customers or customers’ end users and other losses to us or to our customers or end users. These occurrences could also result in the loss of or delay in market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues and profitability.

Rapid changes to existing regulations or technical standards or the implementation of new regulations or technical standards for products and services not previously regulated could be disruptive, time-consuming and costly to us.

We develop many of our products and services based on existing regulations and technical standards, our interpretation of unfinished technical standards or the lack of such regulations and standards. Changes to existing regulations and technical standards, or the implementation of new regulations and technical standards relating to products and services not previously regulated, could adversely affect our development efforts by increasing compliance costs and causing delay. Demand for those products and services could also decline.

Our ten largest customers accounted for 43% of our revenues in 2011 (among which Verizon and AT&T represented 12% and 10% of our revenues, respectively), and most of our revenues come from telecommunications service providers. The loss of one or more key customers or reduced spending by these service providers could significantly reduce our revenues, profitability and cash flow.

Our ten largest customers accounted for 43% of our revenues in 2011 (among which Verizon and AT&T represented 12% and 10% of our revenues, respectively). As service providers increase in size, it is possible that an even greater portion of our revenues will be attributable to a smaller number of large service providers going forward. Our existing customers are typically not obligated to purchase a fixed amount of products or services over any period of time from us and may have the right to reduce, delay or even cancel previous orders. We, therefore, have difficulty projecting future revenues from existing customers with certainty. Although historically our customers have not made sudden supplier changes, our customers could vary their purchases from period to period, even significantly. Combined with our reliance on a small number of large customers, this could have an adverse effect on our revenues, profitability and cash flow. In addition, our concentration of business in the telecommunications service provider industry makes us extremely vulnerable to a downturn in spending in that industry.

We have long-term sales agreements with a number of our customers. Some of these agreements may prove unprofitable as our costs and product mix shift over the lives of the agreements.

We have entered into long-term sales agreements with a number of our large customers, and we expect that we will continue to enter into long-term sales agreements in the future. Some of these existing sales agreements require us to

sell products and services at fixed prices over the lives of the agreements, and some require, or may in the future require us to sell products and services that we would otherwise discontinue, thereby diverting our resources from developing more profitable or strategically important products. Since our strategic plan entails a streamlined set of product offerings, it may increase the likelihood that we may have to sell products that we would otherwise discontinue. The costs incurred in fulfilling some of these sales agreements may vary substantially from our initial cost estimates. Any cost overruns that cannot be passed on to customers could adversely affect our results of operations.

We have significant international operations and a significant amount of our revenues is earned in emerging markets and regions.

In addition to the currency risks described elsewhere in this section, our international operations are subject to a variety of risks arising out of the economy, the political outlook and the language and cultural barriers in countries where we have operations or do business. We expect to continue to focus on expanding business in emerging markets in Asia, Africa, Latin America and Eastern Europe. In many of these emerging markets, we may be faced with several risks that are more significant than in other countries. These risks include economies that may be dependent on only a few products and are therefore subject to significant fluctuations, weak legal systems which may affect our ability to enforce contractual rights, possible exchange controls, unstable governments, privatization actions or other government actions affecting the flow of goods and currency. Also, it is possible that political developments in certain countries, similar to those in the Middle East and North Africa in 2011, may have, at least temporarily, a negative impact on our operations in those countries.

The activities of our Optics division include the installation and maintenance of undersea telecommunications cable networks, and in the course of this activity we may cause damage to existing undersea infrastructure, for which we may ultimately be held responsible.

Our subsidiary Alcatel-Lucent Submarine Networks is an industry leader in the supply of submarine optical fiber cable networks linking mainland to islands, island to island or several points along a coast, with activities now expanding to the supply of broadband infrastructure to oil and gas platforms, sea wind-farms and other offshore installations. Although thorough surveys, permit processes and safety procedures are implemented during the planning and deployment phases of all of these activities, there is a risk that previously-laid infrastructure, such as electric cables or oil pipelines, may go undetected despite such precautions, and be damaged during the process of laying the telecommunications cable, potentially causing business interruption to third parties operating in the same area and/or accidental pollution. While we have in place contractual limitations and maintain insurance coverage to limit our exposure, we can provide no assurance that these protections will be sufficient to cover fully such exposure.

 

 

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RISK FACTORS

3.2 LEGAL RISKS

 

3.2    LEGAL RISKS

 

We are involved in lawsuits and investigations which, if determined against us, could require us to pay substantial damages, fines and/or penalties.

We are defendants in various lawsuits. These lawsuits against us include such matters as commercial disputes, claims regarding intellectual property, customer financing, product discontinuance, asbestos claims, labor, employment and benefit claims and others. We are also involved in certain investigations by government authorities. For a discussion of some of these legal proceedings and investigations, you should read “Legal Matters” in Section 6.10 of this annual report and Note 35 to our consolidated financial statements included elsewhere in this document. We cannot predict the extent to which any of the pending or future actions will be resolved in our favor, or whether significant monetary judgments will be rendered against us. Any material damages resulting from these lawsuits and investigations could adversely affect our profitability and cash flow.

If we fail to protect our intellectual property rights, our business and prospects may be harmed.

Intellectual property rights, such as patents, are vital to our business and developing new products and technologies that are unique is critical to our success. We have numerous French, U.S. and foreign patents and numerous pending patents. However, we cannot predict whether any patents, issued or pending, will provide us with any competitive advantage or whether such patents will be challenged by third parties. Moreover, our competitors may already have applied for patents that, once issued, could prevail over our patent rights or otherwise limit our ability to sell our products. Our competitors also may attempt to design around our patents or copy or otherwise obtain and use our proprietary technology. In addition, patent applications currently pending may not be granted. If we do not receive the patents that we seek or if other problems arise with our intellectual property, our competitiveness could be significantly impaired, which would limit our future revenues and harm our prospects.

We are subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling certain products.

From time to time, we receive notices or claims from third parties of potential infringement in connection with products or software. We also may receive such notices or claims when we attempt to license our intellectual property to others.

Intellectual property litigation can be costly and time-consuming and can divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. A successful claim by a third party of patent or other intellectual property infringement by us could compel us to enter into costly royalty or license agreements or force us to pay significant damages and could even require us to stop selling certain products. Further, if one of our important patents or other intellectual property rights is invalidated, we may suffer losses of licensing revenues and be prevented from attempting to block others, including competitors, from using the related technology.

We are involved in significant joint ventures and are exposed to problems inherent to companies under joint management.

We are involved in significant joint venture companies. The related joint venture agreements may require unanimous consent or the affirmative vote of a qualified majority of the shareholders to take certain actions, thereby possibly slowing down the decision-making process. Our largest joint venture, Alcatel-Lucent Shanghai Bell Co., Ltd, has this type of requirement. We own 50% plus one share of Alcatel-Lucent Shanghai Bell Co., Ltd, the remainder being owned by the Chinese government.

We are subject to environmental, health and safety laws that restrict our operations.

Our operations are subject to a wide range of environmental, health and safety laws, including laws relating to the use, disposal and clean up of, and human exposure to, hazardous substances. In the United States, these laws often require parties to fund remedial action regardless of fault. Although we believe our aggregate reserves are adequate to cover our environmental liabilities, factors such as the discovery of additional contaminants, the extent of required remediation and the imposition of additional cleanup obligations could cause our capital expenditures and other expenses relating to remediation activities to exceed the amount reflected in our environmental reserves and adversely affect our results of operations and cash flows. Compliance with existing or future environmental, health and safety laws could subject us to future liabilities, cause the suspension of production, restrict our ability to utilize facilities or require us to acquire costly pollution control equipment or incur other significant expenses.

 

 

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RISK FACTORS

3.3 RISKS RELATING TO OWNERSHIP OF OUR ADSs

 

 

3.3    RISKS RELATING TO OWNERSHIP OF OUR ADSS

 

The trading price of our ADSs may be affected by fluctuations in the exchange rate for converting euro into U.S. dollars.

Fluctuations in the exchange rate for converting euro into U.S. dollars may affect the market price of our ADSs.

If a holder of our ADSs fails to comply with the legal notification requirements upon reaching certain ownership thresholds under French law or our governing documents, the holder could be deprived of some or all of the holder’s voting rights and be subject to a fine.

French law and our governing documents require any person who owns our outstanding shares or voting rights in excess of certain amounts specified in the law or our governing documents to file a report with us upon crossing this threshold percentage and, in certain circumstances, with the French stock exchange regulator (Autorité des Marchés Financiers).

If any shareholder fails to comply with the notification requirements:

 

 

the shares or voting rights in excess of the relevant notification threshold may be deprived of voting power on the demand of any shareholder;

 

 

all or part of the shareholder’s voting rights may be suspended for up to five years by the relevant French commercial court; and

 

 

the shareholder may be subject to a fine.

Holders of our ADSs will have limited recourse if we or the depositary fail to meet obligations under the deposit agreement between us and the depositary.

The deposit agreement expressly limits our obligations and liability and the obligations and liability of the depositary.

Neither we nor the depositary will be liable despite the fact that an ADS holder may have incurred losses if the depositary:

 

 

is prevented or hindered in performing any obligation by circumstances beyond our control;

 

 

exercises or fails to exercise its discretionary rights under the deposit agreement;

 

 

performs its obligations without negligence or bad faith;

 

 

takes any action based upon advice from legal counsel, accountants, any person presenting our ordinary shares for deposit, any holder or any other qualified person; or

 

 

relies on any documents it believes in good faith to be genuine and properly executed.

This means that there could be instances where holders of an ADS would not be able to recover losses that you may have suffered by reason of our actions or inactions or the actions or inactions of the depositary pursuant to the deposit agreement.

In addition, the depositary has no obligation to participate in any action, suit or other proceeding in respect of our ADSs unless we provide the depositary with indemnification that it determines to be satisfactory.

We are subject to different corporate disclosure standards that may limit the information available to holders of our ADSs.

As a foreign private issuer, we are not required to comply with the notice and disclosure requirements under the Securities Exchange Act of 1934, as amended, relating to the solicitation of proxies for shareholder meetings. Although we are subject to the periodic reporting requirements of the Exchange Act, the periodic disclosure required of non-U.S. issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Therefore, there may be less publicly available information about us than is regularly published by or about most other public companies in the United States.

Judgments of U.S. courts, including those predicated on the civil liability provisions of the federal securities laws of the United States in French courts, may not be enforceable against us.

An investor located in the United States may find it difficult to:

 

 

effect service of process within the United States against us and our non-U.S. resident directors and officers;

 

 

enforce U.S. court judgments based upon the civil liability provisions of the U.S. federal securities laws against us and our non-U.S. resident directors and officers in both the United States and France; and

 

 

bring an original action in a French court to enforce liabilities based upon the U.S. federal securities laws against us and our non-U.S. resident directors and officers.

Preemptive rights may not be available for U.S. persons.

Under French law, shareholders have preemptive rights to subscribe for cash issuances of new shares or other securities giving rights to acquire additional shares on a pro rata basis. U.S. holders of our ADSs or ordinary shares may not be able to exercise preemptive rights for their shares unless a registration statement under the Securities Act of 1933 is effective with respect to such rights or an exemption from the registration requirements imposed by the Securities Act is available.

We may, from time to time, issue new shares or other securities giving rights to acquire additional shares at a time when no registration statement is in effect and no Securities Act exemption is available. If so, U.S. holders of our ADSs or ordinary shares will be unable to exercise their preemptive rights.

 

 

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INFORMATION ABOUT THE GROUP

4.1 GENERAL

 

4    INFORMATION ABOUT THE GROUP

4.1    GENERAL

 

The long-trusted partner of service providers, enterprises and governments around the world, we are a leading innovator in the field of networking and communications technology, products and services. The Group is home to Bell Labs, one of the world’s foremost research centers, responsible for breakthroughs that have shaped the networking and communications industry. We are committed to making communications more sustainable, more affordable and more accessible as we pursue our mission - Realizing the Potential of a Connected World. With operations in more than 130 countries and one of the most experienced global services organizations in the industry, we are a local partner with global reach.

Alcatel-Lucent is a French société anonyme, established in 1898, originally as a listed company named Compagnie

Générale d’Électricité. Our corporate existence will continue until June 30, 2086, which date may be extended by shareholder vote. We are subject to all laws governing business corporations in France, specifically the provisions of the commercial code and the financial and monetary code.

Our registered office and principal place of business is 3, avenue Octave Gréard, 75007 Paris, France, our telephone number is +33 (0)1 40 76 10 10 and our website address is www.alcatel-lucent.com. The contents of our website are not incorporated into this document.

The address for Stephen R. Reynolds, our authorized representative in the United States, is Alcatel-Lucent USA Inc., 600 Mountain Avenue, Murray Hill, New Jersey 07974.

 

 

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4.2 HISTORY AND DEVELOPMENT

 

 

4.2    HISTORY AND DEVELOPMENT

Set forth below is an outline of certain significant events of Alcatel-Lucent from formation until 2008:

 

May 31,

1898

   French engineer Pierre Azaria forms the Compagnie Générale d’Électricité (CGE) with the aim of taking on the likes of AEG, Siemens and General Electric
1925    Acquisition by CGE of Compagnie Générale des Câbles de Lyon
1928    Formation of Alsthom by Société Alsacienne de Constructions Mécaniques and Compagnie Française Thomson-Houston
1946    Formation of Compagnie Industrielle des Téléphones (CIT)
1966    Acquisition by CGE of the Société Alsacienne de Constructions Atomiques, de Télécommunications et d’Électronique (Alcatel)
1970    Ambroise Roux becomes CGE’s Chairman. At the end of his term (1982), he remains Honorary Chairman until his death in 1999
1982    Jean-Pierre Brunet becomes CGE’s Chairman
1984   

Georges Pebereau becomes CGE’s Chairman

 

Thomson CSF’s public telecommunication and business communication operations are merged into a holding company Thomson Télécommunications, which is acquired by the CGE group

1985   

Alsthom Atlantique changes its name to Alsthom

Merger between CIT-Alcatel and Thomson Télécommunications. The new entity adopts the name Alcatel

1986   

Formation of Alcatel NV following an agreement with ITT Corporation, which sells its European telecommunications activities to CGE

 

Pierre Suard becomes CGE’s Chairman. CGE acquires an interest in Framatome (40%). Câbles de Lyon becomes a subsidiary of Alcatel NV

1987   

Privatization of CGE

 

Alsthom wins an order to supply equipment for the TGV Atlantique network and leads the consortium of French, Belgian and British companies involved in the building of the northern TGV network

1988   

Alliance of Alsthom and General Electric Company (UK)

 

Merger of Alsthom’s activities and GEC’s Power Systems division into a joint venture

1989   

Agreement between CGE and General Electric Company and setting up of GEC Alsthom

 

GEC acquires an equity interest in CGEE Alsthom (a company of CGE)

 

CGEE-Alsthom changes its name to Cegelec

1990   

CGE-Fiat agreement. Alcatel acquires Telettra (transmission systems activity) and Fiat acquires a majority stake in CEAC

 

Acquisition by Câbles de Lyon of Câbleries de Dour (Belgium) and Ericsson’s U.S. cable operations

 

Agreement on Framatome’s capital structure, with CGE holding a 44.12% stake

1991   

Compagnie Générale d’Électricité changes its name to Alcatel Alsthom

 

Purchase of the transmission systems division of the American group Rockwell Technologies

 

Câbles de Lyon becomes Alcatel Cable and takes over AEG Kabel

1993    Acquisition by Alcatel Alsthom of STC Submarine Systems, a division of Northern Telecom Europe (today Nortel Networks)
1995    Serge Tchuruk becomes chairman and CEO of Alcatel Alsthom. He restructures the company focusing on telecommunications
1998   

Alcatel Alsthom is renamed Alcatel

 

Acquisition of 16.36% in Thomson-CSF (now Thales)

 

Acquisition of DSC, a U.S. company, which has a solid position in the U.S. access market

 

Initial public offering of GEC ALSTHOM which becomes Alstom. Alcatel retains 24% in the newly-formed company

 

Alcatel sells Cegelec to Alstom

1999   

Acquisition of the American companies Xylan, Packet Engines, Assured Access and Internet Devices, specializing in Internet network and solutions

 

Alcatel raises its ownership in Thomson-CSF (now Thales) to 25.3% and reduces its ownership in Framatome to 8.6%

2000   

Acquisition of Newbridge Networks, a Canadian company and worldwide leader in ATM technology networks

 

Acquisition of the American company Genesys, worldwide leader in contact centers

 

The Cable and Components activities are spun off into a subsidiary and renamed Nexans

 

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2001   

Sale of its 24% share in Alstom

 

IPO of a significant part of Cables & Components business (Nexans activity). Alcatel retains 20% of Nexans shares

 

Acquisition of the remaining 48.83% stake held in Alcatel Space by Thales, bringing Alcatel’s ownership of Alcatel Space to 100%. After this transaction, Alcatel’s stake in Thales decreases to 20%

 

Sale of DSL modems activity to Thomson Multimedia (TMM)

2002   

Sale of its remaining interest in Thomson (formerly TMM)

 

Alcatel acquires control of Alcatel Shanghai Bell

 

Sale of 10.3 million Thales shares (Alcatel’s shareholding in Thales decreases from 15.83% to 9.7%)

2003   

Acquisition of TiMetra Inc., a privately held, U.S.-based company that produces routers

 

Sale of Alcatel’s optical components business to Avanex

 

Sale of SAFT Batteries subsidiary to Doughty Hanson

2004   

Alcatel and TCL Communication Technology Holdings Limited form a joint venture mobile handset company. The joint venture company is 55% owned by TCL and 45% owned by Alcatel

 

Alcatel and Draka Holding NV (“Draka”) combine their respective global optical fiber and communication cable businesses. Draka owns 50.1% and Alcatel owns 49.9% of the new company, Draka Comteq BV

 

Acquisition of privately held, U.S.-based eDial Inc., a leading provider of conferencing and collaboration services for businesses and telephone companies

 

Acquisition of privately held, U.S.-based Spatial Communications (known as Spatial Wireless), a leading provider of software-based and multi-standard distributed mobile switching products

2005   

Acquisition of Native Networks, a UK-based company providing of optical Ethernet goods and services

 

Sale of shareholding in Nexans, representing 15.1% of Nexans’ share capital, through a private placement

 

Merger of Alcatel space activities with those of Finmeccanica, S.p.A completed through the creation of Alcatel Alenia Space (Alcatel owned 67%, and Alenia Spazio, a unit of Finmeccanica, owned 33%) and Telespazio Holding (Finmeccanica owned 67%, and Alcatel owned 33%).

 

Exchange of Alcatel 45% interest in joint venture with TCL Communication for TCL Communication Shares (TCL owning all of the joint venture company and Alcatel owning 141,375,000 shares of TCL).

2006   

Acquisition of UMTS radio access business from Nortel

 

Business combination between historical Alcatel and Lucent Technologies Inc., completed on November 30, 2006

 

Acquisition of VoiceGenie, a leader in voice self-service solutions development by both enterprises and carriers

 

Acquisition of a 27.5% interest in 2Wire, a pioneer in home broadband network product offerings

 

Buy-out of Fujitsu’s interest in Evolium 3G our wireless infrastructure joint venture

2007   

Acquisition of Informiam, pioneer in software that optimizes customer service operations through real-time business performance management (now a business unit within Genesys)

 

Acquisition of NetDevices (enterprise networking technology designed to facilitate the management of branch office networks)

 

Acquisition of Tropic Networks (regional and metro-area optical networking equipment for use in telephony, data, and cable applications)

 

Sale of our 49.9 % interest in Draka Comteq to Draka Holding NV, our joint venture partner in this company

 

Sale of our 12.4 % interest in Avanex to Pirelli, and supply agreements with both Pirelli and Avanex for related components

 

Sale of our 67% interest in the capital of Alcatel Alenia Space and our 33% interest in the capital of Telespazio (a worldwide leader in satellite services) to Thales. Completion of the contribution to Thales of our railway signaling business and our integration and services activities for mission-critical systems not dedicated to operators or suppliers of telecommunications services

2008   

Acquisition of Motive Networks, a U.S-based company developing and selling remote management software solutions for automating the deployment, configuration and support of advanced home networking devices called residential gateways

 

Agreement with Dassault Aviation regarding the sale of our 20.8% interest in Thales.

