20-F 1 d130996d20f.htm 20-F 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, 2015

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)

148/152 route de la Reine
92100 Boulogne-Billancourt, France

(Address of principal executive offices)

Marisa BALDO

Telephone Number 33 (1) 55 14 10 10

Facsimile Number 33 (1) 55 14 14 05

148/152 Route de la Reine

92100 Boulogne-Billancourt 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

None

 

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

Ordinary Shares, nominal value 0.05 per share

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.

3,036,337,359 ordinary shares, nominal value 0.05 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  x    No  ¨

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     3   
  1.2    Exchange rate information     4   
2   Activity overview     5   
  2.1    Core Networking Segment     6   
  2.2    Access Segment     7   
3   Risk factors     9   
  3.1    Risks relating to the business     10   
  3.2    Legal Risks     18   
  3.3    Risks relating to ownership of our ADSs and of our ordinary shares     19   
4   Information about the Group     21   
  4.1    General     22   
  4.2    History and development     22   
  4.3    Structure of the main consolidated companies as of December 31, 2015     29   
  4.4    Real estate and equipment     30   
  4.5    Material contracts     31   
5   Description of the Group’s activities     35   
  5.1    Business organization     36   
  5.2    Core Networking Segment     38   
  5.3    Access Segment     42   
  5.4    Marketing, sales and distribution of our products     44   
  5.5    Competition     44   
  5.6    Technology, research and development     45   
  5.7    Intellectual Property     47   
  5.8    Sources and availability of materials     47   
  5.9    Seasonality     48   
  5.10    Our activities in certain countries     48   
6   Operating and financial review and prospects     49   
  6.1    Overview of 2015     54   
  6.2    Consolidated and segment results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014     55   
  6.3    Consolidated and segment results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013     60   
  6.4    Liquidity and capital resources     65   
  6.5    Contractual obligations and off-balance sheet contingent commitments     69   
  6.6    Qualitative and quantitative disclosures about market risks     73   
  6.7    Legal Matters     75   
  6.8    Research and development — expenditures     76   
7   Corporate governance     77   
  7.1    Chairman’s corporate governance report     78   
  7.2    Regulated agreements     120   
  7.3    Alcatel Lucent Code of Conduct     121   
8   Compensation and long-term incentives     123   
  8.1    Long-term compensation instruments used prior to the success of the Nokia Offer     124   
  8.2    Status of the Executive Directors and officers     137   
9   Sustainability     157   
  9.1    Approach to sustainability     158   
  9.2    Environment     159   
  9.3    Human Resources     162   
  9.4    Supply chain     164   
10   Listing and shareholdings     165   
  10.1    Information concerning our Company     166   
  10.2    Capital     172   
  10.3    Shareholding     183   
  10.4    Stock exchange information     190   
  10.5    Shareholders’ Meetings     193   
11   Controls and procedures, Statutory Auditors’ fees and other matters     195   
  11.1    Controls and procedures     196   
  11.2    Documents on display     200   
  11.3    Audit Committee financial expert     201   
  11.4    Code of ethics     201   
  11.5    Financial statements     201   
  11.6    Exhibits     202   
  11.7    Cross-reference table between Form 20-F and this document     203   
12   Alcatel-Lucent consolidated financial statements at December 31, 2015     207   
 


Table of Contents

Selected financial data

1 

 

 

1.1    Condensed consolidated income statement and statement of financial position data      3   
1.2    Exchange rate information      4   

 

 

 

1


Table of Contents

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. (“Lucent”) completed a business combination pursuant to which Lucent became a wholly owned subsidiary of Alcatel and was renamed Alcatel-Lucent USA Inc.

As a result of the purchase accounting treatment of the Lucent business combination required by IFRS, our results for 2015, 2014, 2013, 2012 and 2011 included several negative, non-cash impacts of purchase accounting entries.

In 2015, we changed our accounting treatment for the recognition of certain deferred tax assets. In accordance with IAS 8 “Accounting policies, changes in accounting estimates and errors”, we have retroactively applied this accounting change and restated prior years (see Note 4 to our consolidated financial statements included elsewhere in this annual report).