 

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INFORMATION ABOUT THE GROUP

4.2 HISTORY AND DEVELOPMENT

 

 

RECENT EVENTS

DISPOSITIONS

Disposal of Genesys. On February 1, 2012, we concluded the sale of our Genesys business to a company owned by the Permira funds (Permira is a European private equity firm) and Technology Crossover Ventures (a venture capital firm), for cash proceeds of U.S.$ 1.5 billion, pursuant to a binding offer that we had received on October 19, 2011.

OTHER MATTERS

2011 dividend. Our Board has determined that it is not prudent to pay a dividend on our ordinary shares and ADSs based on 2011 results. Our Board will present this proposal at our Annual Shareholders’ Meeting on June 8, 2012.

Repurchases of convertible bonds. In February 2012, we repurchased and cancelled a portion of the outstanding Alcatel-Lucent USA Inc. 2.875% Series B convertible bonds due June 2025 for U.S.$ 110 million in cash, excluding accrued interest, corresponding to a nominal value of U.S.$ 116 million. This represents 13% of the total U.S.$881 million nominal value of such bonds outstanding at December 31, 2011.

Repayment of notes. In February 2012, we repaid the notes that we had issued in July 2010 with maturity in February 2011 (then extended to February 2012) and in October 2010 with maturity in February 2012, for an aggregate €50 million in nominal value. There remain outstanding €50 million in nominal value of notes issued in July 2010 with maturity in May 2011 then extended to May 2012.

Change in credit ratings. On January 20, 2012, Moody’s affirmed the B1 rating for the Alcatel-Lucent Corporate Family Rating but downgraded from B2 to B3 the two convertible bonds of Alcatel-Lucent USA Inc. which are guaranteed on a subordinated basis by Alcatel-Lucent. Concurrently the ratings for the legacy bonds issued by Alcatel-Lucent USA Inc. and Lucent Technologies Capital Trust Inc., which are not guaranteed by us, were withdrawn. The Negative outlooks have been affirmed.

Agreement with RPX concerning our patents. On February 9, 2012 we entered into an agreement with RPX Corporation (“RPX”), a company active in the patent risk solutions business, pursuant to which, for a finite period, RPX will offer access to our worldwide patent portfolio (which includes more than 29,000 issued patents) through non-exclusive patent licenses to be entered into between members of the RPX client network and Alcatel-Lucent. License fees will vary depending upon company size, portfolio applicability, technology areas and other relevant factors.

HIGHLIGHTS OF TRANSACTIONS DURING 2011

New business group. On July 20, 2011, we announced the formation of a new business group, the Software, Services & Solutions group, which combines the Networks Applications division of our former Applications segment with the four divisions – Network & Systems Integration, Managed & Outsourcing Solutions, Multivendor Maintenance, and Product Attached Services – of our former Services segment which were in place within our business organization at June 30, 2011.

Changes in credit ratings. On November 10, 2011, Moody’s affirmed the Corporate Family Rating of Alcatel-Lucent at B1 and changed the outlook from Stable to Negative. Concurrently, Moody’s downgraded the ratings of the senior debt of Alcatel-Lucent and Alcatel-Lucent USA Inc. to B2 from B1. The ratings for the trust preferred securities of Lucent Technologies Capital Trust I were affirmed at B3.

On May 18, 2011, Moody’s changed the outlook of its Corporate Family Rating of Alcatel-Lucent as well as of its ratings of Alcatel Lucent USA Inc. and of the Lucent Technologies Capital Trust I, from Negative to Stable. The B1 Long Term rating was affirmed.

On April 12, 2011, Standard & Poor’s revised its outlook on Alcatel-Lucent and on Alcatel-Lucent USA, Inc. from Negative to Stable. The B ratings were affirmed.

Extension and repayment of notes issued in 2010. Regarding the notes we issued in October 2010 and July 2010 for an aggregate of 200 million in nominal value, the maturity dates of the notes due in February 2011 for a nominal amount of 25 million and for notes due in May 2011 for a nominal amount of 50 million were extended until February 2012 for a nominal amount of 25 million and until May 2012 for a nominal amount of 50 million. The notes due in August and November 2011 for a nominal amount of 100 million were not extended and were repaid. After the extensions and after the repayments, the new maturity dates became February 2012 for a nominal amount of 50 million and May 2012 for a nominal amount of 50 million.

Repayment of convertible bonds. On January 3, 2011 we repaid our 4.75% convertible/exchangeable bonds (which we refer to as OCEANE) issued in June 2003 and due January 2011 that remained outstanding at that date, for their nominal value of 818 million.

Developments in Microsoft case. This matter initiated in 2003 (along with a number of other patent infringement matters involving Microsoft as well as other parties and long since settled) resulted in a District Court finding that Microsoft’s Outlook, Money and Windows Mobile products infringed the Day patent owned by us. This decision was followed by numerous appeals. The last jury award, in 2011, amounted to US$ 70 million in damages. In November 2011, the judge lowered the award to US$ 26.3 million. This judgment was appealed by Alcatel-Lucent. On December 29, 2011, we and Microsoft settled this dispute and dismissed the Day Patent litigation.

FCPA investigations. In December 2010 we entered into final settlement agreements with the SEC and the DOJ with regards to alleged violations of the Foreign Corrupt Practices Act (FCPA) in several countries, including but not limited to Costa Rica, Taiwan, and Kenya. Both agreements were approved in 2011 by the U.S. Federal Court, which resulted during that year in the payment of U.S.$45.4 million in disgorgement of profits and prejudgment interest to the SEC, the payment, for an amount of U.S.$25 million, of the first of the three installments of the criminal fine of U.S.$92 million imposed on us by the DOJ and our appointment of a French anticorruption compliance monitor for three years. In addition, three of our subsidiaries – Alcatel-Lucent France, Alcatel-Lucent Trade International AG and Alcatel Centroamerica – each pleaded guilty to conspiracy to violate the FCPA’s antibribery, books and records and internal accounting controls provisions.

 

 

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INFORMATION ABOUT THE GROUP

4.2 HISTORY AND DEVELOPMENT

 

HIGHLIGHTS OF TRANSACTIONS DURING 2010

DISPOSITIONS

Sale of 2Wire stake. On October 20, 2010 we concluded the sale of our 26.7% shareholding in 2Wire, a U.S.-based provider of advanced residential gateways for the broadband service provider market, to Pace plc, a technology developer for the global pay-TV market, for cash proceeds of 75 million. This transaction was part of the acquisition by Pace of the stock of 2Wire owned by a consortium that included, in addition to Alcatel-Lucent, AT&T, Telmex and Oak Investments Partners.

Sale of vacuum business. On December 31, 2010 we completed the sale of our Vacuum pump solutions and instruments business to Pfeiffer Vacuum Technology AG, a world leader in the vacuum industry. We received preliminary cash proceeds of 197 million. This amount was reduced by a net amount of 1 million in 2011 as a result of various purchase price adjustments.

OTHER MATTERS

Notes issuances. In July 2010 and October 2010, we issued a series of notes for an aggregate 100 million in nominal value upon each issuance (200 million in total). The notes bear interest at a floating rate and are due in several instalments throughout 2011 and in February 2012, with the right to extend their maturity at our option either annually or until 2016.

On December 2, 2010, we closed our private placement of 500 million Senior Notes due January 15, 2016 with an 8.5% coupon, for which we received net proceeds of 487.3 million. We used all of these net proceeds to partially refinance the 4.75% convertible/exchangeable bonds (OCEANE) due on 1 January 2011 mentioned above.

Repurchases of convertible bonds. In February and March 2010, we repurchased and cancelled a portion of the outstanding Alcatel-Lucent Inc. 2.875% Series A convertible bonds due June 2023 for U.S.$74.8 million in cash, excluding accrued interest, corresponding to a nominal value of U.S.$75.0 million.

Further, on June 15, 2010, many of the remaining holders of the Alcatel-Lucent Inc. Series A bonds exercised their optional redemption right, and as a result we paid the redeeming holders U.S.$360 million in cash, excluding accrued interest, corresponding to the nominal value of the bonds redeemed.

Developments in Microsoft cases. On February 22, 2010, Microsoft filed a Petition for a Writ of Certiorari in the United States Supreme Court asking the Supreme Court to review the Federal Circuit’s September 11, 2009 decision to affirm the District Court’s finding that Microsoft’s Outlook, Money and Windows Mobile products infringed the Day patent. On April 23, 2010, Alcatel-Lucent filed its Brief in Opposition and the Supreme Court denied Microsoft’s Petition on May 24, 2010. A trial took place starting on July 19, 2011 in the U.S. District Court in San Diego to determine the amount of compensation owed to us by Microsoft for its infringement of the Day patent.

On March 2, 2010, the United States Patent and Trademark Office issued a Reexamination Certificate confirming the validity of the Day Patent in response to the re-examination request filed by Dell in May of 2007.

FCPA investigations. In December 2010 we entered into final settlement agreements with the SEC and the DOJ. Under the agreement with the SEC, which has been approved by the U.S. Federal Court, we neither admit nor deny the allegations of violations of the antibribery, internal controls and books and records provisions of the FCPA in the SEC’s complaint, we are permanently restrained and enjoined from future violations of U.S. securities laws, we are liable for U.S.$45.4 million in disgorgement of profits and prejudgment interest, and we agree to engage a French anticorruption compliance monitor for three years. Under the agreement with the DOJ, we will enter into a three-year deferred prosecution agreement (“DPA”) charging us with violations of the internal controls and books and records provisions of the FCPA, and we will pay a total criminal fine of U.S.$92 million – payable in four installments over the course of three years. If we fully comply with the terms of the DPA, the DOJ will dismiss the charges upon conclusion of the three-year term. In addition, three of our subsidiaries – Alcatel-Lucent France, Alcatel-Lucent Trade International AG and Alcatel Centroamerica – will each plead guilty to conspiracy to violate the FCPA’s antibribery, books and records and internal accounting controls provisions. The DPA also contains provisions relating to engaging a French anticorruption compliance monitor for three years (the settlement agreement with the DOJ was approved by the U.S. Federal Court on June 1, 2011).

HIGHLIGHTS OF TRANSACTIONS DURING 2009

DISPOSITIONS

Thales. In May 2009, we completed the sale of our 20.8% stake in Thales to Dassault Aviation for 1.566 billion.

Electrical motors. On December 31, 2009, we completed the sale of Dunkermotoren GmbH, our electrical fractional horsepower motors and drives subsidiary, to Triton, a leading European private equity firm, for an enterprise value of 145 million.

OTHER MATTERS

Joint venture with Bharti Airtel. On April 30, 2009, we announced the formation of a joint venture with Bharti Airtel to manage Bharti Airtel’s pan-India broadband and telephone services and help Airtel’s transition to a next generation network across India.

Co-sourcing and joint marketing arrangement with Hewlett-Packard (HP). On June 18, 2009, we and HP jointly announced a 10-year co-sourcing agreement which is expected to help improve the efficiency of our IS/IT (Information Systems/Information Technology) infrastructure and create a joint go-to-market approach. Under the joint marketing agreement, the two companies will be able to jointly and

 

 

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4.2 HISTORY AND DEVELOPMENT

 

 

separately deliver integrated IT and telecom products and services to service providers and mid- to large-size enterprise customers. Definitive agreements were signed on October 20, 2009, and were implemented beginning December 2009.

Changes in credit ratings. On November 9, 2009, Standard & Poor’s lowered to “B” from “B+” its long-term corporate credit ratings and senior unsecured ratings on Alcatel-Lucent and on Alcatel-Lucent USA Inc. The “B” short-term credit ratings of Alcatel-Lucent and of Alcatel-Lucent USA Inc. were affirmed. The rating on the trust preferred notes of Lucent Technologies Capital Trust was lowered from “CCC+” to “CCC”. The negative outlook was maintained.

On March 3, 2009, Standard & Poor’s lowered to B+ from BB- its long-term corporate credit ratings and senior unsecured ratings on Alcatel-Lucent and on Alcatel-Lucent USA Inc. The rating on the trust preferred notes of Lucent Technologies Capital Trust was lowered to CCC+. The B short-term rating on Alcatel-Lucent was affirmed. The B1 short-term credit rating on Alcatel-Lucent USA Inc. was withdrawn and a negative outlook was issued.

On February 18, 2009, Moody’s lowered the Alcatel-Lucent Corporate Family Rating as well as the rating for senior debt of the Group from Ba3 to B1. The trust preferred notes of Lucent Technologies Capital Trust were downgraded from B2 to B3. The Not-Prime rating for the Group’s short-term debt was confirmed. The negative outlook of the ratings was maintained.

Issuance and repurchases of convertible bonds. On September 2, 2009, we launched a convertible bond offering. The bonds are convertible into and/or exchangeable for new or existing shares of Alcatel-Lucent (we refer to these convertible bonds as OCEANE). The bonds carry a 5% annual interest rate and the initial conversion price is 3.23, equivalent to a conversion premium of 35%. They are redeemable in cash, at par, on January 1, 2015. Early redemption at our option is possible under certain conditions. On settlement date (September 10, 2009), the proceeds of this offering, including the over-allotment option, were approximately 1 billion.

Concurrently, we offered to repurchase and cancel some of our existing convertible bonds due 2011. On settlement date for the repurchase (September 11, 2009), we purchased 11.97% of the outstanding 2011 bonds. The price per bond was 16.70 (including accrued interest) and the total amount paid was 126 million.

Repurchases of the 2011 bonds also took place after the closing of the repurchase offer. Overall, in 2009, we repurchased bonds of a nominal value of 204 million, corresponding to 19.98% of the outstanding 2011 bonds, for a total cash amount paid of 204 million, excluding accrued interest.

We also partially repurchased and cancelled outstanding Lucent 7.75% convertible bond due March 2017 in 2009, using a total cash amount of U.S.$28 million, corresponding to a nominal value of U.S.$99 million.

We partially repurchased and cancelled outstanding Lucent 2.875% Series A convertible bonds due June 2023 in 2009, using U.S.$218 million in cash excluding accrued interest, corresponding to a nominal value of U.S.$220 million.

Developments in Microsoft cases. On December 15, 2008, we and Microsoft executed a settlement and license agreement whereby the parties agreed to settle the majority of a series of patent litigations that had been outstanding between them. This settlement included dismissing pending patent claims by Microsoft against us and provided us with licenses to all Microsoft patents-in-suit in these cases. Also, on May 13, 2009, we and Dell agreed to a settlement and dismissal of certain issues appealed after a trial involving us, Dell and Microsoft, held in April, 2008. Thereafter, the only matter that remained pending was the appeal filed by Microsoft with the Court of Appeals for the Federal Circuit in Washington, D.C. relating to the “Day” Patent, which relates to a computerized form entry system. On June 19, 2008, the District Court had entered a judgment based on a jury award to us of approximately U.S.$357 million in damages for Microsoft’s infringement of the Day Patent in the April 2008 trial, and had also awarded us prejudgment interest exceeding U.S.$140 million.

Oral argument before the Federal Circuit was held on June 2, 2009, and on September 11, 2009, the Federal Circuit issued its opinion affirming that the Day Patent is both a valid patent and infringed by Microsoft in Microsoft Outlook, Microsoft Money, and Windows Mobile products. However, the Federal Circuit vacated the jury’s damages award and ordered a new trial in the District Court in San Diego to re-calculate the amount of damages owed to us for Microsoft’s infringement. On November 23, 2009, the Federal Circuit denied Microsoft’s “en banc” petition for a rehearing on the validity of the Day Patent.

In a parallel proceeding, Dell filed a reexamination of the Day Patent with the United States Patent and Trademark Office (“Patent Office”) in May of 2007, alleging that prior art existed that was not previously considered in the original examination and the Day patent should therefore be re-examined for patentability. The Patent Office granted Dell’s reexamination request and the examiner issued three office actions rejecting the two claims of the Day patent at issue in the April 2008 trial as unpatentable. In the appeal of that decision, the Patent Office withdrew its rejection of the Day Patent and confirmed that the Day Patent is a valid patent.

FCPA investigations: In December 2009 we reached agreements in principle with the SEC and the U.S. Department of Justice with regard to the settlement of their ongoing investigations involving our alleged violations of the Foreign Corrupt Practices Act (FCPA) in several countries, including Costa Rica, Taiwan, and Kenya.

 

 

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INFORMATION ABOUT THE GROUP

4.3 STRUCTURE OF THE MAIN CONSOLIDATED COMPANIES AS OF DECEMBER 31, 2011

 

4.3    STRUCTURE OF THE MAIN CONSOLIDATED COMPANIES AS OF DECEMBER 31, 2011

The organization chart below reflects the main companies consolidated in the Group as of December 31st, 2011, such as listed in note 37 of the consolidated financial statements. Percentages of shares capital’s interest equal 100% unless otherwise specified.

LOGO

 

 

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INFORMATION ABOUT THE GROUP

4.4 REAL ESTATE AND EQUIPMENT

 

 

4.4    REAL ESTATE AND EQUIPMENT

 

We occupy, as an owner or tenant, a large number of buildings, production sites, laboratories and service sites around the world. There are two distinct types of sites with the following features:

 

 

production and assembly sites dedicated to our various businesses;

 

 

sites that house research and innovation activities and support functions, which cover a specific region and all businesses.

A significant portion of production, assembly and research activities are carried out in Europe, in the United States and in China for all of our businesses.

At December 31, 2011, our total production capacity was equal to approximately 255,000 sq. meters and the table below shows the breakdown by region for the Networks segment, where our production capacity is concentrated.

We believe that these properties are in good condition and meet the needs and requirements of the Group’s current and future activity and do not present an exposure to major environmental risks that could impact the Group’s earnings.

The environmental issues that could affect how these properties are used are mentioned in Section 5.12 (Environmental matters) of this annual report.

The sites mentioned in the tables below were selected among our portfolio of 594 sites to illustrate the diversity of the real estate we use, applying four main criteria: region, business segment, type of use (production/assembly, research/innovation or support function), and whether the property is owned or leased.

 

 

ALCATEL-LUCENT, PRODUCTION CAPACITY AT DECEMBER 31, 2011

 

(in thousands of sq. meters)    EMEA      Americas      APAC      Total  
Networks      148         45         61         255   
Total      148         45         61         255   

PRODUCTION/ASSEMBLY SITES

 

Country    Site      Ownership  
China      Shanghai Pudong         Full ownership   
France      Calais         Full ownership   
France      Eu         Full ownership   
United Kingdom      Greenwich         Full ownership   
United States      Meriden         Full ownership   

The main features of our production sites are as follows:

 

 

site of Shanghai Pudong (China): 142,000 sq. meters, of which 24,000 sq. meters is used for the production for Wireline and Wireless Access activities, the remainder of the site is used mainly for offices and laboratories;

 

 

site of Calais (France): 79,000 sq. meters, of which 61,000 sq. meters is used for the production of submarine cables;

 

 

site of Eu (France): 31,000 sq. meters, of which 16,000 sq. meters is used for the production of boards;

 

 

site of Greenwich (United Kingdom): 34,000 sq. meters, of which 19,500 sq. meters is used for the production of submarine cables;

 

 

site of Meriden (United States): 31,000 sq. meters, used for the manufacturing of products for RFS (Radio Frequency Systems);

 

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4.4 REAL ESTATE AND EQUIPMENT

 

RESEARCH AND INNOVATION AND SUPPORT SITES

 

Country    Site      Ownership  
Germany      Stuttgart         Lease   
Germany      Nuremberg         Lease   
Austria      Vienna         Full ownership   
Belgium      Anvers         Lease   
Brazil      São Paulo         Full ownership   
Canada      Ottawa         Full ownership   
China      Shanghai Pudong         Full ownership   
Spain      Madrid         Lease   
United States      Daly City         Lease   
United States      Plano         Full ownership   
United States      Naperville         Full ownership   
United States      Murray Hill         Full ownership   
France      Villarceaux         Lease   
France      Vélizy         Lease   
France      Colombes         Lease   
France      Lannion         Full ownership   
France      Paris Headquarters         Lease   
France      Orvault         Lease   
India      Bangalore         Lease   
India      Chennai         Lease   
Italy      Vimercate         Lease   
Mexico      Cuautitlan Izcalli         Full ownership   
Netherlands      Hilversum         Lease   
Poland      Bydgoszcz         Full ownership   
Romania      Timisoara         Full ownership   
United Kingdom      Swindon         Lease   
Singapore      Singapore         Lease   

The occupation rate of these sites varies between 50 and 100 % (average rate is 78%); the space which is not occupied by Alcatel-Lucent is leased to other companies or remains vacant. The average rate of 78% is based on the global portfolio of Alcatel-Lucent. The facilities presented are the major sites and form a representative sample of our activities.

 

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INFORMATION ABOUT THE GROUP

4.5 MATERIAL CONTRACTS

 

 

4.5     MATERIAL CONTRACTS

 

NATIONAL SECURITY AGREEMENT AND SPECIALTY SECURITY AGREEMENT

On November 17, 2006, the Committee on Foreign Investment in the United States (“CFIUS”), approved our business combination with Lucent. In the final phase of the approval process CFIUS recommended to the President of the United States that he not suspend or prohibit our business combination with Lucent, provided that we execute a National Security Agreement (“NSA”) and Specialty Security Agreement (“SSA”) with certain U.S. Government agencies within a specified time period. As part of the CFIUS approval process, we entered into a NSA with the Department of Justice, the Department of Homeland Security, the Department of Defense and the Department of Commerce (collectively, the “USG Parties”) effective on November 30, 2006. The NSA provides for, among other things, certain undertakings with respect to our U.S. businesses relating to the work done by Bell Labs and to the communications infrastructure in the United States. Under the NSA, in the event that we materially fail to comply with any of its terms, and the failure to comply threatens to impair the national

security of the United States, the parties to the NSA have agreed that CFIUS, at the request of the USG Parties at the cabinet level and the Chairman of CFIUS, may reopen review of the business combination with Lucent and revise any recommendations or make new recommendations to the President of the United States, which could lead to new commitments for Alcatel Lucent. In addition, we agreed to establish a separate subsidiary to perform certain work for the U.S. government, and hold government contracts and certain sensitive assets associated with Bell Labs. This separate subsidiary has a Board of Directors including at least three independent Directors who are resident citizens of the United States who have or are eligible to possess personnel security clearances from the Department of Defense. These Directors are former U.S. Secretary of Defense William Perry, former National Security Agency Director Lt. Gen. Kenneth A. Minihan, USAF (Ret.) and former Assistant Secretary of the U.S Navy Dr. H. Lee Buchanan. The SSA, effective December 20, 2006, that governs this subsidiary contains provisions with respect to the separation of certain employees, operations and facilities, as well as limitations on control and influence by the parent company and restrictions on the flow of certain information.

 

 

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5.1 BUSINESS ORGANIZATION

 

5    DESCRIPTION OF  THE GROUP’S ACTIVITIES

5.1    BUSINESS ORGANIZATION

 

Strategic Focus. Our strategic vision that we call Application Enablement, launched in 2009, is to improve the Internet or “web” experience of service providers, enterprises and end-users while improving our customers’ return on their investments. To do that, we are working to provide consumers and business users with a rich and more trusted web experience by combining:

 

 

the speed and creative innovation of the web;

 

 

the unique capabilities of our customers’ networks - such as quality, security, reliability, billing, privacy, user context (location); and

 

 

the trusted relationship our customers have with their subscribers.

Our strategy is the Alcatel-Lucent High Leverage NetworkTM (HLN) that supports our Application Enablement vision. Alcatel-Lucent’s High Leverage NetworkTM provides the technological foundation needed to help service providers improve the Internet experience for business and consumer customers, providing a platform for the profitable delivery of new revenue-generating services. HLN will also allow service providers the agility to develop applications faster, scale to meet the demands of transporting rapidly growing video and mobile traffic and reduce overall operating costs. For those building private networks in the critical infrastructure segments, such as energy, transportation and public services, HLN will provide the intelligence and mission-critical reliability they need to support their operations.

A High Leverage NetworkTM is a converged, all-IP (Internet protocol) network that can carry the different services that are carried today over a service provider’s multiple networks. It delivers broadband access to users on any device (wired or wireless), and automatically provides the bandwidth needed to deliver the services being used. It has the intelligence to manage traffic while providing the quality of service that is appropriate for each user and each of his services, and to do that at optimum cost. It is suitable for deployment in both emerging markets and the developed world, and in both densely populated and remote areas. It requires state of the art capabilities in IP, optics, wireless and wireline broadband access - as well as the software and services that together support Application Enablement.

Through Application Enablement, service providers can make their High Leverage NetworkTM available to content and application partners in a managed and controlled way. This approach is intended to help service providers develop new business models and improve subscriber loyalty through unique and personalized services, which help generate more revenue and boost brand value for these service providers. These services include multi-screen and high-definition video services, application-assured business services and collaborative communication services. We also believe that our High Leverage NetworkTM will help service providers address new market opportunities such as next generation open access fiber networks, cloud computing and machine-to-machine (M2M) communication.

Organization. In the context of our continued focus on the High Leverage NetworkTM framework, on July 20, 2011, we reorganized our operating segments in an effort to better support our vision of the network as a platform that allows service providers to better monetize their networks and improve the quality of service for end-users. The three operating segments are as follows:

 

 

Networks – which remained unchanged, includes four main businesses - IP, Optics, Wireless and Wireline - and provides end-to-end networks and individual network elements that meet the strategic communications needs of fixed, mobile and converged service providers. The Networks group also includes another smaller business, Radio Frequency Systems;

 

 

Software, Services & Solutions (S3) – delivers a portfolio of combined software, services and solutions that focuses on the key opportunities and challenges facing our customers and that supplements and enhances our High Leverage Network™ product strengths. The Software, Services & Solutions group consists of the former Network Applications business, and the former Services group. The Services division designs, integrates, and manages networks through its consulting, professional and operations management practices. The Network Applications division integrates services and software to offer a wide range of solutions that allow service providers to better monetize their networks and for end-users to enjoy a better quality of service. This group also supports end-to-end solutions for strategic industries (energy, transportation and the public sector);

 

 

Enterprise - provides voice telephony, data networking technology and call center software (Genesys). On February 1, 2012 we consummated the sale of our Genesys business to Permira. For more information about the sale, see Chapter 4.2.

In addition, we organize our business as follows:

 

 

Customer sales organizations. We continue to have three customer-facing regional organizations: the Americas, Asia Pacific and EMEA (Europe, the Middle East and Africa), that are accountable for serving customers and growing the business profitably. The primary mission of these organizations is to sell and ensure the highest customer satisfaction. The three regions share responsibility for customer-focused activities with separate, dedicated sales teams for our vertically integrated units (submarine systems, Radio Frequency Systems and the enterprise marketing organization);

 

 

Global customer delivery. In July 2011, we created the Global Customer Delivery Organization (GCD) to serve as a single interface for Alcatel-Lucent when delivering on commitments to our customers. This new organization combines the resources from the former Quality Assurance & Customer Care teams with the Regional

 

 

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5.1 BUSINESS ORGANIZATION

 

 

   

Services Delivery and Carrier Applications teams. The GCD serves all customers and delivers our portfolio of products, services and solutions as well as other original equipment manufacturers’ products. The GCD oversees and manages end-to-end delivery of product to customers, manages global service delivery centers and defines and supports programs for end-to-end delivery strategy, best practices, knowledge management, delivery tools and systems, responsibilities, specific to the unique technology or solution.

For financial information by operating segment (also called business segment) and geographic market, see Note 5 to our consolidated financial statements and Chapter 6 - “Operating and financial review and prospects”, included elsewhere in this document.

New 2011 Organization

The 2011 organization, following the reorganization in July 2011, is shown in the table below:

 

Networks   S3    Enterprise
IP   Services    Enterprise Solutions
Optics   Network Applications    Genesys (sold in 2012)
Wireless (including Radio Frequency Systems)         
Wireline         
 

 

The following table shows how the 2011 organization was changed to create the new organizational structure:

 

LOGO

5.2 NETWORKS SEGMENT

 

Globally, end-user demand for high-bandwidth services that are delivered with an enhanced quality of experience is surging. In addition, global market dynamics are dictating that service providers must have the agility to support multiple business models to deliver innovative revenue-generating services. To meet all these challenges, service providers are evolving their networks to a next-generation, all-IP multiservice infrastructure that is fully converged, optimized and scalable. The Networks segment supplies a broad portfolio of products and offerings used by fixed, wireless and converged service providers to address these needs, as well as enterprises and governments for their business critical communications.

 

The High Leverage Network™ is our vision of how networks need to evolve, leveraging fundamental technology shifts in wireline and wireless broadband access, internet protocol (IP) and optics to address evolving networking needs. It allows service providers to address the key challenge of how to simultaneously deliver innovative, revenue-generating services and provide scalable, low-cost bit delivery. In order to achieve this objective, in 2011 we continued to invest in:

 

 

Next-generation IP platforms, including mobile backhaul and the evolved packet core (EPC), which converges voice and data over an all-IP core network;

 

 

Continued focus on multi-dimensional IP platform scale (capacity, services, control plane) utilizing silicon technology as demonstrated by our FP3 400 gigabit/second (400 Gbps) Network Processor;

 

 

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Converged IP/Optical backbone offerings;

 

 

Converged Radio Access Networks (RAN) using multi-generation access radio equipment and the latest lightRadio™ and small cell/femto technologies, which allow coverage and capacity expansion while offloading voice and data traffic on a service provider’s macro network;

 

 

Next-generation copper and fiber access innovations, focusing on very high speed Digital Subscriber Line (VDSL) bonding vectoring, which increases network speeds over existing copper infrastructure, and 10 Gbps symmetrical Gigabit Passive Optical Networks (GPON); and

 

 

Converged network management.

In 2011 our Networks segment revenues were 9,654 million including intersegment revenues and 9,638 million excluding intersegment revenues, representing 62% of our total revenues.

INTERNET PROTOCOL

Our portfolio of IP routers and switches is designed to support IP-based applications and services while helping service providers monetize their network investment and reduce customer churn. Key services supported by this portfolio include broadband triple play (voice, video and data) for residential customers; Ethernet and IP Virtual Private Network (VPN) services for Enterprise customers; and wireless second generation (2G), third generation (3G) and fourth generation (4G) broadband services for mobile operators.

The main product families within the IP portfolio are:

 

 

Internet Protocol/Multiprotocol Label Switching (or IP/MPLS) service routers. These products direct traffic within and between carriers’ national and international networks to enable delivery of a broad range of IP-based services (including internet access, Internet Protocol TV (IPTV), Voice over IP, mobile phone and data and managed business VPNs) on a single common network infrastructure with superior performance, application intelligence, and scalability (i.e. the simultaneous support of many diverse types of traffic and customers);

 

 

Carrier Ethernet service switches. These switches enable carriers to deliver residential, business and wireless services more cost-effectively than traditional methods due to their higher capacity and performance. These products are mainly used in metropolitan area networks;

 

 

Multi-service wide-area-network (or MS WAN) switches. These switches enable fixed line and wireless carriers to transition their existing networks to support newer technologies and services; and

 

 

Content Delivery Network (CDN) appliances. These devices distribute and store web and video content. They align with and support our High Leverage NetworkTM strategy by delivering a wide variety of video and other content to businesses and consumers in cost-effective ways, as well as providing opportunities for new business relationships between service providers and content providers.

The applicability of our service router and switch portfolio continues to expand to meet the needs of service providers. The following are some of our key areas of focus and investment in 2011:

 

 

The Evolved Packet Core (EPC), which utilizes our service routers, plays a key role in fourth generation (4G) LTE wireless architecture, providing wireless data services and internet access for devices such as smartphones, tablets and netbooks;

 

Our Converged Backbone Transformation Solution, utilizes our market-leading 100 Gbps technology across both our IP and optics portfolios. This product increases the communication and collaboration between the traditionally independent IP and optical layers of the network by tightly integrating IP and optical network elements as well as network management and control layers;

 

 

Continued focus on multi-dimensional platform scale (capacity, services, control plane) with leading-edge silicon innovation as demonstrated by our FP3 400 Gbps Network Processor. This platform will help service providers deliver voice, data and video services at the highest speeds without compromising quality of service; and

 

 

Deep packet inspection (DPI) technology, which allows service providers to deliver enhanced application-aware cloud services to enterprise customers and to broadband customers.

Our service routers and carrier ethernet service switches share a single network management system that provides consistency of features, quality of service, and operations, administration and maintenance capabilities from the network core to the customer edge. These capabilities are critical as carriers transform their networks to support new Internet-based services. Our service routers enable service providers to deliver complex services to business, residential and mobile end-users, ensuring high capacity, reliability and quality of service.

OPTICS

Our Optics division designs and markets equipment for the long distance transmission of high speed data over fiber optic connections via land (terrestrial) and undersea (submarine), for the short distances in metropolitan and regional areas, and for traffic aggregation of fixed and mobile multi-services. Our leading transport portfolio also includes microwave wireless transmission equipment.

Terrestrial optics

Our terrestrial optical products offer a portfolio designed to seamlessly support service growth from the metro access to the network core. With our products, carriers manage voice, data and video traffic patterns based on different applications or platforms and can introduce a wide variety of managed data services, including multiple service quality capabilities, variable service rates and traffic congestion management. Most importantly, these products allow carriers to leverage their existing network infrastructure to offer new services and to support third generation (3G) and LTE mobile services.

As a leader in optical networking, we play a key role in the transformation of optical transport networks within a High Leverage NetworkTM. Our wavelength-division multiplexing (WDM) products address a variety of markets, from the enterprise to the ultra-long-haul, to meet service provider requirements for cost-effective, scalable networks that can handle their increased data networking needs. Our WDM product portfolio is based on an intelligent photonics approach

 

 

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which eliminates the need for frequent on-site configuration and provisioning. The 100 Gbps technology innovation available in our WDM products along with 10 Gbps and 40 Gbps high speed rates allow operators to solve bandwidth bottlenecks, while offering the lowest cost per transported bit. This new approach facilitates the design and installation of a more flexible WDM network that is easier to operate, manage and monitor.

In 2011, the Terrestrial optics unit focused its R&D efforts on:

 

 

expanded scalability, capacity and performance features of our photonic networking portfolio, which allows service providers to more efficiently transport increasing volumes of IP-based traffic including:

 

   

the commercial launch of our converged DWDM and Optical Transport Network (OTN) switching platform with control plane intelligence, which provides more service scalability and efficient utilization of optical network resources; and

 

   

the launch of our second generation of 100 Gbps single-carrier coherent technology in our WDM products to improve transmission capabilities and efficiency over long distances;

 

 

traffic aggregation, where our new packet optical transport technology facilitates the migration of a network to all-IP by aggregating multiple types of traffic including legacy and IP-based; and

 

 

our Converged Backbone Transformation Solution, which increases the integration and collaboration between the optical and IP layers of the network, helping service providers optimize their transport infrastructure to profitably meet the growing demands of multimedia traffic growth.

These products and technologies provide cost-effective, managed platforms that support different services and are suitable for many different network configurations.

Submarine

We are an industry leader in the development, manufacturing, installation and maintenance of undersea telecommunications cable networks. Our submarine cable networks connect continents (using optical amplification required over long distances), a mainland to islands, island to islands or several points along a coast. This market is characterized by relatively few large contracts that often require more than one year to complete. Projects are currently concentrated on links between Europe, Africa, India and Southeast Asia. In addition to new cable systems, this market also includes significant activity upgrading existing submarine networks as our service provider customers add capacity – moving to 40 Gbps and preparing for 100 Gbps - in response to surging broadband traffic volumes.

Wireless transmission

We offer a comprehensive portfolio of microwave radio products meeting both European telecommunications standards (or ETSI) and American standards-based (or ANSI) requirements. These products include high, medium and low

capacity microwave transmission systems for mobile backhaul applications, fixed broadband access applications, and private applications in markets like digital television broadcasting, defense and security, energy and utilities.

In 2011, the Wireless Transmission unit focused its R&D efforts on:

 

 

The 9500 Microwave Packet Radio (MPR), a next-generation multi-purpose packet microwave radio which allows service providers to quickly and efficiently transform their networks from legacy, or time-division multiplexing (TDM), transport to highly efficient packet transport. Packet transport supports the shift to IP-based services and data traffic and growth;

 

 

IP-enabled microwave for mobile backhaul applications, which combines packet-based wireless transmission with IP networking to help service providers transition from second generation (2G) to third or fourth generation (3G or 4G) mobile networks.

In the wireless transmission market, we maintained a leadership position in both the worldwide packet microwave segment as well as the long haul segment.

WIRELESS

Our “Wireless All Around” approach is a unique combination of wireless and IP products designed for mobile operators so that they may improve the mobile internet service for their customers. We enable today’s network evolution toward end-to-end wireless IP, supporting a converged radio access network (RAN) using multi-generation (2G, 3G, and 4G LTE) access radio equipment and the latest lightRadio™ and small cell/femto technologies. We launched lightRadio™ in 2011 as an innovative platform that provides service providers a true converged RAN, enabling capacity upgrades more quickly and cost effectively.

CDMA (Code Division Multiple Access)

Our CDMA strategy is focused on maintaining our installed base of this technology by delivering quality, capacity and OA&M (operations, administration and management) improvements to our customers. In 2011, we continued to focus on our customers’ total cost of ownership with products that can reduce capital expenditures and operating expenses. Operators are seeking to evolve their existing networks to the latest LTE technology that will work with their existing 3G technology which will allow the reuse of base station and back haul assets, while at the same time minimizing the footprint and improving the power efficiency of these products. Our Multi-Technology (MT) products accomplish this evolution. Introducing elements from our LightRadio™ program into our CDMA product provides CDMA operators the benefit from the latest wireless advances and reinforces our commitment to eco-sustainability.

The current version of CDMA technology supports circuit switched voice with CDMA2000® 1X and packet data with 1x EV-DO Revision A. We have developed improvements for both programs: 1X Advanced uses improved interference cancelation routines to improve the voice capacity and quality of existing networks and has the potential to triple the current

 

 

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voice capacity with new 1X Advanced handsets. Likewise, 1xEV-DO Revision B has the potential to triple the current Revision A user data experience and a new program called EV-DO Advanced provides network load balancing features that improve the overall user experience by maximizing the operational efficiencies of heavily loaded networks.

GSM (Global System for Mobile Communications)

We develop mobile radio products for the second generation (or 2G) GSM (or Global System for Mobile communications) standard, including GPRS/EDGE (or General Packet Radio Service / Enhanced Data Rates for GSM Evolution) technology upgrades to that standard. As part of our multi-technology or multi-mode strategy, our GSM radio products also support 3G and 4G technologies to allow a smooth network evolution at minimum cost. While GSM is a mature technology, operators in emerging markets, such as China and India, continue to add capacity to accommodate subscriber growth.

In 2011, we launched our new SDR (software defined radio) product that allows fast and cost-effective network rollouts and facilitates upgrading to new wireless technologies (such as 3G and 4G) by software upgrade.

As part of our innovation program, we are active in the “Green” base station market with products powered by renewable energy sources. We have already deployed thousands of base stations using alternative energies worldwide, including wind and solar power. Our Dynamic Power Save capability can be installed in base stations and has helped reduce the power consumption by up to 30%.

W-CDMA (Wideband Code Division Multiple Access)

Wideband Code Division Multiple Access, referred to as W-CDMA or Universal Mobile Telephone Communications Systems (UMTS), is the third generation wireless technology derived from the GSM standard deployed worldwide. The focus on W-CDMA and other 3G wireless technologies has increased along with increasing end-user demand for mobile broadband capabilities because pre-3G technologies have an extremely limited broadband data capability. Growing demand for mobile broadband has driven increased investment in 3G networks so that our service provider customers can offer new mobile high-speed data capabilities to end-users.

We are a key supplier of some of the W-CDMA networks carrying the highest amount of traffic in the world, including AT&T in the U.S., China Unicom in China and various networks in Korea. Our portfolio strategy is based on improving network capacity while reducing total cost of ownership, consistent with our High Leverage NetworkTM concept. For example, our multi-technology and multi-carrier radio modules are key components of our converged RAN (radio access network) solution that allows for a smooth technology evolution to LTE. We conducted our first lightRadio W-CDMA Metrocell trials with tier-1 operators in Europe and the Middle East aimed at improving network efficiency and complementing an operator’s broader network at a lower cost with a shorter time to market.