 

 

 

 

2


Table of Contents

SELECTED FINANCIAL DATA

 

 

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)   2015 (1)     2015     2014 (2)     2013 (2)(3)     2012 (2)(3)     2011 (2)(3)  
                         
Income Statement Data              
                                                 
Revenues     U.S.$15,501      14,275      13,178      13,813      13,764      14,637   
                                                 
Income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities, transaction-related costs, impairment of assets and post-retirement benefit plan amendments     1,090        1,004        572        192        (480)        241   
 
Restructuring costs     (435)        (401)        (574)        (518)        (479)        (202)   
 
Impairment of assets     (210)        (193)        -        (548)        (894)        -   
 
Income (loss) from operating activities     736        678        137        (739)        (1,636)        108   
 
Income (loss) from continuing operations     272        251        (23)        (1,336)        (2,854)        298   
 
Net income (loss)     255        235        (72)        (1,361)        (2,215)        720   
   
Net income (loss) attributable to equity owners of the parent     224        206        (107)        (1,371)        (2,138)        671   
   
 
Earnings per ordinary share              
                                                 
 
Net income (loss) before discontinued operations attributable to the equity owners of the parent per share              
 

·    basic (4)

    U.S.$0.09        0.08        (0.02)        (0.55)        (1.16)        0.11   
 

·    diluted (5)

    U.S.$0.09        0.08        (0.02)        (0.55)        (1.16)        0.10   
 
Dividend per ordinary share (6)     -        -        -        -        -        -   
 
Dividend per ADS (6)     -        -        -        -        -        -   
   

 

    At December 31,  
(In millions)   2015 (1)     2015     2014 (2)     2013 (2)(3)     2012 (2)(3)     2011 (2)(3)  
                         
Statement of Financial Position Data              
   
Total assets   U.S.$ 25,826        23,783        22,005        22,638        22,011        24,995   
   
Marketable securities and cash and cash equivalents     7,092        6,531        5,550        6,355        4,929        4,472   
 
Bonds, notes issued and other debt - long-term portion     5,030        4,632        4,875        4,922        3,954        4,290   
 
Current portion of long-term debt and short-term debt     629        579        402        1,240        851        323   
 
Capital stock     165        152        141        140        4,653        4,651   
 
Equity attributable to the equity owners of the parent after appropriation (7)     4,643        4,276        2,406        3,675        2,595        4,643   
 
Non-controlling interests     982        904        833        730        745        747   
   

 

(1)   Translated solely for convenience into dollars at the noon buying rate of €1.00 = U.S.$1.0859 on December 31, 2015.

 

(2)   2014, 2013, 2012 and 2011 amounts are restated to reflect the impact of a change in accounting treatment (see Note 4). 2012 and 2011 are not audited.

 

(3)   2013, 2012 and 2011 amounts are re-presented to reflect the impacts of discontinued operations (see Note 9 to the consolidated financial statements for the year ended December 31, 2014).

 

(4)   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: 2,808,608,666 in 2015, 2,767,026,349 in 2014, 2,431,168,718 in 2013, 2,396,818,408 in 2012 and 2,393,578,923 in 2011.

 

(5)   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: 2,852,673,640 in 2015, 2,767,026,349 in 2014, 2,431,168,718 in 2013, 2,396,818,408 in 2012 and 2,701,421,886 in 2011.

 

(6)   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 2015 at our Annual Shareholders’ Meeting to be held in 2016. ADS: American Depositary Share.

 

(7)   Amounts presented are net of dividends distributed. No dividend was proposed and distributed as of December 31, 2015, 2014, 2013, 2012 and 2011.

 

 

 

3


Table of Contents

1

SELECTED FINANCIAL DATA

 

 

Exchange rate information

 

 

1.2 Exchange rate information

 

The table below shows the average noon buying rate of euro for each year from 2011 to 2015. 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 or, from 2014, the European Central Bank fixing at 3:00 pm Paris time.