TD-SCDMA (Time Division-Synchronized Code Division Multiple Access)

We have an alliance with Datang Mobile to foster the development of the TD-SCDMA (or Time Division-Synchronized Code Division Multiple Access) 3G mobile standard in China, where we deployed trial TD-SCDMA networks starting in 2006. In 2009, we were selected, along with Datang Mobile, by China Mobile for deployment of its phase III TD-SCDMA mobile networks in 11 provinces. In 2010, we continued to work with China Mobile as it continued its massive TD-SCDMA rollout (phase IV) to expand 3G coverage across China, with the networks covering 339 Chinese cities. In 2011 we continued deployment of TD-SCDMA equipment. Growth will depend upon how quickly the handset and other device markets expand.

LTE (Long-Term Evolution)

Fuelled by the proliferation of smartphones, tablets, laptops and netbooks, the increasing number of multimedia applications and the resulting surge of mobile broadband data traffic, the market for 4G LTE (Long Term Evolution), or fourth-generation wireless, is being adopted faster than originally predicted. The first commercially available LTE networks are now operational, including several large scale networks serving millions of people. In addition there are a significant number of service providers who are participating in advanced large scale trials and pilot networks. LTE offers service providers a highly compelling evolution path from all existing networks (GSM, W-CDMA, CDMA or WiMAX) to 4G wireless by simplifying the radio access network and converging on a common IP base, leading to better network performance and a lower cost per bit. LTE creates an environment in which consumers will be able to use wireless networks to access high-bandwidth content at optimal cost, enabling a new generation of affordable services.

We are focusing our LTE R&D spending on developing a differentiating, end-to-end all-IP wireless offering that includes our RAN (radio access network), mobile backhaul that supports 2G, 3G and 4G/LTE traffic, a high-performing evolved packet core, end-to-end IP multimedia subsystem (IMS) and a full set of differentiating 4G/LTE services and applications. In February 2011, we announced our vision for a breakthrough multi-generation wireless portfolio called lightRadio, which will allow service providers to quickly expand network capacity, lower operating costs and reduce energy consumption. The lightRadio portfolio is being co-created in collaboration with leading operators like China Mobile, Telefonica, Etisalat and others and has won several industry awards for innovation in mobile broadband.

As for services, we founded the ngConnect Program to link operators with a broad ecosystem of device, content and application partners committed to the development and rapid deployment of new services based on LTE and other high bandwidth technologies. We have entered into contracts to deploy commercial LTE networks with 20 operators worldwide, including Verizon Wireless, AT&T, Sprint, Vimpelcom Group, Etisalat and large scale pilot networks with China Mobile and Telefonica. We currently have more than 80 LTE trials covering different geographies, frequencies and applications.

 

 

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We also continue to make progress in the area of LTE for public safety with a number of industry firsts and live demonstrations as well as a contract with the city of Charlotte in the US.

RFS (Radio Frequency Systems)

RFS designs and sells cable, antenna, tower systems and their related electronic components, providing an end-to-end suite of radio frequency products. RFS serves OEMs, distributors, system integrators, network operators and installers in the broadcast, wireless communications, microwave and defense sectors. Specific applications for RFS products include cellular sites, in-tunnel and in-building radio coverage, microwave links, TV and radio.

WIRELINE

Fixed access

We are the worldwide leader in the fixed broadband access market, supporting the largest mass deployments of video, voice and data services. According to Dell’Oro (December 2011), we are the largest global supplier of digital subscriber line (or DSL) technology, with 37% of global DSL revenues, and the second largest global supplier of Gigabit Passive Optical Networking (or GPON) technology, with 24% of global revenue. Today, one out of three fixed broadband subscribers around the world is served through one of our access networks. Our global installed base now includes about 248 million DSL lines and more than 4.1 million GPON end-user connections. Our fixed access customers include leading global service providers as well as utility companies and municipalities. We are present in most major GPON deployments worldwide, including more than 140 fiber-to-the-home (FTTH) projects of which more than 120 are GPON-based.

Our fixed access product unit designs and develops products that allow service providers to offer high speed broadband connectivity for internet access and other services to residents and businesses around the world, otherwise known as DSL FTTH equipment. The explosion of data into the home, especially in the form of video, has driven the need for service providers to invest in their access networks and to increase speeds at a faster rate. These products also help complete the transformation of legacy networks to IP by providing IP connectivity for the last mile.

Our latest DSL investments are centered around VDSL2, providing vectoring capabilities to increase the bandwidth that can be delivered over a service provider’s existing copper infrastructure, reaching data speeds of 100 Mbps or more to the home. Vectoring is a noise cancelling technology that removes the interference, or “crosstalk”, from neighboring copper pairs and allows the connection to operate at the highest levels possible.

For FTTH, we continue to invest in technology to increase capacity and density to lower a service provider’s cost per subscriber. In addition, efforts to reduce the size and increase the capability of optical network terminals (ONTs) are underway. Integrating home residential gateway and wireless access point functions into the ONT portfolio simplifies managing home environments by requiring fewer devices in the home.

Also in this area, providers must accommodate new video traffic demand and compete with other service providers who can offer a full suite of triple play services (voice, video and data). Our investments in fixed access products are intended to meet those needs. Our portfolio contains the software to offer the quality of experience and the innovation to deliver the speeds needed for various services. The converged nature and the portfolio breadth of the our fixed access products allows providers to efficiently deploy a mix of both copper and fiber technologies in whatever deployment model is desired.

IMS/NGN

We offer products that extend from legacy switching systems to IP multimedia subsystem (IMS) solutions for fixed, mobile, and converged operators. Service providers have expressed a strong desire to migrate their legacy switching infrastructure to IMS with products that are reliable, scalable, and secure, beginning with basic voice services and growing into enriched multimedia services enabled by IMS.

Our IMS products are designed to meet a diverse set of network objectives ranging from consumer and business VoIP to enhanced and multimedia communications services, for both fixed and mobile operators. We achieve these objectives by delivering a single set of software assets that are highly scalable. Our IMS products work across all types of access (wireline and wireless) and all network technologies.

By leveraging our IMS communications solutions, service providers can deliver to subscribers a seamless transition between telecommunications, the web, and alternative providers’ networks. Our IMS portfolio is a focus of our Application Enablement strategy, and a key component of the High Leverage Network™ architecture.

Our IMS technology is flexible and scalable enough to be deployed in various configurations across all geographies and network types – fixed, mobile, converged, and cable. Our IMS products work across all types of access networks and can be deployed in either a distributed or integrated configuration. In either configuration, the same software supports both traditional POTS (plain old telephone service) and IP endpoints. The integrated configuration is packaged within a single hardware platform (or chassis) while the distributed product is packaged based on a customer’s business needs and network topology (multiple chassis). As an added capability, the product elements can be located in different sites (geo-redundancy) for even higher reliability.

 

 

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5.3 SOFTWARE, SOLUTIONS AND SERVICES (S3) SEGMENT

 

5.3    SOFTWARE, SOLUTIONS AND SERVICES (S3) SEGMENT

 

Overview

Our S3 segment is a software-enabled services business that focuses on bringing innovation to our customers’ networks and enabling them to use their networks as a business platform. S3 supplements and enhances our High Leverage Network™ strategy by transforming communications networks and operations from legacy to next generation wireless and converged networks, and building applications that leverage those next-generation networks. S3 is a world leader supplying solutions for telecommunications service providers and strategic industries including transportation, energy and the public sector.

The S3 Business portfolio includes:

 

 

Services that include: Network and Systems Integration, Managed and Outsourcing Solutions, Multivendor Maintenance and Product Attached Services that design, integrate, manage and maintain networks worldwide.

 

 

Network Applications address key customer opportunities including: Advanced Communications Solutions, Customer Experience Solutions, Payment and Charging Solutions, Mobile Commerce Solutions, Applications Enablement and Cloud.

In 2011 our S3 segment revenues were 4,461 million including intersegment revenues and 4,451 million excluding intersegment revenues, representing 28% of our total revenues.

SERVICES

We have expertise in consulting, planning, design integration and optimization, operations management and maintenance of complex, multi-vendor end-to-end telecommunications networks, as well as design, delivery and operations of network-based software solutions. S3 services are designed to provide a full services value chain – from planning to implementation to operations and support needed to create solutions with our customers in collaborative engagements.

Services offerings are organized around the four areas where we believe our customers can most benefit from our multi-vendor IT/telecommunication practices:

 

 

network and system integration

 

 

managed and outsourcing solutions

 

 

multi-vendor maintenance

 

 

product-attached services

Network and Systems Integration (NSI) encompasses Consulting Services and Professional Services. Consulting Services address our customers’ strategic, business and technology considerations in transforming their legacy networks into IP platforms. NSI Professional Services consist of our Network Innovation and Network Solution practices. Our network innovation practice focuses on planning, design, integration, optimization and transformation of wireless and

wireline networks while helping customers address challenges in network operating systems and related IT infrastructure as well as creating integrated telecommunications cloud infrastructures. Our network solution practice focuses on planning, design, integration and delivery of solutions that allow for features such as managing customer experience, delivery of IMS-based communications services, mobile commerce and application enablement. Professional Services offered by NSI are differentiated in the market by our software-enhanced delivery methodology and our Advanced Integration Methods (AIM), which provide a framework for execution that combines network, telecommunications, IT and migration expertise in a streamlined way to reduce integration time, improve solution quality and ensure meeting customer requirements.

Our IP Transformation Centers are located in Antwerp (Belgium), Murray Hill (USA), Chennai (India) and Singapore, allowing our customers to robustly test their target network in a live, multi-vendor environment, thereby minimizing risk and shortening time-to-market. Our centers for engineering and migration services in Poland, Turkey and India allow the migration of data or subscribers around the globe. Our IP network transformation services also support the evolution of our customers to a High Leverage NetworkTM.

Managed and outsourcing solutions consist of a range of network operations services and hosted or service management solutions tailored to the solutions that S3 delivers. Managed Services practices are aligned with our Professional Services Practices and provide options for simplifying network transformations, reducing the risk of introducing new solutions, and reducing operating expenses. Managed Services, including Outsourcing, use a standard set of tools and other resources (technology and people) to manage our customers’ networks.

We are a global player in the delivery of multi-vendor maintenance services. Multi-vendor maintenance services create operational efficiencies for customers by restructuring and streamlining traditional maintenance functions and delivering improved service levels at a lower total cost. Our global reach, multi-vendor technology skills, integrated delivery capability, and delivery track record characterize our offerings. Multi-vendor services include technical support to diagnose, restore, and resolve network problems, and spare parts management to improve asset utilization.

We also provide product-attached services, which include network build and implementation (NBI) and maintenance services for our equipment and systems. Our NBI services support networks of all sizes and complexity regardless of whether they are wireless, wireline or converged. These activities are carried out by our own global workforce, supplemented by a network of qualified partners who ensure that our customers’ new networks are delivered cost-effectively and with minimum risk. Our maintenance professionals provide industry leading support as a single point of contact for Alcatel-Lucent and multivendor products. Capabilities include remote and on-site technical support services for both proactive and reactive maintenance needs.

 

 

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5.3 SOFTWARE, SOLUTIONS AND SERVICES (S3) SEGMENT

 

 

NETWORK APPLICATIONS

Our Network Applications combine software and systems to address key customer challenges and opportunities. Networks Applications include:

 

 

Advanced Communications Applications: comprised of communication products and solutions to transition our customers to next generation voice, video and messaging communications services. Key building blocks include IMS, Subscriber Data Management and Messaging/Communication enablers.

 

 

Mobile Commerce Applications: enable service providers to drive engagement and transactions on the network by securely allowing mobile commerce to capitalize on the immediacy of purchase decisions. The portfolio addresses the entire lifecycle of user purchases from promotion, discovery, to storefronts and purchase.

 

 

Our Payment and Charging Applications include real-time rating, charging, billing and payment applications for voice and data services. These applications give service providers the ability to charge their consumer and enterprise customers for services rendered.

 

 

Our Customer Experience Applications which are built around our Motive software, enable communications providers to offer, activate, support and manage a wide range of high-speed Internet, VoIP, video, mobile and converged services. Motive software gives communications providers the tools they need to help customers set up, manage, and meter their home and mobile devices and services.

 

 

Application Enablement focuses on ensuring that service providers can participate in new business models and new distribution channels to transform their business to take advantage of application programming interfaces (API). APIs enable service providers to create new services that are developed and delivered to market faster, at lower cost and at scale.

 

 

Our new CloudBand solution allows service providers to deliver to their customers cloud services that include voice, video, and data across both fixed and mobile networks. Using CloudBand, service providers can ‘virtualize’ many of the critical elements of their networks by converting them into software which is run in the cloud and accessed on demand as needed to address shifts in customer usage patterns.

Key areas of focus in 2011 included:

 

 

Customer experience analytics: We continued our work in Customer Experience Analytics products, which began in 2010 - as part of the Motive portfolio of customer experience solutions - designed to deliver customer-focused, data-driven insights that let service providers track their customers’ quality of experience, predict propensity to churn and calculate customer lifetime value.

 

 

Advanced Communication Solutions: Building off our success with fixed networks, we helped our customers transition from legacy mobile to 4G networks with next generation communication services including voice, video communications and intuitive messaging across any device.

 

 

Mobile Commerce/Mobile Payment solutions in 2011 reaped the benefits of the work our Digital Media Store, Optism™, and Mobile Wallet solutions began in 2010. We closed multiple key definitional customer wins in each major region, demonstrating the success of our solutions in meeting the emerging requirements of our customers.

 

 

Application Enablement: We launched our Open API Platform, which allows developers to collaborate, build, test and distribute new applications for service provider networks. This has helped expand on our success of our ProgrammableWeb and OpenPlug acquisitions including engagements with Service Providers on multiple key projects around the globe.

 

 

5.4    ENTERPRISE SEGMENT

 

Our Enterprise organization is a world leader in communications and network solutions for businesses of all sizes, serving more than 250,000 customers worldwide. Enterprise delivers solutions to improve conversations across employees, customers and partners by driving multi-media, multi-device, multi-party communications and collaboration. Enterprise products can be utilized in multiple enterprise communications platforms, telephony and networks, and customer service software.

We work with more than 2,000 application and business partners to meet the unique needs of customers and ensure success – from small to medium-sized business to large enterprises and public sector organizations to global companies. Our solutions and services can be based on premise, hosted, outsourced or customized environments that allow a combination of deployment models. Our team of

service professionals provides services ranging from consulting through to implementation to support of complex or customized deployments.

The Group’s portfolio includes:

 

 

Unified Communication & Collaboration applications: Fixed and mobile unified communications software and products that integrate communications networks with in-house data, systems and business process platforms to provide anytime, anywhere access to business data across the enterprise.

 

 

Communications Platforms and Telephony solutions: Next generation enterprise communications that delivers multi-media, multi-device, multi-party communication to enterprise employees across site and locations.

 

 

Comprehensive project management and professional services: Offerings for large enterprises, carriers and customers in a wide range of vertical markets.

 

 

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Previously, the Genesys customer service and contact center software business was included within this segment. Genesys is a market leader in contact centers worldwide and is a leading provider of the software used by enterprises and service providers to manage all aspects of customer service with their customers through the Web, by phone or mobile device. On February 1, 2012, we completed the sale of this business to Permira for a cash payment of US$ 1.5 billion.

Key areas of focus in 2011 included:

 

 

Communications platforms: During 2011, we launched our next generation suite of communications platforms called OpenTouch. Leveraging our innovation and expertise in Session Initiation Protocol (SIP), the dominant signaling protocol, or standard, used to control IP-based multimedia communications, OpenTouch delivers an open approach to communications that is natively multi-party, can mix media, and can allow users to move freely between any device within the same conversation.

 

Network infrastructure: in 2011 we launched innovative offerings for enterprise networks and data centers, enabling 10 Gigabit Ethernet or 40 Gigabit Ethernet options, through our OmniSwitch 10K switching portfolio. These new releases have tremendous market momentum and are enabling us to deliver on our Application Fluent Network Vision, which was launched in 2010 and focuses on providing products that meet the demands of rich media applications and virtualization within the enterprise.

 

 

Devices: in 2011 we brought our My IC Phone to market, a new smart desk phone that combines the capabilities and application experience of a smartphone with the reliability and availability of a desk phone.

In 2011 our Enterprise segment revenues were 1,213 million including intersegment revenues and 1,143 million excluding intersegment revenues, representing 8% of our total revenues.

 

 

5.5     MARKETING AND DISTRIBUTION OF OUR PRODUCTS

 

We sell substantially all of our products and services to the world’s largest telecommunications service providers through our direct sales force. In some countries, such as China, our direct sales force may operate in joint ventures with local partners and through indirect channels. For sales to Tier 2 and Tier 3 service providers, we use our direct sales force and value-added resellers. Our three regionally-focused sales organizations have primary responsibility for all customer-focused activities, and share that responsibility with the sales teams at certain integrated units such as submarine systems, radio frequency systems and strategic industries, such as transportation, energy and the public sector. Our enterprise communications products are sold through channel partners and distributors that are supported by our direct sales force. We also jointly market, with HP, our enterprise products and applications with their IT solutions.

Our three regionally focused sales organizations work very closely with our Marketing and Global Customer Delivery organizations. The Marketing team is focused on understanding customer needs and bringing value propositions to market to meet these needs. The Global Customer Delivery team oversees and manages end-to-end delivery of product to customers, manages global service delivery centers and defines and supports programs for end-to-end delivery strategy, best practices, knowledge management, delivery tools and systems, responsibilities, as well as provides technology or system specific solutions to problems as they arise.

 

 

5.6    COMPETITION

 

We have one of the broadest portfolios of product and services offerings in the telecommunications equipment and related services market, both for the carrier and non-carrier markets. Our addressable market segment is very broad and our competitors include large companies, such as Avaya, Cisco Systems, Ericsson, Fujitsu, Huawei, ZTE and Nokia Siemens Networks (NSN). Some of our competitors, such as Ericsson, NSN and Huawei, compete across many of our product lines while others - including a number of smaller companies - compete in one segment or another. In recent years, consolidation has reduced the number of networking equipment vendors, and the list of our competitors may continue to change as the intensely competitive environment drives more consolidation. However, it is too early to predict the changes that may occur.

We believe that technological advancement, product and service quality, reliable on-time delivery, product cost, flexible manufacturing capacities, local field presence and long-standing customer relationships are the main factors that

distinguish competitors within each of our segments in their respective markets. In today’s tight-credit environment another factor that may serve to differentiate competitors, particularly in emerging markets, is the ability and willingness to offer some form of financing.

We expect that the level of competition in the global telecommunications networking industry will remain intense for several reasons. First, although consolidation among vendors results in a smaller set of competitors, it also triggers competitive attacks to increase established positions and market share, pressuring margins.

Consolidation also allows some vendors to enter new markets with acquired technology and capabilities, effectively backed by their size, relationships and resources. In addition, carrier consolidation is continuing in both developed and emerging markets, resulting in fewer customers overall. In areas where capital expenditures remain under pressure, the competitive impact of a smaller set of customers may be compounded.

 

 

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Most vendors are also targeting the same set of the world’s largest service providers because they account for the bulk of carrier spending for new equipment. Competition is also accelerating around IP network technologies as carriers continue to shift capital to areas that support the migration to next-generation networks. Furthermore, competitors providing low-priced products and services from Asia are

gaining significant market share worldwide. They have been gaining share both in developed markets and in emerging markets, which account for a growing share of the overall market and which are particularly well-suited for those vendors’ low-cost, basic communications offerings. As a result, we continue to operate in an environment of intensely competitive pricing.

 

 

5.7     TECHNOLOGY, RESEARCH AND DEVELOPMENT

 

We place a priority on research and development because innovation creates technologies and products that can differentiate us from our competitors and can potentially generate new sources of revenue. Research is undertaken by Bell Labs, our research arm. In addition to the new products and technologies brought to market, in 2011 our R&D community and Bell Labs continued to achieve advances across a wide range of disciplines - from optical networking to eco-sustainable (“green”) technologies, to wireline and wireless technologies. The following are examples of some of our ongoing projects:

Technology/Development Activities:

 

 

In 2011, we introduced a new network processor that delivers a fourfold increase in performance over the fastest Internet Protocol (IP) networks available today. By supporting 400 Gbps transmission speeds, the FP3 processor opens up new possibilities for bandwidth-intensive services, applications and content, while cutting power consumption by up to 50 percent.

 

 

Our lightRadio™ product made its debut at Mobile World Congress in February 2011. The cube-sized device represents a new approach where a base station (typically located at the base of each cell site tower) is broken into its component elements and then distributed through both the antenna and a cloud-like network. Since its launch, the lightRadio team has made tremendous strides, including connecting the world’s first long-distance, high-quality mobile video-call using lightRadio™. The lightRadio team is building collaborative partnerships with several large carriers, including China Mobile and Telefonica. It also has won several industry awards, including the CTIA E-Tech Award, Light Reading’s Best New Product in the Mobile category, and the Broadband World Forum Infovision Award.

 

 

In December, we made a major advance in 100 Gbps optical networking by introducing a breakthrough in single-carrier coherent technology that will extend optical signals over distances far greater than has been possible before, even over poor quality fiber.

 

 

We are developing a new product that employs techniques developed at Bell Labs to monitor and maintain the quality of optical signals transferred throughout a network. Our 100 Gbps XR card will be the first solution on the market capable of substantially extending the range, performance and capacity of 100 Gbps optical networks, while cutting building and operating costs.

INNOVATION

In 2011, we took a number of initiatives to further strengthen the innovation culture within our company, as well as advance “open” innovation programs that engage third parties in generating and exploiting new market opportunities.

Internally, we continued the “Entrepreneurial Boot Camp”, a program designed to encourage employees to develop innovative ideas into comprehensive business plans and ultimately, new products, solutions or services.

Externally, Bell Labs and partners continued to explore new products and systems with advanced technologies. For example:

 

 

We are working with Telekom Austria Group to roll out new technology showcases and trials of new innovations across its Eastern European operating companies. As part of the cooperation, Telekom Austria Group has been field-testing the latest state-of-the-art VDSL2 vectoring technology to enhance the speed of broadband services based on copper networks in Austria. The technology mitigates cross-talk between the copper lines within a cable and therefore increases the throughput and quality of broadband signals for customers.

 

 

We and the Singapore government’s Agency for Science, Technology and Research (A*STAR) Institute of Microelectronics are jointly planning to commercialize key innovations in silicon chips by bringing innovative silicon component designs from research to commercial fabrication readiness by 2013. These silicon building blocks will allow the integrated circuit industry to benefit from the availability of a dramatically increased data rate and processing power while simultaneously driving down cost.

 

 

Bell Labs and University of Melbourne, in partnership with the Victorian State Government, officially launched the Centre for Energy-Efficient Telecommunications (CEET), one of the largest research efforts on green telecommunications in the world. CEET will be devoted to innovation in energy-efficient networks and technologies with the ultimate goal of reducing the impact of telecommunications on the environment.

 

 

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5.7 TECHNOLOGY, RESEARCH AND DEVELOPMENT

 

 

RESEARCH ACTIVITIES

The Bell Labs Chief Scientist’s Office has been engaged in a two-phase activity focused on strengthening science and fundamental research in the labs. During the first phase, an assessment was made to determine the level of science and fundamental research projects that fulfill the Bell Labs mission. The second phase, which is on-going, is to identify and build on areas important to the future interests of Alcatel-Lucent. Some examples of these projects include:

 

 

In early 2011, Bell Labs provided the first demonstration of spatial division multiplexing over a single optical fiber, a novel multiplexing technology that has the potential to increase optical transmission by an order of magnitude over what is currently possible. This development represents a viable way of satisfying demand for high-speed networks into the future by overcoming previously perceived optical network capacity limits.

 

 

The GreenTouch™ consortium, launched in 2010 with 13 members, expanded its membership to 53 companies, universities and national research labs. The working groups within GreenTouch™ have more than 14 ongoing large collaborative projects and several others in development. In November GreenTouch™ unveiled its strategic research agenda for energy-efficient networks, and demonstrated its Large Scale Antenna System (LSAS) at an event in Switzerland. What distinguishes the GreenTouch™ LSAS is the method used to transmit signals. Instead of broadcasting signals throughout the entire coverage area as other antenna systems typically do, the LSAS transmits concentrated beams of information selectively to many users at once. The greater the number of antenna elements deployed, the higher the concentration of the beams and, therefore, the lower the power that any antenna needs to send a given amount of information.

STANDARDIZATION

Bell Labs employees continued to be actively engaged with telecommunication standardization bodies in 2011. Our engineers have participated in approximately 100 standards organizations and more than 200 different working groups, including the 3GPP, 3GPP2, ATIS, Broadband Forum, CCSA, ETSI, IEEE, IETF, OMA, Open IPTV Forum and TIA.

INDUSTRY RECOGNITION

During 2011, several current and past members of the Bell Labs research community and the broader Alcatel-Lucent technical community were recognized for their research at Alcatel-Lucent, as the recipients of more than 30 prestigious awards. Some of the most notable included: the 2011 Japan Prize, 2011 IEEE William R. Bennett Prize, the “Most Innovative Mobile Technology in 2011” category at the Andrew Seybold Choice Awards, World Technology Award by the World Technology Network and the Popular Mechanics 2011 Breakthrough Award.

 

 

5.8     INTELLECTUAL PROPERTY

 

In 2011, we obtained more than 2,600 patents worldwide, resulting in a portfolio of more than 29,000 active patents worldwide across a vast array of technologies. We also continued to actively pursue a strategy of licensing selected technologies to expand the reach of our technologies and to generate licensing revenues.

We rely on patent, trademark, trade secret and copyright laws both to protect our proprietary technology and to protect us against claims from others. We believe that we have direct

intellectual property rights or rights under licensing arrangements covering substantially all of our material technologies.

We consider patent protection to be critically important to our businesses due to the emphasis on Research and Development and intense competition in our markets.

On February 9, 2012 we entered into an agreement with RPX, pursuant to which they will offer our worldwide patent portfolio through non-exclusive patent licenses. For more information on this agreement, see Chapter 4.2 “History and Development – Recent Events”.

 

 

5.9     SOURCES AND AVAILABILITY OF MATERIALS

 

We make significant purchases of electronic components and other material from many sources. While we have experienced some shortages in components and other commodities used across the industry, we have generally been able to obtain sufficient materials and components from various sources around the world to meet our needs. Although both the Japan

earthquake which happened during the first quarter of 2011 and the flood in Thailand in the third quarter of 2011 led to an increase in delivery lead times, shortages, and inventory levels, there was neither disruption nor major impact on our production output across 2011. We continue to develop and maintain alternative sources of supply for essential materials and components.

 

 

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5.10 SEASONALITY

 

 

5.10    SEASONALITY

 

The typical quarterly pattern in our revenues - a weak first quarter, a strong fourth quarter and second and third quarter results that fall between those two extremes - generally reflects the traditional seasonal pattern of service providers’ capital expenditures. In 2011, however, the typical seasonal

pattern in our revenues was somewhat distorted due to stronger first-half spending in the U.S. and a weaker than expected fourth quarter given market uncertainty and selective spending from service providers, particularly in Europe.

 

 

5.11     OUR ACTIVITIES IN CERTAIN COUNTRIES

 

We operate in more than 130 countries, some of which have been accused of human rights violations, are subject to economic sanctions by the U.S. Treasury Department’s Office of Foreign Assets Control or have been identified by the U.S. State Department as state sponsors of terrorism. Some U.S.-based pension funds and endowments have announced their intention to divest the securities of companies doing business in these countries and some state and local governments have adopted, or are considering adopting, legislation that would

require their state and local pension funds to divest their ownership of securities of companies doing business in those countries. Our net revenues in 2011 attributable to Cuba, Iran, Sudan, Syria, North Korea and Myanmar represent less than one percent of our total net revenues. Although U.S.-based pension funds and endowments own a significant amount of our outstanding stock, most of these institutions have not indicated that they intend to effect such divestment.

 

 

5.12     ENVIRONMENTAL MATTERS

 

We are subject to national and local environmental and health and safety laws and regulations that affect our operations, facilities and products in each of the jurisdictions in which we operate. These laws and regulations impose limitations on the discharge of pollutants into the air and water, establish standards for the treatment, storage and disposal of solid and hazardous waste and may require us to clean up a site at significant cost. In the U.S., these laws often require parties to fund remedial action regardless of fault. We have incurred significant costs to comply with these laws and regulations and we expect to continue to incur significant compliance costs in the future.

With energy costs rising, our customers have indicated a desire for products that consume less energy. We have responded in kind with products that use, on average, 20% less energy than the previous generation, as well as founded the GreenTouch™ Consortium, which seeks to increase the efficiency of communications networks by 1,000-fold.

Our company believes that reducing our greenhouse gas (GHG) emissions is an important aspect of our reputation and future business performance. We have set an ambitious GHG reduction target of 50% from our operations by 2020. As of this time, we have reduced emissions from our own operations by over 22% and have instituted material changes in our own building operations and manufacturing locations to gain efficiencies, reduce energy-related costs and reduce our own carbon footprint.

Remedial and investigatory activities are under way at numerous current and former facilities owned or operated by the respective historical Alcatel and Lucent entities. In addition, Lucent (renamed Alcatel-Lucent USA Inc.) was named a successor to AT&T as a potentially responsible party at numerous Superfund sites pursuant to the U.S. Comprehensive Environmental Response, Compensation and

Liability Act of 1980 (“CERCLA”) or comparable state statutes in the United States. Under a Separation and Distribution Agreement with AT&T and NCR Corp. (a former subsidiary of AT&T), Alcatel-Lucent USA Inc. is responsible for all liabilities primarily resulting from or relating to its assets and the operation of its business as conducted at any time prior to or after the separation from AT&T, including related businesses discontinued or disposed of prior to its separation from AT&T. Furthermore, under that Separation and Distribution Agreement, Alcatel-Lucent USA Inc. is required to pay a portion of contingent liabilities in excess of certain amounts paid out by AT&T and NCR, including environmental liabilities. For a discussion about one such matter that involves the cleanup of the Fox River in Wisconsin, USA, please refer to Section 6.7 “Contractual Obligations and Off-Balance Sheet Contingent Commitments”, sub-title “Specific commitments - Alcatel-Lucent USA Inc.” in this annual report. In Alcatel-Lucent USA Inc.’s separation agreements with Agere and Avaya, those companies have agreed, subject to certain exceptions, to assume all environmental liabilities related to their respective businesses.

It is our policy to comply with environmental requirements and to provide workplaces for employees that are safe and environmentally sound and that will not adversely affect the health or environment of communities in which we operate. Although we believe that we are in substantial compliance with all environmental and health and safety laws and regulations and that we have obtained all material environmental permits required for our operations and all material environmental authorizations required for our products, there is a risk that we may have to incur expenditures significantly in excess of our expectations to cover environmental liabilities, to maintain compliance with current or future environmental and health and safety laws and regulations or to undertake any necessary remediation.

 

 

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The future impact of environmental matters, including potential liabilities and changing carbon and environmental reporting requirements, as well as the potential pricing of carbon emissions, is often difficult to estimate. We have also modeled the potential pricing of carbon on our financials. Although it is not possible at this stage to predict the outcome

of the remedial and investigatory activities with any degree of certainty, we believe that the ultimate financial impact of these activities, net of applicable reserves, will not have a material adverse effect on our consolidated financial position or our income (loss) from operating activities.

 

 

5.13     HUMAN RESOURCES

 

OUR APPROACH

The objective of the Human Resources team is to ensure that the right talent is at the right place at the right time in order to maximize our capability to execute our business strategy while continuing to pursue the objectives of encouraging diversity, promoting the development of talent and further driving employee engagement.

The Human Resources organization is committed to a focus on accountability, simplification and execution.

In 2011 we continued to simplify and transform our Human Resources operating model to further increase the efficiency and effectiveness of the Human Resources team in driving compelling plans to align people, competences and organization.

STRATEGIC WORKFORCE PLANNING

In 2011, we strengthened our ability to look beyond the one-year budget planning from a human capital point of view. In line with our long-term strategy and multi-year financial performance direction, we defined targets for skills and talents necessary to execute our business strategy. It is key for our long-term strategic direction with respect to product portfolio and financial performance to align critical talent with such strategy by adopting a prospective view on the necessary employee population changes and enhancing our ability to launch focused recruiting (internal and/or external), targeted training and planned geographic footprint consistency for the future.

With this new capability, our Group is able to manage its human capital population in an organization-agnostic way, by mapping all employees and contractors onto approximately one hundred standard profiles. The interchangeability and consistency of skills and competence mapping across sub-organizations is widely increased, resulting in a significant rise of internal hires versus external recruiting.

DIALOGUE BETWEEN MANAGERS AND EMPLOYEES

Focusing on continuous improvement and transparency, all managers and employees participate in continuous dialogues to define objectives, assess performance and discuss strengths and areas of development as well as career options. This process facilitates transparent, open discussions between each individual and his or her manager, in line with our Group’s global objectives.

STRATEGIC FOCUSED EMPLOYEE LEARNING

Leveraging the strategic direction and outcome of the dialogues between managers and employees, we have prioritized employee learning to increase the professional capabilities of our employees.

The new approach of the Human Resources Learning & Accreditation organization aims at further evolving its capabilities to provide maximum learning, coaching and mentoring for all employees. To do so, the learning offering now includes:

 

 

Common learning tracks across all our leadership competencies

 

 

People Accreditation programs aligned with strategic profiles defined by our strategic workforce plan

 

 

A new concept of Community Learning, reducing the lead-time for adapting to best-in-class skills, learning from the best in our company

 

 

Continuing the technical high standard learning classes using state-of-the-art learning facilities and e-learning aspects

LEADERSHIP PIPELINE AND TECHNICAL LADDER

A renewed Leadership Pipeline process enables the early detection of current and future high potential leadership talent at all levels in our Group. Accelerated development offerings are tailored to different readiness horizons for those identified in the Leadership Pipeline.

Growth of skills and competences for technical employees is also facilitated via the Technical Ladder initiative, which will provide employees:

 

 

Opportunities to excel in their expertise with a better view of their career path in the Group

 

 

Career opportunities and development growth

 

 

Recognition of the technical excellence and innovation they are delivering

ENCOURAGING MOBILITY

Providing employees the opportunity to explore new career options and to pursue professional advancement, mobility is a key driver in building Alcatel-Lucent’s human resource capabilities. By increasing the visibility of skills and competences, internal career mobility is reinforced by the Internal Job Opportunity Market (IJOM) launched in 2011. Designed to promote career

 

 

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growth and advancement opportunities within our Group, IJOM creates an open, easy and fair internal market for employees to seek roles that best fit their competencies and motivation.

DIVERSITY AT ALCATEL-LUCENT

As a world-wide player, diversity in all of its aspects is a key driver for ensuring a rich talent mix at Alcatel-Lucent. With more than 76,000 employees working and operating in more than 130 countries and representing more than 100 nationalities, we continue to believe that diversity is one of our greatest strengths.

This allows each of us to develop new ways of looking at issues and to contribute to our innovation and creativity. In today’s global environment we believe more than ever that it is crucial to understand the cultures, customs and needs of employees, customers and regional markets. As a global enterprise, we actively seek to ensure that our employee body reflects the diversity of our business environment. Our Statement of Business Principles and our Human Rights policies clearly confirm our responsibility to recognizing and respecting the diversity of people and ideas, and to ensuring equal opportunities.

Both gender and generation diversity are key active global initiatives.

With respect to gender diversity, we are focusing on five key elements going forward: Awareness Building, Staffing/Recruitment, Leadership Pipeline (succession planning) and Equal pay.

With respect to generation diversity, we have a world-wide Generation Y initiative, building further momentum on local initiatives, to enable and motivate the younger generation to connect with the leaders in our Group while providing a focused framework for Gen Y networking and engagement within the Group, and to stimulate upwards feedback (understanding from the youngest) and education (learn together in a way that fits the needs).

 

A LONG-TERM LOOKING COMPENSATION POLICY

Besides our renewed commitment to provide our employees with a competitive compensation package by country and in line with those of major companies in the technology sector, our compensation policy strives to strike a balance among various elements:

Clarity: common worldwide incentive criteria,

Simplicity: clear performance achievement levels communicated to all beneficiaries,

Global approach:  common sales incentive policy, worldwide equity yearly grant (see Chapter 7) and

Harmonization of global policies.

Our compensation structure also reflects both individual and company performance through the selected criteria.

Our policy is for all employees to be fairly paid regardless of gender, ethnic origin or disability.

Particular emphasis is placed on securing the future profile of our workforce, rewarding the development of highly needed skills driving our Group’s innovation and ensuring a long-term engagement with us through appropriate and dedicated policies, processes and recognition tools.

EMPLOYEES

At December 31, 2011, we employed 76,002 people worldwide(1), compared with 79,796 at December 31, 2010 and 78,373 at December 31, 2009.

The tables below show the business segments and geographic locations in which our employees worked on December 31, 2009 through 2011.

Total number of employees and the breakdown of this number by business segment and by geographical area is determined by taking into account all of the employees at year-end who worked for fully consolidated companies and companies in which we own 50% or more of the equity.

 

 

 

(1) This number includes the 1,636 employees of our Genesys business at December 31, 2011.

 

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Breakdown of employees by business segment

 

      Networks      Software,
Services and
Solutions
(S3)
     Enterprise      Applications      Services      Other      Total Group  
2009      28,429                           12,088         35,801         2,055         78,373   
2009 Restated (1)      28,429         41,483         6,406                           2,055         78,373   
2010      28,547                           11,155         38,909         1,186         79,796   
2010 Restated (1)      28,547         44,289         5,775                           1,186         79,796   
2011      27,261         41,959         5,703                           1,079         76,002   

 

(1) The 2011 figures are presented according to the new organization structure that became effective from July 20, 2011. The new organization includes three business segments: Networks, Software, Services and Solutions (S3), and Enterprise. The previous organization structure encompassed three business groups: Networks, Applications and Services. Figures for 2009 and 2010 in this table are presented according to the 2011 former organization structure, and also restated to reflect the new organization structure, in order to facilitate comparison with the current period.

Breakdown of employees by geographical area

 

      France      Other
Western
Europe
     Rest of
Europe
     Asia Pacific      North
America
     Rest of the
World
     Total Group  
2009      10,467         12,610         3,352         24,553         20,114         7,277         78,373   
2010      9,751         12,169         6,297         24,464         19,285         7,830         79,796   
2011      9,560         11,706         5,824         22,780         18,254         7,878         76,002   

 

Membership of our employees in trade unions varies from country to country. In general, relations with our employees are satisfactory.

CONTRACTORS AND TEMPORARY WORKERS

The average number of contractors (that is, individuals at third parties performing work subcontracted by us on a “Time and Materials” basis, when such third parties’ cost to us is almost exclusively a function of the time spent by their employees in performing this work), and of temporary workers (that is, in general, employees of third parties seconded to perform work at our premises due, for example, to a short-term shortfall in our employees or in the availability of a certain expertise) in 2011 was 8,038(1) in the aggregate.

 

(1) This number includes the 136 contractors of our Genesys business at December 31, 2011.

 

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DESCRIPTION OF THE GROUP’S ACTIVITIES

5.13 HUMAN RESOURCES

 

 

 

 

 

 

 

 

 

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6    OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

FORWARD LOOKING INFORMATION

This Form 20-F, including the discussion of our Operating and Financial Review and Prospects, contains forward-looking statements based on beliefs of our management. We use the words “anticipate”, “believe”, “expect”, “may”, “intend”, “should”, “plan”, “project”, or similar expressions to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results to be materially different, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products, and if the strategic focus we adopted in 2009 is not aligned with our customers’ business strategy. Such forward-looking statements include, but are not limited to, the forecasts and targets set forth in this Form 20-F, such as the discussion below in this Chapter 6 under the heading “Outlook for 2012” with respect to our statement that we aim to achieve in 2012 an operating margin before restructuring costs, impairment of assets, gain/loss on disposal of consolidated entities, litigations and post-retirement benefit plan amendments (excluding the negative non-cash impacts of Lucent’s purchase price allocation) higher than the level reached in 2011 and a strong positive net cash position at the end of 2012. Such forward-looking statements also include the statements regarding the expected level of restructuring costs and capital expenditures in 2012 that can be found under the heading “Liquidity and Capital Resources”, and statements regarding the amount we would be required to pay in the future pursuant to our existing contractual obligations and off-balance sheet contingent commitments that can be found under the heading “Contractual obligations and off-balance sheet contingent commitments”.

PRESENTATION OF FINANCIAL INFORMATION

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes presented elsewhere in this document. Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union.