 

Year   Average rate (1)  
   
2015   U.S.$ 1.1095   
2014   U.S.$ 1.3211   
2013   U.S.$ 1.3303   
2012   U.S.$ 1.2909   
2011   U.S.$ 1.4002   
   

 

(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  
   
April 2016   U.S.$ 1.1432      U.S.$ 1.1252   
March 2016   U.S.$ 1.1385      U.S.$ 1.0856   
February 2016   U.S.$ 1.1347      U.S.$ 1.0884   
January 2016   U.S.$ 1.0920      U.S.$ 1.0742   
December 2015   U.S.$ 1.0990      U.S.$ 1.0600   
November 2015   U.S.$ 1.1032      U.S.$ 1.0579   
October 2015   U.S.$ 1.1439      U.S.$ 1.0930   
September 2015   U.S.$ 1.1419      U.S.$ 1.1138   
   

On April 25, 2016, the noon buying rate was 1.00 = U.S.$1.1264.

 

 

 

 

4


Table of Contents

Activity overview

 

 

2  

 

 

 

2.1    Core Networking Segment      6   
2.2    Access Segment      7   

 

 

 

5


Table of Contents

2

ACTIVITY OVERVIEW

 

 

Core Networking Segment

 

 

2.1 Core Networking Segment

Our Core Networking segment includes three business divisions: IP Routing, IP Transport and IP Platforms. In 2015, revenues in our Core Networking segment were 6,780 million, representing 47% of our total revenues. Within Core Networking, IP Routing revenues were 2,669 million in 2015, representing 39% of segment revenues, IP Transport revenues were 2,450 million, representing 36% of segment revenues and IP Platforms revenues were 1,661 million, representing 24% of segment revenues.

 

 

IP Routing

 

Description   Activities   Market positions
We are a world leader and privileged partner of service providers, cable/multi-system operators (MSOs), large enterprises and vertical markets including transportation, energy, governments in transforming their networks to an all-IP (Internet Protocol) architecture.   We deliver IP routing, Carrier ethernet, Network Function Virtualization (NFV) and Software Defined Networking (SDN) applications and infrastructure required to meet the challenges of sustaining massive network traffic growth while supporting the efficient delivery of cloud-enabled business, mobile and residential services. Our technology allows our customers to create a more efficient network infrastructure that enables new services to enrich the end-user experience and create sustainable value.  

·    #2 in Global IP Services Edge Routing with 25% market share based on revenues in 2015 (1)

 

·    #3 in total routing (global) with 20% market share based on revenues in 2015 (1)

 

·    #4 in Global IP Services Core Routing with 7% market share based on revenues in 2015 (1)

 

(1)   Industry analysts

 

 

IP Transport

 

Description   Activities   Market positions
As a leader in optical networking, we help more than 1,000 service providers, cable/MSOs, large enterprises and vertical markets including transportation, energy, governments and large enterprises to transform their optical transmission infrastructures, ensuring reliable transport of data at the lowest cost per bit and enabling new revenue generating services and applications.   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 related professional services and microwave wireless transmission equipment.  

·    #4 in optical networking with 11% market share based on revenues in 2015 (1)

 

(1)   Industry analysts

 

 

 

6


Table of Contents

ACTIVITY OVERVIEW

 

 

Core Networking Segment

 

 

 

IP Platforms

 

Description   Activities   Market positions
Our IP Platforms portfolio provides software and service offerings that help service providers and large enterprises deliver, manage, charge for, and optimize voice and data communications services. Our products and services help customers accelerate their innovation, monetize services and improve customer care.   We develop products and solutions focused on: communications, collaboration, Network Function Virtualization (NFV), customer experience, device management, policy, charging, network intelligence, operations support systems, and related professional services.  

·    Proven capability with the #3 IMS/NGN portfolio based on revenues (1).

 

·    Strong field experience with early NFV deployments acquired from 42 CloudBand proof of concepts and trials.

 

(1)   Industry analysts

 

2.2 Access Segment

Our Access segment includes four business divisions: Wireless, Fixed Access, Licensing and Managed Services. In 2015, revenues in our Access segment were 7,482 million, representing 52% of our total revenues. Within Access, Wireless revenues were 4,896 million in 2015, representing 65% of segment revenues, Fixed Access revenues were 2,268 million, representing 30% of segment revenues, Licensing revenues were 56 million, representing 1% of segment revenues and Managed Services revenues were 262 million, representing 4% of segment revenues.