As of December 31, 2011, all IFRSs that the IASB had published and that are mandatory are the same as those endorsed by the EU and mandatory in the EU, with the exception of:

 

 

IAS 39, which the EU only partially adopted. The part not adopted by the EU has no impact on Alcatel-Lucent’s financial statements.

As a result, our consolidated financial statements for the years presented in this document in accordance with IFRS would be no different if we had applied International Financial Reporting Standards issued by the International Accounting Standards Board. References to “IFRS” in this Form 20-F refer to IFRS as adopted by the European Union.

As a result of the purchase accounting treatment of the Lucent business combination required by IFRS, our results for 2011, 2010 and 2009 included several negative, non-cash impacts of purchase accounting entries.

CHANGES IN ACCOUNTING STANDARDS AS OF JANUARY 1, 2011

New financial reporting standards and interpretations that the Group applies but which are not yet mandatory

As of December 31, 2011 we had not applied any new International Financial Reporting Standards and Interpretations as issued by the IASB and that the European Union had published and adopted but which were not yet mandatory.

Published IASB financial reporting standards, amendments and interpretations applicable to the Group, that the EU has endorsed, that are mandatory in the EU as of January 1, 2011, and that the Group has adopted

 

 

Amendment to IAS 32 “Financial Instruments: Presentation - Classification of Rights Issues” (issued October 2009);

 

 

IFRIC 19 “Extinguishing Financial Liabilities with Equity Instruments” (issued November 2009);

 

 

Amendment to IAS 24 “Related Party Disclosures” (issued November 2009);

 

 

Amendment to IFRIC 14 “IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interactions - Prepayments of a Minimum Funding Requirement” (issued November 2009);

 

 

Amendment to IFRS 1 “Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters” (issued January 2010); and

 

 

Improvements to IFRSs (issued May 2010).

None of these new IFRS requirements had a material impact on our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES

Our Operating and Financial Review and Prospects is based on our consolidated financial statements, which are prepared in accordance with IFRS as described in Note 1 to our consolidated financial statements. Some of the accounting methods and policies used in preparing our consolidated

 

 

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financial statements under IFRS are based on complex and subjective assessments by our management or on estimates based on past experience and assumptions deemed realistic and reasonable based on the circumstances concerned. The actual value of our assets, liabilities and shareholders’ equity and of our earnings could differ from the value derived from these estimates if conditions changed and these changes had an impact on the assumptions adopted.

We believe that the accounting methods and policies listed below are the most likely to be affected by these estimates and assessments:

a/ Valuation allowance for inventories and work in progress

Inventories and work in progress are measured at the lower of cost or net realizable value. Valuation allowances for inventories and work in progress are calculated based on an analysis of foreseeable changes in demand, technology or the market, in order to determine obsolete or excess inventories and work in progress.

 

 

The valuation allowances are accounted for in cost of sales or in restructuring costs depending on the nature of the amounts concerned.

 

(In millions of euros)    December 31,
2011
     December 31,
2010
     December 31,
2009
 
Valuation allowance for inventories and work in progress on construction contracts      (455)         (436)         (500)   
      2011      2010      2009  
Impact of changes in valuation allowance on income (loss) before income tax and discontinued operations      (169)         (113)         (139)   

 

b/ Impairment of customer receivables

An impairment loss is recorded for customer receivables if the expected present value of the future receipts is below the carrying value. The amount of the impairment loss reflects

both the customers’ ability to honor their debts and the age of the debts in question. A higher default rate than estimated or the deterioration of our major customers’ creditworthiness could have an adverse impact on our future results.

 

 

(In millions of euros)    December 31,
2011
     December 31,
2010
     December 31,
2009
 
Accumulated impairment losses on customer receivables      (123)         (153)         (168)   
      2011      2010      2009  
Impact of impairment losses in income (loss) before income tax and discontinued operations      3         (14)         (23)   

c/ Capitalized development costs, other intangible assets and goodwill

Capitalized development costs

 

(In millions of euros)    December 31,
2011
     December 31,
2010
     December 31,
2009
 
Capitalized development costs, net      560         569         558   

 

The criteria for capitalizing development costs are set out in Note 1f to our consolidated financial statements. Once capitalized, these costs are amortized over the estimated useful lives of the products concerned (3 to 10 years).

The Group must therefore evaluate the commercial and technical feasibility of these development projects and estimate the useful lives of the products resulting from the projects. Should a product fail to substantiate these

assumptions, the Group may be required to impair or write off some of the capitalized development costs in the future.

During the fourth quarter of 2009, following the Group’s decision to cease any new WiMAX development on the existing hardware platform and software release, restructuring costs of 44 million were reserved.

An impairment loss of 11 million for capitalized development costs was accounted for in 2011.

 

 

Other intangible assets and Goodwill

 

(In millions of euros)    December 31,
2011
     December 31,
2010
     December 31,
2009
 
Goodwill, net      4,389         4,370         4,168   
Intangible assets, net (1)      1,774         2,056         2,214   
Total      6,163         6,426         6,382   

 

(1) Including capitalized development costs.

 

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Goodwill amounting to 8,051 million and intangible assets amounting to 4,813 million were accounted for in 2006 as a result of the Lucent business combination, using market-related information, estimates (primarily based on risk adjusted discounted cash flows derived from Lucent’s management) and judgment (in particular in determining the fair values relating to the intangible assets acquired). The remaining outstanding amounts as of December 31, 2011 are 2,291 million of goodwill and 1,065 million of intangible assets.

No impairment loss on goodwill was accounted for during 2009, 2010 and 2011.

The carrying value of each group of Cash Generating Unit (which we consider to be each Product Division) is compared to its recoverable value. Recoverable value is the greater of the value in use and the fair value less costs to sell.

The value in use of each Product Division is calculated using a five-year discounted cash flow analysis plus a discounted residual value, corresponding to the capitalization to perpetuity of the normalized cash flows of year 5 (also called the Gordon Shapiro approach).

The fair value less costs to sell of each Product Division is determined based upon the weighted average of the Gordon Shapiro approach described above and the following two approaches:

 

 

five-year discounted cash flow analysis plus a Sales Multiple (Enterprise Value/Sales) to measure discounted residual value; and

 

 

five-year discounted cash flow analysis plus an Operating Profit Multiple (Enterprise Value/Earnings Before Interest, Tax, Depreciation and Amortization – “EBITDA”) to measure discounted residual value.

In the second quarter of 2011, the recoverable values of the groups of cash generating units that include our goodwill and intangible assets, as determined for the annual impairment tests performed by the Group, were based on key assumptions which could have a significant impact on the consolidated financial statements. Some of these key assumptions were:

 

 

discount rate;

 

 

a faster growth of our Group than our addressable market in 2011; and

 

 

a significant increase in profitability in 2011 with a segment consolidated operating income above 5% of 2011 revenues.

As indicated in Note 1g to our consolidated financial statements, in addition to the annual goodwill impairment tests that occur each year, impairment tests are carried out as soon as Alcatel-Lucent has indications of a potential reduction in the value of its goodwill or intangible assets. Possible impairments are based on discounted future cash flows and/or fair values of the net assets concerned. Changes in the market conditions or the cash flows initially estimated can therefore lead to a review and a change in the impairment losses previously recorded.

Following the revised 2011 outlook published on October 2011 and the increase of the discount rate from 10.0% to 11.0% between the date of the annual impairment test of goodwill and the end of the year, it was decided to perform an additional impairment test as at December 31, 2011.

The recoverable values of the groups of cash generating units that include our goodwill and intangible assets, as determined

for the additional impairment test performed by the Group in the fourth quarter of 2011, were based on key assumptions which could have a significant impact on the consolidated financial statements. Some of these key assumptions were:

 

 

discount rate; and

 

 

acceleration of the overall actions taken to reduce the cost structure with contemplated additional savings.

The discount rate used for the additional impairment test performed in the fourth quarter of 2011 was the Group’s weighted average cost of capital (“WACC”) of 11% and the discount rates for the annual impairment test ware also based on the Group’s WACC of 10%, 10% and 11% respectively. The discount rates used for both the annual and additional impairment tests are after-tax rates applied to after-tax cash flows. The use of such rates results in recoverable values that are identical to those that would be obtained by using, as required by IAS 36, pre-tax rates applied to pre-tax cash flows. A single discount rate is used on the basis that risks specific to certain products or markets have been reflected in determining the cash flows.

Holding all other assumptions constant, a 0.5% increase or decrease in the discount rate would have decreased or increased the 2011 recoverable value of the groups of cash generating units that include goodwill and intangible assets by 549 million and 627 million, respectively. An increase of 0.5% in the discount rate would have led to account for an impairment loss of 6 million as of December 31, 2011.

For one of our Product Divisions (Wireline Networks), the difference between the recoverable value and the carrying value of its net assets as of December 31, 2011 was slightly positive and the recoverable value was based upon a fair value less costs to sell of 378 million. Any material unfavorable change in any of the key assumptions used to determine the recoverable value (i.e. fair value less costs to sell) of this Product Division could therefore cause the Group to account for an impairment charge in the future. The carrying value of the net assets of this Product Division as of December 31, 2011 was 321 million, including goodwill of 183 million.

The key assumptions used to determine the fair value of this Product Division were the following:

 

 

Sales multiple and Operating profit multiple: based on spot data for a sample of comparable companies;

 

 

Discount rate of 11%; and

 

 

Perpetual growth rate of 1%.

Holding all other assumptions constant, a 0.5% increase in the discount rate would have decreased the 2011 recoverable value of this Product Division by 13 million but would not have led to account for any impairment loss as of December 31, 2011.

Holding all other assumptions constant, a 0.5% decrease in the perpetual growth rate would have decreased the 2011 recoverable value of this Product Division by 5 million but would not have led to account for any impairment loss as of December 31, 2011.

Holding all other assumptions constant, a 10% decrease in the sales multiple would have decreased the 2011 recoverable value of this Product Division by 19 million but would not have led to account for any impairment loss as of December 31, 2011.

 

 

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d/ Impairment of property, plant and equipment

In accordance with IAS 36 “Impairment of Assets”, when events or changes in market conditions indicate that tangible or intangible assets may be impaired, such assets are reviewed in detail to determine whether their carrying value is lower than their recoverable value, which could lead to recording an impairment loss (recoverable value is the higher of value in use and fair value less costs to sell). Value in use is estimated by calculating the present value of the future cash flows expected to be derived from the asset. Fair value less costs to sell is based on the most reliable information available (such as market statistics and recent transactions).

When determining recoverable values of property, plant and equipment, assumptions and estimates are made, based primarily on market outlooks, obsolescence and sale or liquidation disposal values. Any change in these assumptions can have a significant effect on the recoverable amount and could lead to a revision of recorded impairment losses.

 

The planned closing of certain facilities, additional reductions in personnel and unfavorable market conditions have been considered impairment triggering events in prior years. No impairment loss on property, plant and equipment was accounted for in 2011, in 2010 or 2009.

e/ Provision for warranty costs and other product sales reserves

Provisions are recorded for (i) warranties given to customers on Alcatel-Lucent products, (ii) expected losses at completion and (iii) penalties incurred in the event of failure to meet contractual obligations. These provisions are calculated based on historical return rates and warranty costs expensed as well as on estimates. These provisions and subsequent changes to the provisions are recorded in cost of sales either when revenue is recognized (provision for customer warranties) or, for construction contracts, when revenue and expenses are recognized by reference to the stage of completion of the contract activity. Costs and penalties ultimately paid can differ considerably from the amounts initially reserved and could therefore have a significant impact on future results.

 

 

(In millions of euros)

Product sales reserves

   December 31,
2011
     December 31,
2010
     December 31,
2009
 
Related to construction contracts (1)      98         97         114   
Related to other contracts      439         482         482   
Total      537         579         596   

 

(1) See Notes 4, 18 and 28 of our consolidated financial statements.

For more information on the impact on the 2011 net result of the change of these provisions, refer to Note 28 to our consolidated financial statements.

f/ Deferred taxes

Deferred tax assets relate primarily to tax loss carry-forwards and to deductible temporary differences between reported amounts and the tax bases of assets and liabilities. The assets relating to the tax loss carry-forwards are recognized if it is probable that the Group will generate future taxable profits against which these tax losses can be set off.

 

(In millions of euros)

Deferred tax assets recognized

   December 31,
2011
    December 31,
2010
    December 31,
2009
 
Related to the disposal of Genesys business (4)      363        -        -   
Related to the United States      1,294  (3)      277  (2)      206  (1) 
Related to other tax jurisdictions      297  (3)      671        630   
Total      1,954        948        836   

 

(1) Following the performance of the 2009 annual goodwill impairment tests, a reassessment of deferred taxes resulted in reducing the deferred tax assets recorded in the United States and increasing those recognized in France compared to the situation as of December 31, 2008.
(2) Following the performance of the 2010 annual goodwill impairment test, a reassessment of deferred taxes, updated as of December 31, 2010, resulted in increasing the deferred tax assets recorded in the United States compared to the situation as of December 31, 2009.
(3) Following the performance of the 2011 goodwill impairment tests performed in the second and fourth quarters of 2011, a reassessment of deferred taxes resulted in increasing the deferred tax assets recorded in the United States and reducing those recognized in France compared to the situation as of December 31, 2010.
(4) Represents estimated deferred tax assets relating to tax losses carried forward as of December 31, 2011 that will be used to offset the taxable capital gains on the disposal of the Genesys business in 2012. These estimated deferred tax assets will be expensed in 2012, when the corresponding definitive capital gains are recorded. The impact of recognizing these deferred tax assets in 2011 is recorded in the income statement in the “Income (loss) from discontinued operations” line item for an amount of 338 million (U.S.$ 470 million). The amount of deferred tax assets accounted for as of December 31, 2011 is based on an estimated allocation of the selling price, which could differ in some respects from the definitive allocation. This could have an impact on the Group’s tax losses carried forward.

 

     On the other hand, deferred tax assets recognized as of December 31, 2010, which were based then on the future taxable net income of the Genesys business, were reduced in 2011, having regard to the future disposal of the Genesys business, by an amount of 96 million with a corresponding impact in the income statement in the “income tax (expense) benefit” line item.

 

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Evaluation of the Group’s capacity to utilize tax loss carry-forwards relies on significant judgment. The Group analyzes past events and the positive and negative elements of certain economic factors that may affect its business in the foreseeable future to determine the probability of its future utilization of these tax loss carry-forwards, which also consider the factors indicated in Note 1n to our consolidated financial statements.

This analysis is carried out regularly in each tax jurisdiction where significant deferred tax assets are recorded. If future taxable results are considerably different from those forecast that support recording deferred tax assets, the Group will be obliged to revise downwards or upwards the amount of the deferred tax assets, which would have a significant impact on Alcatel-Lucent’s statement of financial position and net income (loss).

As a result of the business combination with Lucent, 2,395 million of net deferred tax liabilities were recorded as of December 31, 2006, resulting from the temporary differences generated by the differences between the fair value of assets and liabilities acquired (mainly intangible assets such as acquired technologies) and their corresponding tax bases. These deferred tax liabilities will be reduced in future Group income statements as and when such differences are amortized. The remaining deferred tax liabilities related to the purchase price allocation of Lucent as of December 31, 2011 are 591 million (691 million as of December 31, 2010 and 751 million as of December 31, 2009).

As prescribed by IFRSs, Alcatel-Lucent had a twelve-month period to complete the purchase price allocation and to

determine whether certain deferred tax assets related to the carry-forward of Lucent’s unused tax losses that had not been recognized in Lucent’s historical financial statements should be recognized in the combined company’s financial statements. If any additional deferred tax assets attributed to the combined company’s unrecognized tax losses existing as of the transaction date are recognized in future financial statements, the tax benefit will be included in the income statement after January 1, 2010 (See note 1-c “Business combinations after January 1, 2010” in our consolidated financial statements).

g/ Pension and retirement obligations and other employee and post-employment benefit obligations

Actuarial assumptions

Alcatel-Lucent’s results of operations include the impact of significant pension and post-retirement benefits that are measured using actuarial valuations. Inherent in these valuations are key assumptions, including assumptions about discount rates, expected return on plan assets, healthcare cost trend rates and expected participation rates in retirement healthcare plans. These assumptions are updated on an annual basis at the beginning of each fiscal year or more frequently upon the occurrence of significant events. In addition, discount rates are updated quarterly for those plans for which changes in this assumption would have a material impact on Alcatel-Lucent’s results or equity attributable to equity owners of the parent.

 

 

Weighted average rates used to determine the

pension and post-retirement expense

   Year ended
December 31,
2011
     Year ended
December 31,
2010
     Year ended
December 31,
2009
 
Weighted average expected rates of return on pension
and post-retirement plan assets
     6.42%         6.57%         6.69%   
Weighted average discount rates used to determine the pension
and post-retirement expense
     4.85%         5.04%         5.84%   

 

The net effect of pension and post-retirement costs included in “income (loss) before tax and discontinued operations” was a 429 million increase in pre-tax income during 2011 (319 million increase in 2010 and 150 million increase in 2009). Included in the 429 million increase in pre-tax income during 2011 (319 million in 2010 and 150 million in 2009) was 67 million (30 million in 2010 and 253 million in 2009) booked as a result of certain changes to the management retiree pension plan and to the management retiree healthcare benefit plan, as described in Note 26f of our consolidated financial statements.

Discount rates

Discount rates for Alcatel-Lucent’s U.S. plans are determined using the values published in the “original” CitiGroup Pension Discount Curve, which is based on AA-rated corporate bonds. Each future year’s expected benefit payments are discounted

by the discount rate for the applicable year listed in the CitiGroup Curve, and for those years beyond the last year presented in the CitiGroup Curve for which we have expected benefit payments, we apply the discount rate of the last year presented in the Curve. After applying the discount rates to all future years’ benefits, we calculate a single discount rate that results in the same interest cost for the next period as the application of the individual rates would have produced. Discount rates for Alcatel-Lucent’s non U.S. plans are determined based on Bloomberg AA Corporate yields.

Holding all other assumptions constant, a 0.5% increase or decrease in the discount rate would have decreased or increased the 2011 net pension and post-retirement result by approximately (63) million and 67 million, respectively.

 

 

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Expected return on plan assets

Expected returns on plan assets for Alcatel-Lucent’s U.S. plans are determined based on recommendations from our external investment advisor and our own experience of historical returns. Our advisor develops its recommendations by applying the long-term return expectations it develops for each of many classes of investments, to the specific classes and values of investments held by each of our benefit plans. Expected return assumptions are long-term assumptions and are not intended to reflect expectations for the period immediately following their determination. Although these assumptions are reviewed each year, we do not update them for small changes in our advisor’s recommendations. However, the pension expense or credit for our U.S. plans is updated every quarter using the fair value of assets and discount rates as of the beginning of the quarter. The expected return on plan assets (accounted for in “other financial income (loss)”) for Alcatel-Lucent’s U.S. plans for the fourth quarter of 2011 is based on September 30, 2011 plan asset fair values. However, the expected return on plan assets for Alcatel-Lucent’s non U.S. plans for each quarter of 2011 is based on the fair values of plan assets at December 31, 2010.

Holding all other assumptions constant, a 0.5% increase or decrease in the expected return on plan assets would have increased or decreased the 2011 net pension and post-retirement result by approximately 133 million.

For its U.S. plans, Alcatel-Lucent recognized a US$41 million (29 million) increase in the net pension credit during the fourth quarter of 2011 compared to the third quarter of 2011, which is accounted for in “other financial income (loss)”. This increase corresponds to an increase in the expected return on plan assets for Alcatel-Lucent’s U.S. plans due to the increase in plan asset fair values and a lower interest cost due to a decrease in discount rates. On Alcatel-Lucent’s U.S. plans, Alcatel-Lucent expects a US$ 6 million (5 million) decrease in the net pension credit to be accounted for in “other financial income (loss)” between the 2011 fourth quarter and the 2012 first quarter. This decrease mainly corresponds to lower expected rates of return. Alcatel-Lucent does not anticipate a material impact outside its U.S. plans.

Healthcare inflation trends

Regarding healthcare inflation trend rates for Alcatel-Lucent’s U.S. plans, our actuaries annually review expected cost trends from numerous healthcare providers, recent developments in medical treatments, the utilization of medical services, and Medicare future premium rates published by the U.S. Government’s Center for Medicare and Medicaid Services (CMS) as these premiums are reimbursed for some retirees. They apply these findings to the specific provisions and experience of Alcatel-Lucent’s U.S. post-retirement healthcare plans in making their recommendations. In determining our assumptions, we review our recent experience together with our actuary’s recommendations.

Participation assumptions

Alcatel-Lucent’s U.S. post-retirement healthcare plans allow participants to opt out of coverage at each annual enrollment

period, and for almost all to opt back in at any future annual enrollment. An assumption is developed for the number of eligible retirees who will elect to participate in our plans at each future enrollment period. Our actuaries develop a recommendation based on the expected increases in the cost to be paid to a retiree participating in our plans and recent participation history. We review this recommendation annually after the annual enrollment has been completed and update it if necessary.

Mortality assumptions

As there are less and less experience data to develop our own experience mortality assumptions, starting December 31, 2011, these assumptions were changed to the RP-2000 Combined Health Mortality table with Generational Projection based on the U.S. Society of Actuaries Scale AA. This update had a U.S.$ 128 million positive effect on the benefit obligation of the Management Pension Plan and a U.S.$ 563 million negative effect on the benefit obligation of the U.S. Occupational pension plans. These effects were recognized in the 2011 Statement of Comprehensive Income.

Plan assets investment

Pursuant to a decision of our Board of Directors at its meeting on July 29, 2009, the following modifications were made to the asset allocation of Alcatel-Lucent’s pension funds: the investments in equity securities were to be reduced from 22.5% to 15% and the investments in bonds were to be increased from 62.5% to 70%, while investments in alternatives (i.e., real estate, private equity and hedge funds) remained unchanged. At the same time, the investments in fixed income were modified to include a larger component of corporate fixed income securities and less government, agency and asset-backed securities. The impact of these changes was reflected in our expected return assumptions for year 2010.

At its meeting on July 27, 2011, as part of its prudent management of the Group’s funding of our pension and retirement obligations, our Board of Directors approved the following further modifications to the asset allocation of our Group’s Management plan: the portion of funds invested in public equity securities is to be reduced from 20% to 10%, the portion invested in fixed income securities is to be increased from 60% to 70 % and the portion invested in alternatives remains unchanged. These changes are expected to reduce the volatility of the funded status and reduce the expected return on plan assets by 50 basis points, with a corresponding negative impact in our pension credit in the second half of 2011. No change was made in the allocation concerning our Group’s occupational plans.

Plan assets are invested in many different asset categories (such as cash, equities, bonds, real estate and private equity). In the quarterly update of plan asset fair values, approximately 80% are based on closing date fair values and 20% have a one to three-month delay, as the fair values of private equity, venture capital, real estate and absolute return investments are not available in a short period. This is standard practice in the investment management industry. Assuming that the December 31, 2011 actual fair values of private equity, venture capital, real estate and absolute return

 

 

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investments were 10% lower than the ones used for accounting purposes as of December 31, 2011, and since the Management Pension Plan has a material investment in these asset classes (and the asset ceiling described below is not applicable to this plan), equity would be negatively impacted by approximately 261 million.

2010 U.S. health care legislation

On March 23, 2010, the Patient Protection and Affordable Care Act (PPACA) was signed into law; and on March 30, 2010, the Health Care and Education Reconciliation Act of 2010 (HCERA) that amended the PPACA was also signed into law. Under this legislation, the subsidy paid to Alcatel-Lucent by Medicare for continuing to provide prescription drug benefits to the Group’s U.S. employees and retirees that are at least equivalent to those provided by Medicare Part D, will no longer be tax free after 2012. This change in law resulted in a write-down of our deferred tax assets, which caused a 76 million charge to the consolidated income statement and a 6 million profit to the consolidated statement of comprehensive income for the year ended December 31, 2010 (refer to Note 9 of our consolidated financial statements). In addition, reductions in the Medicare payments to Medicare Advantage plans, such as our Private Fee For Service plan, which we offer to our U.S. management retirees, resulted in the need to change our related cost assumption, with an increase in our benefit obligation of 6 million recognized in the consolidated statement of comprehensive income as an actuarial loss for the year ended December 31, 2010 (see Note 26 of our consolidated financial statements). One additional provision of the new health care law pertaining to the excise tax on high cost employer-sponsored health coverage may affect our post-retirement health care benefit obligations. An attempt was made by the actuary to assess the impact working with the very limited guidance available. Under the various considerations necessary due to the uncertainty associated with the appropriate methodology to be utilized, the impact was shown to be immaterial. As additional regulatory guidance is issued, this initial assessment will be revisited.

Asset ceiling

According to IAS 19, the amount of prepaid pension costs that can be recognized in our financial statements is limited to the sum of (i) the cumulative unrecognized net actuarial losses and prior service costs, (ii) the present value of any available refunds from the plan and (iii) any reduction in future contributions to the plan. Since Alcatel-Lucent has used and intends to use in the future eligible excess pension assets applicable to formerly union-represented retirees to fund certain retiree healthcare benefits for such retirees, such use is considered as a reimbursement from the pension plan when setting the asset ceiling.

The impact of expected future economic benefits on the pension plan asset ceiling is a complex matter. For formerly union-represented retirees, we expect to fund our current retiree healthcare obligation with Section 420 Transfers from the U.S. Occupational pension plan. Section 420 of the U.S. Internal Revenue Code provides for transfers of certain excess pension plan assets held by a defined benefit pension plan into a retiree health benefits account established to pay

retiree health benefits. We selected among numerous methods available for valuing plan assets and obligations for funding purposes and for determining the amount of excess assets available for Section 420 Transfers (see Note 26 of our consolidated financial statements). Also, asset values for private equity, real estate, and certain alternative investments, and the obligation based on January 1, 2012 census data will not be final until late in the third quarter of 2012. Prior to the Pension Protection Act of 2006 (or the PPA), Section 420 of the U.S. Internal Revenue Code allowed for a Section 420 Transfer in excess of 125% of a pension plan’s funding obligation to be used to fund the healthcare costs of that plan’s retired participants. The Code permitted only one transfer in a tax year with transferred amounts being fully used in the year of the transfer. It also required the company to continue providing healthcare benefits to those retirees for a period of five years beginning with the year of the transfer (cost maintenance period), at the highest per-person cost it had experienced during either of the two years immediately preceding the year of the transfer. With some limitations, benefits could be eliminated for up to 20% of the retiree population, or reduced for up to 20% of the retiree population, during the five-year period. The PPA, as amended by the U.S. Troop readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, expanded the types of transfers to include transfers covering a period of more than one year of assets in excess of 120% of the funding obligation, with the cost maintenance period extended through the end of the fourth year following the transfer period, and the funded status being maintained at a minimum of 120% during each January 1 valuation date in the transfer period. The PPA also provided for collective bargained transfers, both single year and multi-year, wherein an enforceable labor agreement is substituted for the cost maintenance period. Using the methodology we selected to value plan assets and obligations for funding purposes, we estimate that as of December 31, 2011, the excess of assets above 120% of the plan obligations is US$2.3 billion (1.7 billion), and the excess above 125% of plan obligations is US$ 1.8 billion (1.4 billion). However, deterioration in the funded status of the U.S. Occupational pension plan could negatively impact our ability to make future Section 420 Transfers.

h/ Revenue recognition

As indicated in Note 1m of our consolidated financial statements, revenue under IAS 18 accounting is measured at the fair value of the consideration received or to be received when the Group has transferred the significant risks and rewards of ownership of a product to the buyer.

For revenues and expenses generated from construction contracts, the Group applies the percentage of completion method of accounting, provided certain specified conditions are met, based either on the achievement of contractually defined milestones or on costs incurred compared with total estimated costs. The determination of the stage of completion and the revenues to be recognized rely on numerous estimations based on costs incurred and acquired experience. Adjustments of initial estimates can, however, occur throughout the life of the contract, which can have significant impacts on future net income (loss).

 

 

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Although estimates inherent in construction contracts are subject to uncertainty, certain situations exist whereby management is unable to reliably estimate the outcome of a construction contract. These situations can occur during the

early stages of a contract due to a lack of historical experience or throughout the contract as significant uncertainties develop related to additional costs, claims and performance obligations, particularly with new technologies.

Contracts that are multiple element arrangements can include hardware products, stand-alone software, installation and/or integration services, extended warranty, and product roadmaps, as examples. Revenue for each unit of accounting is recognized when earned based on the relative fair value of each unit of accounting as determined by internal or third-party analyses of market-based prices. If the criteria described in Note 1m of our consolidated financial statements are met, revenue is earned when units of accounting are delivered. If such criteria are not met, revenue for the arrangement as a whole is accounted for as a single unit of accounting. Significant judgment is required to allocate contract consideration to each unit of accounting and determine whether the arrangement is a single unit of accounting or a multiple element arrangement. Depending upon how such judgment is exercised, the timing and amount of revenue recognized could differ significantly.

For multiple element arrangements that are based principally on licensing, selling or otherwise marketing software solutions, judgment is required as to whether such arrangements are accounted for under IAS 18 or IAS 11. Software arrangements requiring significant production, modification or customization are accounted for as a construction contract under IAS 11. All other software arrangements are accounted for under IAS 18, in which case the Group requires vendor specific objective evidence (VSOE) of fair value to separate the multiple software elements. If VSOE of fair value is not available, revenue is deferred until the final element in the arrangement is delivered or revenue is recognized over the period that services are being performed if services are the last undelivered element. Significant judgment is required to determine the most appropriate accounting model to be applied in this environment and whether VSOE of fair value exists to allow separation of multiple software elements.

For product sales made through distributors, product returns that are estimated according to contractual obligations and past sales statistics are recognized as a reduction of sales. Again, if the actual product returns were considerably different from those estimated, the resulting impact on the net income (loss) could be significant.

It can be difficult to evaluate the Group’s capacity to recover receivables. Such evaluation is based on the customers’ creditworthiness and on the Group’s capacity to sell such receivables without recourse. If, subsequent to revenue recognition, the recoverability of a receivable that had been initially considered as likely becomes doubtful, a provision for an impairment loss is then recorded (see Note b above).

i/ Purchase price allocation of a business combination

In a business combination, the acquirer must allocate the cost of the business combination at the acquisition date by recognizing the acquiree’s identifiable assets, liabilities and contingent liabilities at fair value at that date. The allocation is based upon certain valuations and other studies performed with the assistance of outside valuation specialists. Due to the underlying assumptions made in the valuation process, the determination of those fair values requires estimations of the effects of uncertain future events at the acquisition date and the carrying amounts of some assets, such as fixed assets, acquired through a business combination could therefore differ significantly in the future.

As prescribed by IFRS 3 (revised), if the initial accounting for a business combination can be determined only provisionally by the end of the reporting period in which the combination is effected, the acquirer must account for the business combination using those provisional values and has a twelve-month period to complete the purchase price allocation. Any adjustment of the carrying amount of an identifiable asset or liability made as a result of completing the initial accounting is accounted for as if its fair value at the acquisition date had been recognized from that date. Detailed adjustments accounted for in the allocation period are disclosed in Note 3 of our consolidated financial statements.

Once the initial accounting of a business combination is complete, only errors may be corrected.

j/ Accounting treatment of convertible bonds with optional redemption periods/dates before contractual maturity

Some of our convertible bonds have optional redemption periods/dates occurring before their contractual maturity, as described in Note 25 of our consolidated financial statements. All the Alcatel-Lucent convertible bond issues were accounted for in accordance with IAS 32 requirements (paragraphs 28 to 32) as described in Note 1q of our consolidated financial statements. Classification of the liability and equity components of a convertible instrument is not revised when a change occurs in the likelihood that a conversion will be exercised. On the other hand, if optional redemption periods/dates occur before the contractual maturity of a debenture, a change in the likelihood of redemption before the contractual maturity can lead to a change in the estimated payments. As prescribed by IAS 39, if an issuer revises the estimates of payment due to reliable new estimates, it must adjust the carrying amount of the instrument by computing the present value of the remaining cash flows at the original effective interest rate of the financial liability to reflect the revised estimated cash flows. The adjustment is recognized as income or loss in the net income (loss).

As described in Notes 8, 25 and 27 of our consolidated financial statements, such a change in estimates already occurred regarding Lucent’s 2.875% Series A convertible debentures. Similar changes in estimates are expected to occur in June 2012 regarding Lucent’s 2.875% Series B

 

 

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6.1 OVERVIEW OF 2011

 

convertible debentures. A loss corresponding to the difference between the present value of the revised estimated cash flows and the carrying amount derived from the split accounting, as described in Note 1q of our consolidated financials statements, could impact “other financial income (loss)” as a result of any change in the Group’s estimate of redemption triggers. An approximation of the potential negative impact on “other financial income (loss)” is the carrying amount of the equity component, as disclosed in Notes 25 and 27 of our consolidated financial statements (estimated impact as of June 2012 is equal to 202 million).

k/ Insured damages

In 2008, Alcatel-Lucent experienced a fire in a newly-built factory containing new machinery. The cost of the physical damage and business interruption were insured and gave right to an indemnity claim, the amount of which was definitively settled as of September 30, 2009. Alcatel-Lucent

received 33 million on its business interruption insurance, which was accounted for in other revenues during 2009, when the cash was received.

In December 2009, the roof and technical floor of Alcatel-Lucent Spain’s headquarters in Madrid partially collapsed for unknown reasons. Alcatel-Lucent Spain rents this building and the lease is accounted for as an operating lease. The damaged assets were derecognized as of December 31, 2009 with a negative impact of 1 million on income (loss) from operating activities. All costs related to this incident (damaged assets, displacement and relocation costs, etc.) are insured subject to a 15 million deductible. Displacement and relocation costs below this threshold were accounted for as incurred in 2010. These costs represented a negative impact of 1 million on income (loss) from operating activities during the year 2010. The arbitration related to the lease agreement and its consequences on the 2010 consolidated financial statements are described in Note 34e of our consolidated financial statements filed as part of the Group’s 2010 20-F.

 

 

6.1 OVERVIEW OF 2011

 

The economy was, once again, a key factor impacting the market for telecommunications equipment and related services in 2011, similar to 2010. In 2011, macroeconomic conditions showed mixed signals across the world, with some regions showing slight signs of growth, while others struggled throughout the year:

 

 

The United States experienced slight GDP growth and a decline in unemployment rates in 2011 while a downgrade of its credit rating by S&P confirmed fear about its ability to manage sustainable debt levels going forward. Financial markets experienced one of the most volatile periods in recent history in 2011, with the S&P 500 peaking at 8% in April, hitting its lowest levels in October down 12% and finishing the year relatively flatly compared to the end of 2010.

 

 

Sovereign debt issues in Europe, mainly southern Europe, continued to impact the global financial markets and threatened the expansive fiscal policies that helped foster economic recovery in this region.

 

 

Rising inflation in China and in other emerging markets and political unrest in certain North African and Middle Eastern regions also impacted economies all around the world.

In addition to these broader economic conditions, industry trends continued to play a very significant role in the shaping of the telecommunications and related services market in 2011. The most important of these trends have been dominating the industry for some time. They include:

 

 

Surging growth in data traffic volumes, especially mobile broadband data traffic volumes, driven by increased smartphone and tablet penetration and video use. Although this trend has been especially pronounced in the United States, we believe that other regions are also similarly impacted. Service providers continue to deploy LTE, a 4G wireless technology based on an all-IP network, allowing faster download and upload speeds, lower latency and overall lower costs. Service providers in the United States have been the main adopters of LTE in terms of nationwide

   

roll-outs, although its popularity in other regions is growing. While growth in mobile traffic volumes has driven spending for wireless equipment, it has also driven spending for the fixed access equipment that also carries that traffic – over mobile backhaul, packet core and optical networks for example.

 

 

An increased focus by service providers on how to “monetize” their increasing investment in new capacity, essentially by cutting operating and capital expenses and by facilitating the development and offering of new profitable services.

 

 

The migration of service providers’ networks to a converged, multi-service all-IP architecture. Cost concerns and the suitability an all-IP architecture to handle the ongoing shift of network traffic - from voice-centric to increasingly video-centric traffic, has driven this trend. One aspect of the transition to an all-IP architecture is the shift in carrier investment spending from legacy technologies to IP.

This combination of economic, industry and regional trends drove a mixed telecommunications and related services market in 2011. These trends were also a key driver of how our own businesses performed in 2011:

 

 

The surging broadband traffic volumes have driven service provider spending for additional capacity and enhanced data capabilities, particularly in the wireless market, where our business grew 1.4% in 2011. Within wireless, North American service providers have aggressively taken the global lead in terms of 3G network upgrades and the first large-scale deployments of 4G LTE. Consequently, the growth in wireless in 2011 was concentrated in North America, and to a certain extent in China, while other regions lagged behind in terms of investments in wireless technologies.

 

 

Service providers continued to view IP as a major area of investment in 2011, with upgrades to parts of their networks such as mobile backhaul, driving much of the growth in the market. We witnessed an 8.3% increase in overall

 

 

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IP revenues in 2011, with strong growth in both North America and Asia Pacific.

 

 

Our optics business witnessed mixed trends in 2011, with growth in our submarine business offset by declines in our terrestrial business, leading to an overall decline of 1.9%, compared to 2010. Within terrestrial, lagging sales of legacy equipment drove the overall decline, while next generation equipment, such as WDM and our single-carrier 100 Gbps optical coherent technology gained traction throughout the year.

 

 

Our wireline business, which consists largely of fixed broadband access equipment as well as legacy switching equipment, declined at a high-single-digit rate in 2011 as strong growth in next-generation technologies such as GPON and VDSL2 vectoring was not large enough to offset the declining investment in legacy technologies.

 

 

Software, Services and Solutions (S3) saw flat revenue performance in 2011, with relatively flat Services revenues, negatively impacted by slight declines in Network

   

Applications. Within Services, Managed & Outsourcing Solutions and Network & System Integration drove strong growth compared to 2010, but was offset by flat performance in Customer Care and strong declines in Network Build & Implementation. Our Network Applications business saw strong growth in Motive, our remote customer management business, and Unified Communications, both of which were offset by declines in Digital Media & Advertising and Payment applications.

 

 

Our Enterprise business grew at a mid-single-digit rate in 2011, mostly driven by growth in our data network and Genesys businesses.

In support of our High Leverage Network™ strategy, in 2011 we announced a number of innovations to help align our portfolio to address trends in the market, including lightRadio™, our converged IP/optical backbone platform, our FP3 400 Gbps network processor and VDSL2 vectoring. We believe these innovations will continue to drive success in our High Leverage Network™ strategy.

 

 

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6.2 CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011

COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

6.2    CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011 COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

Introduction. The following discussion takes into account our results of operations for the years ended December 31, 2011 and December 31, 2010 on the following basis:

 

 

The 2011 results exclude the Genesys business that was sold to Permira on February 1, 2012, since this business has been presented as a discontinued activity in our financial statements for the year ended December 31, 2011 included elsewhere in this annual report.

 

 

The 2010 results, which were originally presented treating the Genesys business as a continuing activity, have been

 

re-presented in our consolidated income statements included elsewhere in this annual report to exclude this business, as required by IFRS. The table below shows the reconciliation between our 2010 results that included Genesys and our re-presentation of our 2010 results which exclude Genesys.

 

 

The results for both years are presented according to the organization structure that became effective July 20, 2011. The 2011 organization includes three business segments: Networks, S3 (Software, Services & Solutions) and Enterprise.

 

 

(In millions of euros — except per share information)   2011     2010  
    

As

published

    With
Genesys
   

Genesys
discontinued

   

As

published

 
Revenues     15,327        15,996        (338)        15,658   
Cost of sales     (9,967)        (10,425)        69        (10,356)   
Gross profit     5,360        5,571        (269)        5,302   
Administrative and selling expenses     (2,642)        (2,907)        138        (2,769)   
Research and development expenses before capitalization of development expenses     (2,472)        (2,652)        59        (2,593)   
Impact of capitalization of development expenses     5        (10)        -        (10)   
Research and development costs     (2,467)        (2,662)        59        (2,603)   
Income (loss) from operating activities before restructuring costs, litigations, impairment of assets, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments     251        2        (72)        (70)   
Restructuring costs     (203)        (375)        4        (371)   
Litigations     4        (28)        -        (28)   
Gain/(loss) on disposal of consolidated entities     (2)        62        -        62   
Post-retirement benefit plan amendments     67        30        -        30   
Income (loss) from operating activities     117        (309)        (68)        (377)   
Interest relative to gross financial debt     (353)        (357)        -        (357)   
Interest relative to cash and marketable securities     59        53        -        53   
Finance costs     (294)        (304)        -        (304)   
Other financial income (loss)     359        356        -        356   
Share in net income (losses) of equity affiliates     4        14        -        14   
Income (loss) before income tax and discontinued operations     186        (243)        (68)        (311)   
Income tax, (charge) benefit     544        (37)        23        (14)   
Income (loss) from continuing operations     730        (280)        (45)        (325)   
Income (loss) from discontinued operations     414        (12)        45        33   
Net income (loss)     1,144        (292)                (292)   
Attributable to:                                
• Equity owners of the parent     1,095        (334)                (334)   
• Non-controlling interests     49        42                42   
Net income (loss) attributable to the equity owners of the parent per share (in euros)                                
• Basic earnings (loss) per share     0.48        (0.15)                (0.15)   
• Diluted earnings (loss) per share     0.42        (0.15)                (0.15)   
Net income (loss) before discontinued operations attributable to the equity owners of the parent per share (in euros)                                
• Basic earnings per share     0.30        (0.15)                (0.16)   
• Diluted earnings per share     0.28        (0.15)                (0.16)   
Net income (loss) of discontinued operations per share (in euros)                                
• Basic earnings per share     0.18        -                0 .01   
• Diluted earnings per share     0.14        -                0 .01   

 

 

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6.2 CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011

COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

 

Revenues. Revenues totaled 15,327 million in 2011, a decline of 2.1% from 15,658 million in 2010. Approximately 59% of our revenues are denominated in or linked to the U.S. dollar. When we translate our non-euro sales into euros for accounting purposes, there is an exchange rate impact based on the relative value of the euro versus other currencies, including the U.S. dollar. The decline in the value of other currencies, including the U.S. dollar, relative to the euro in 2011 compared with 2010 had a negative effect on our reported revenues. If there had been constant exchange rates in 2011 as compared to 2010, our consolidated revenues would have decreased by approximately 0.1% instead of the

2.1% decrease actually reported. This is based on applying (i) to our sales made directly in currencies other than the euro effected during 2011, the average exchange rate that applied for 2010, instead of the average exchange rate that applied for 2011, and (ii) to our exports (mainly from Europe) effected during 2011 which are denominated in other currencies and for which we enter into hedging transactions, our average hedging rates that applied for 2010. Our management believes that providing our investors with our revenues for 2011 at a constant exchange rate facilitates the comparison of the evolution of our revenues with that of the industry.

 

 

The table below sets forth our revenues as reported, the conversion and hedging impact of the euro/other currencies and our revenues at a constant rate:

 

(In millions of euros)   

Year ended

December 31,

2011

    

Year ended

December 31,

2010

     % Change  
Revenues as reported      15,327         15,658         (2.1%)   
Conversion impact euro/other currencies      324                  2.1%   
Hedging impact euro/other currencies      (10)                  (0.1%)   
Revenues at constant rate      15,641         15,658         (0.1%)   

 

Revenues in our Networks segment were essentially flat in 2011 compared to 2010, as growth in key areas such as IP and wireless was almost completely offset by declines in optics and wireline. Our IP division increased 8.3% in 2011, driven by the IP/MPLS service router business, which was slightly offset by the secular decline in spending for legacy ATM equipment. Our wireless business grew 1.4% in 2011, on the strength 3G and 4G spending, particularly for CDMA (EV-DO) and LTE in the US. Optics revenues declined 1.9% in 2011, as growth in our submarine activities were more than

offset by declines in terrestrial optics. Our wireline business declined 10.0% in 2011, reflecting pronounced weakness in spending for legacy core switching, which was partially offset by growth in our fixed access business, where we saw strong gains in fiber-based access equipment. Revenues in our S3 segment declined 1.7% in 2011, with our Services and Networks Applications businesses decreasing 1.1% and 6.2% in 2011, respectively. Revenues in our Enterprise segment grew by 2.4% in 2011, led primarily by growth in our data networking business.

 

 

Revenues in 2011 and in 2010 by geographical market (calculated based upon the location of the customer) are as shown in the table below, and include results from Genesys, except in the column entitled Discontinued Operations:

 

(In millions of euros)

Revenues by
geographical market

  France     Other
Western
Europe
    Rest of
Europe
    China     Other
Asia
Pacific
    U.S.     Other
Americas
    Rest of
world
    Consolidated     Discontinued
Operations
    As
published
 

2011

    1,229        2,813        623        1,295        1,402        5,602        1,616        1,116        15,696        (369)        15,327   

2010

    1,376        3,032        673        1,211        1,717        5,291        1,404        1,292        15,996        (338)        15,658   

% Change 2011 vs. 2010

    (11%)        (7%)        (7%)        7%        (18%)        6%        15%        (14%)        (2%)                (2%)   

 

In 2011, the United States accounted for 35.7% of revenues, up from 33.1% in 2010 as revenues grew 6%. The U.S continued to show signs of growth in the telecom sector following a strong recovery in 2010, with growth in the telecom sector driven by a surge in spending to accommodate strong growth in mobile data traffic, which led to strong growth in key areas such as IP and wireless in the first half of the year, with tempered spending in the second half. Europe accounted for 29.7% of revenues in 2011 (7.8% in France, 17.9% in Other Western Europe and 4.0% in Rest of Europe), down from 31.8% in 2010 (8.6% in France, 19.0% in Other Western Europe and 4.2% in Rest of Europe) as economic fears over sovereign debt weighed heavy on these regions. Within Europe, revenue decreased 11% year-over-year in France, and declined 7% in both Other Western Europe the Rest of Europe. Overall, Europe saw weakness spread across most businesses, with a few pockets of strength like our Managed & Outsourcing Solutions business within the S3 segment. Asia Pacific accounted for 17.2% of revenues in 2011 (8.3% in China and 8.9% in Other Asia Pacific), down

from 18.3% of revenues in 2010 (7.6% in China and 10.7% in Other Asia Pacific). The year-over-year decline in Asia Pacific was mainly attributable to an 18% decline in Other Asia Pacific, while our China revenues grew 7% compared to 2010. Revenues in Other Americas grew 15% in 2011 from 2010 and its share of total revenue increased to 10.3% from 8.8%. Rest of World decreased its share of total revenue to 7.1% in 2011, down from 8.1% in 2010, and had a 14% decrease in revenue.

Gross Profit. In 2011, gross profit increased to 35.0% of revenues, or 5,360 million, compared to 33.9% of revenue or 5,302 million in 2010. The increase in gross profit was mainly driven by favorable product and geographic mix as well as ongoing initiatives to reduce fixed operations, procurement and product design costs. Gross profit in 2011 primarily included the negative impact from a net charge of 170 million for write-downs of inventory and work in progress, as compared to 115 million for write-downs of inventory and work in progress in 2010.

 

 

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6.2 CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011

COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

We sell a wide variety of products in many geographic markets. Profitability per product can vary based on a product’s maturity, the required intensity of R&D and our competitive position. In addition, profitability can be impacted by geographic area depending on the local competitive environment, our market share and the procurement policy of our customers. During 2011, we witnessed a recovery in sales of products and in geographic areas where our profitability has historically been above average, compared to 2010.

Administrative and selling expenses. In 2011, administrative and selling expenses were 2,642 million or 17.2% of revenues compared to 2,769 million or 17.7% of revenues in 2010. Included in administrative and selling expenses are non-cash purchase accounting entries resulting from the Lucent business combination of 116 million in 2011 and 126 million in 2010. These non-cash purchase accounting entries primarily relate to the amortization of purchased intangible assets of Lucent, such as customer relationships and were lower year-over-year due to the impact of the strength of the euro compared to the U.S. dollar. The 4.6% decline in administrative and selling expenses year-over-year reflects the progress we have made to improve operational efficiency through the reduction of administrative expense, Information Systems/Information Technology and real estate expenses and organizational complexity.

Research and development costs. Research and development costs were 2,467 million or 16.1% of revenues in 2011, after a net impact of capitalization of 5 million of development expense, a decrease of 5.2% from 2,603 million or 16.6% of revenues after the net impact of capitalization of (10) million of development expense in 2010. The 5.2% decrease in research and development costs reflects a reduction in spending on legacy technologies in an effort to reduce overall costs. Capitalization of R&D expense was negative in 2010, reflecting the fact that the amortization of our capitalized R&D costs was greater than new R&D costs that were capitalized during this period. Included in research and development costs are non-cash purchase accounting entries resulting from the Lucent business combination of 152 million in 2011 and 159 million in 2010.

Income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments. We recorded income from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments of 251 million in 2011 compared to a loss of (70) million in 2010. The improvement in 2011 reflects the impact of higher gross margins as well as improvements in our operating expenses. Non-cash purchase accounting entries resulting from the Lucent business combination had a negative, non-cash impact of 268 million in 2011, which was lower than the impact of 286 million in 2010 due to the strength of the euro compared to the U.S. dollar.

In addition, changes in provisions adversely impacted income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments in 2011 by 363 million, of which 617 million were additional provisions and 254 million were reversals. Additional product sales reserves created during 2011 were 528 million while reversals of product sales reserves were 168 million during the same

period. Of the 168 million in reversals, 56 million related to reversals of reserves made in respect of warranties due to the revision of our original estimates for these reserves regarding warranty period and costs. This revision was due mainly to (i) the earlier than expected replacement of products under warranty by our customers with more recent technologies and (ii) the product’s actual performance leading to fewer warranty claims than anticipated and for which we had made a reserve. In addition, 50 million of the 168 million reversal of product sales reserves was mainly related to reductions in probable penalties due to contract delays or other contractual issues or in estimated amounts based upon statistical and historical evidence. The remaining reversals of 62 million were mainly related to new estimates of losses at completion. Changes in provisions adversely impacted income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments by 397 million in 2010, of which additional provisions were 701 million and reversals were 304 million. Additional product sales reserves (construction contracts and non-construction contracts) created during 2010 were 600 million while reversals of product sales reserves were 199 million.

Restructuring Costs. Restructuring costs were 203 million for 2011, representing (i) 113 million of new restructuring plans and adjustments to previous plans; (ii) 60 million of other monetary costs related to reorganizational projects and related fees payable to third parties, (iii) 29 million of other monetary costs related to restructuring reserves and (iv) a valuation allowance and a write-off of assets of 1 million in the aggregate. New restructuring plans cover costs related to the elimination of jobs and to product rationalization and facilities closing decisions. Restructuring costs were 371 million in 2010, representing (i) 240 million of new restructuring plans or adjustments to previous plans; (ii) 79 million of other monetary costs related to payables, (iii) 46 million of other monetary costs related to restructuring reserves and (iv) a valuation allowance and write-off of assets of 6 million in the aggregate. Our restructuring reserves of €294 million at December 31, 2011 declined compared to our €413 million restructuring reserves at December 30, 2010, and covered jobs identified for elimination and notified in 2011, jobs eliminated in previous years for which total or partial payment is still due, costs of replacing rationalized products, and other monetary costs linked to decisions to reduce the number of our facilities. Our restructuring reserves declined in 2011 primarily due to the adoption of fewer new restructuring plans in 2011 as well as the closure of older plans.

Litigations. In 2011, we booked litigation credit of 4 million related to both the FCPA and Fox River litigations (refer to Notes 35b and 32 of our audited Consolidated Financial Statements) due to the settlement of the FCPA matter with the SEC and the US Department of Justice as well as the reduction in the claim amount made against us in connection with the Fox River matter. In 2010, we booked litigation charges of (28) million related to: (i) the arbitral award on the collapse of a building in Madrid for an amount of (22) million and (ii) the FCPA litigation for an amount of (10) million, which charges were offset by a 4 million litigation credit pertaining to the Fox River litigation.

Gain/(loss) on disposal of consolidated entities. In 2011, we booked a loss on the disposal of consolidated entities of (2) million, mainly related to the post-closing adjustments paid by us in connection with the sale of our Vacuum business

 

 

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS

6.2 CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2011

COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

 

to Pfeiffer Vacuum Technology AG in 2010, compared to a gain of 62 million in 2010, which was mainly related to the completion of the sale of our Vacuum business that year.

Post-retirement benefit plan amendment. In 2011, we booked a 67 million one-time credit related to the change in our Management Pension Plan, effective April 1, 2011, which provides current active employees who participate in this plan the option to receive a lump sum when they retire. In 2010, we booked a 30 million net credit related to post-retirement benefit plan amendments that arose out of Alcatel-Lucent USA Inc.’s amendment of its Medicare Advantage National PPO plan in the third quarter of 2010 with an effective date of January 1, 2011 to increase the out-of-pocket maximums paid by Medicare eligible management participants and their Medicare eligible dependents.

Income (loss) from operating activities. Income (loss) from operating activities was income of 117 million in 2011, compared to a loss of (377) million in 2010. The improvement in income/(loss) from operating activities in 2011 is due in part to higher gross margins, lower operating expenses, lower restructuring costs, credits related to litigations and post-retirement benefit plan amendments, partially offset by a loss on the disposal of consolidated entities.

Finance costs. Finance costs were 294 million in 2011, a slight decrease from 304 million in 2010. The decrease is due to an increase in interest earned, from 53 million in 2010 to 59 million in 2011, in addition to a decrease in interest paid, from 357 million in 2010 to 353 million in 2011. The 2011 decrease in interest paid is primarily due to lower levels of financial debt whereas the increase in interest earned is due to the increase of interest rates between 2010 and 2011.

Other financial income (loss). Other financial income was 359 million in 2011, compared to 356 million in 2010. In 2011, other financial income consisted primarily of (i) income of 417 million related to the financial component of pension and post-retirement benefit costs offset by (ii) a loss of 65 million, a majority of which is due to bank charges and discount costs in connection with the sale of our receivables without recourse. In 2010 other financial income consisted of (i) income of 339 million related to the financial component of pension and post-retirement benefit costs and (ii) income of 82 million from actual and potential gains on financial assets (of which 33 million related to the disposal of 2Wire and 10 million related to the disposal of our Vacuum business both partially offset by a net loss of 45 million related to foreign exchange transactions.

Share in net income (losses) of equity affiliates. Share in net income of equity affiliates was 4 million during 2011, compared with 14 million in 2010. The decline compared to 2010 is largely due to the lack of income from our stake in 2Wire, which was sold in October 2010.

Income (loss) before income tax and discontinued operations. Income (loss) before income tax and discontinued operations was 186 million in 2011 compared to a loss of (311) million in 2010.

Income tax (expense) benefit. We had an income tax benefit of 544 million in 2011, compared to an income tax expense of (14) million in 2010. The income tax benefit for 2011 resulted from a current income tax charge of (42) million more than offset by a net deferred income tax benefit of 586 million. The 586 million net deferred tax benefit includes: (i) 559 million of other deferred income tax benefits primarily related to the re-assessment of the recoverability of certain deferred tax assets mainly in connection with the 2011 annual impairment tests of goodwill performed in the second and fourth quarters of 2011 and (ii) 114 million of deferred income tax benefits related to the reversal of deferred tax liabilities accounted for in the purchase price allocation of Lucent. These positive effects were slightly offset by (87) million in deferred tax charges related to Lucent’s post-retirement benefit plans. The income tax expense for 2010 resulted from a current income tax charge of (78) million offset by a net deferred income tax benefit of 64 million. The 64 million net deferred tax benefit includes deferred income tax benefits of 124 million related to the reversal of deferred tax liabilities accounted for in the purchase price allocation of the Lucent combination and 97 million of other deferred income tax benefits primarily related to the re-assessment of the recoverability of deferred tax assets mainly in connection with the 2010 annual impairment test of goodwill performed in the second quarter of 2010. These positive effects were slightly offset by: (i) (136) million in deferred tax charges related to Lucent’s post-retirement benefit plans, (ii) (12) million of deferred tax charges related to the post-retirement benefit plan amendment and (iii) (9) million of deferred taxes related to Lucent’s 2.875% Series A convertible debenture.

Income (loss) from continuing operations. We had income from continuing operations of 730 million in 2011 compared to a loss of (325) million in 2010.

Income (loss) from discontinued operations. We had income from discontinued operations of 414 million in 2011 related to the disposal of our Genesys business in 2012, including 338 million of deferred tax assets relating to the tax losses carried forward that will be used to offset the capital gain on the disposal of our Genesys business in 2012. Income from discontinued operations was 33 million in 2010 due to the disposal of our Genesys business partially offset by settlements of litigations related to businesses discontinued in prior periods.

Non-controlling Interests. Non-controlling interests accounted for income of 49 million in 2011, compared to income of 42 million in 2010. The increase from 2010 is due largely to the income from our operations in China through Alcatel-Lucent Shanghai Bell, Co. Ltd.

Net income (loss) attributable to equity holders of the parent. A net income of 1,095 million was attributable to equity holders of the parent in 2011, compared with a loss of (334) million in 2010.

 

 

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS

6.3 RESULTS OF OPERATIONS BY BUSINESS SEGMENT FOR THE YEAR ENDED DECEMBER 31, 2011

COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

6.3    RESULTS OF OPERATIONS BY BUSINESS SEGMENT FOR THE YEAR ENDED DECEMBER 31, 2011 COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

The following discussion takes into account our results of operations for the years 2011 and 2010, with results presented according to the organization structure that became effective July 20, 2011. The 2011 organization includes three business segments: Networks, S3 (Software, Services & Solutions) and Enterprise, while the 2010 organization structure consisted of three different business segments - Networks, Applications and Services. Results of operations for 2010 were originally presented according to the 2010 organization structure but are presented here according to the 2011 organization structure in order to facilitate comparison with the current period. Unlike the discussion in Section 6.2 of the Consolidated Results of Operations, the discussions below also include the results of our Genesys business that was sold to Permira on February 1, 2012.

The table below sets forth certain financial information on a segment basis for the years ended December 31, 2011 and December 31, 2010. Segment operating income (loss) is the

measure of operating segment profit or loss that is used by our Chief Executive Officer to perform his chief operating decision making function, to assess performance and to allocate resources. It consists of segment income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and postretirement benefit plan amendments, excluding the main non-cash impacts of the purchase price allocation (PPA) entries relating to the Lucent business combination. Adding “PPA Adjustments (excluding restructuring costs and impairment of assets)” to segment operating income (loss) as well as the Genesys activity accounted for in discounted operations, reconciles segment operating income (loss) with income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments, as shown in the table below and the consolidated financial statements included as part of this annual report.

 

 

(In millions of euros)

Twelve months ended December 31, 2011

                                  
   Networks      Software,
Services &
Solutions
     Enterprise      Other      Total  
Revenues      9,654         4,461         1,213         368         15,696   
Segment Operating Income (Loss)      263         227         108         12         610   
PPA Adjustments (excluding restructuring costs and impairment of assets)                                          (268)   
Genesys activity accounted for in discontinued operations                                          (91)   
Income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments                                          251   

 

(In millions of euros)

Twelve months ended December 31, 2010

                                  
   Networks      Software,
Services &
Solutions
     Enterprise      Other      Total  
Revenues      9,643         4,537         1,185         631         15,996   
Segment Operating Income (Loss)      187         30         83         (12)         288   
PPA Adjustments (excluding restructuring costs and impairment of assets)                                          (286)   
Genesys activity accounted for in discontinued operations                                          (72)   
Income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments                                          (70)   

 

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OPERATING AND FINANCIAL REVIEW AND PROSPECTS

6.3 RESULTS OF OPERATIONS BY BUSINESS SEGMENT FOR THE YEAR ENDED DECEMBER 31, 2011

COMPARED TO THE YEAR ENDED DECEMBER 31, 2010

 

 

 

PPA adjustments (excluding restructuring costs and impairment of assets). PPA adjustments (excluding restructuring costs and impairment of assets) decreased in 2011, to (268) million compared with (286) million in 2010. The decrease was largely due to the increase in the value of the euro relative to the U.S. dollar in 2011, as the amortization of purchased intangible assets of Lucent, including long-term customer relationships, acquired technologies and in-process R&D was little changed in 2011 compared with 2010.

Income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments. In 2011, segment operating income of 610 million for the Group, adjusted for (268) million in PPA and (91) million for the Genesys activity accounted for in discontinued operations yielded income from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendments of 251 million. In 2010, a segment operating income of 288 million for the Group, adjusted for (286) million in PPA and (72) million for the Genesys activity accounted for in discontinued operations yielded a loss from operating activities before restructuring costs, li