 

 

Wireless

 

Description   Activities   Market positions
We are one of the world’s leading suppliers of wireless communications infrastructure. Our focus is on delivering high capacity, next generation wireless access solutions for our customers, enabling them to move faster to meet demand, deliver the highest quality of experience for the end user and be first to capture new market opportunities.   We are committed to a wireless access portfolio that is best suited to operators who are focused on constructing next generation wireless networks based on the most advanced technologies. As such, our primary activities focus on delivering 4G/Long Term Evolution (LTE)/Long Term Evolution-Advanced (LTE-A) overlay solutions and 3G/4G/multi-standard small cell solutions along with related professional services. We are developing industry leading portfolios in foundational 5G technologies such as Networks Function Virtualization (NFV), including vRAN, and Software Defined Networks (SDN) as well as working with operators considered to be leaders of 5G principles. In addition, our wireless access portfolio includes 2G/3G wireless products and related professional services as well as our Radio Frequency Systems (RFS) portfolio.  

·    #4 in Total Wireless Radio Access Networks (RAN) with 12% market share based on revenues in 2015 (1)

 

·    #3 in LTE with 15% market share based on revenues in 2015 (1)

 

·    Small cell industry leader with 87 customer contracts through the end of 2015 (2)

 

(1)   Industry analysts

 

(2)   Alcatel-Lucent estimate

 

 

 

7


Table of Contents

2

ACTIVITY OVERVIEW

 

 

Access Segment

 

 

 

Fixed access

 

Description   Activities   Market positions
We are a worldwide leader 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, the second largest supplier of GPON technology and a leader in VDSL2 Vectoring (1).   Our family of IP-based fixed access products and related professional services provides support for both DSL and fiber, allowing service providers to extend Ultra-Broadband access to the customer’s premise regardless of technology and to seamlessly combine copper and fiber access technologies and FTTx deployment models to achieve the fastest return-on-investment and time-to-market.  

·    #1 in broadband access with 41% DSL market share based on ports shipped in 2015 (1)

 

·    #1 in very-high-bit-rate digital subscriber line (VDSL2) with 47% market share based on ports shipped in 2015. (1)(2)

 

·    #3 in gigabit passive optical network (GPON) technology based on ports shipped with 17% market share in 2015 (1)

 

(1)   Industry analysts

 

(2)   Alcatel-Lucent estimate

 

 

Licensing

 

Description   Activities   Market positions
We are one the largest patent owners in the telecommunications industry. While we have particular strengths in the wireless, optical, and data networking segments, our patents cover a diverse range of technologies.   The Licensing business works to monetize our patent portfolio through licensing and patent sales while also maintaining and prosecuting patents.  

·    Over 34,000 active patents worldwide

 

·    Over 2,600 newly granted patents in 2015

 

·    Over 13,000 pending patent applications

 

 

Managed services

 

Description   Activities   Market positions
We are a leader in providing innovative managed services solutions in both the carrier and strategic industries markets. Our solutions help customers by delivering accelerated time to market, continuous improvement in service quality and a sustainable lower total cost of operations.   Our managed services portfolio includes Build-Operate-Manage-Transfer (BOMT) Solutions, Operations Transformation Solutions, and Network Operations Services. These services can be delivered across a wide array of network technologies including Network Access (FTTx), next generation wireless (LTE, Small Cells, 4G), and IP networks.  

·    Managed Services contracts in approximately 90 networks that cover over 100 million subscribers (1)

 

(1)   Alcatel-Lucent estimate

 

 

 

8


Table of Contents

Risk factors

3  

 

 

 

3.1    Risks relating to the business      10   
3.2    Legal Risks      18   
3.3    Risks relating to ownership of our ADSs and of our ordinary shares      19   

 

 

 

9


Table of Contents

3

RISK FACTORS

 

 

Risks relating to the business

 

 

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, including the additional risks that could potentially arise from Nokia’s acquisition of Alcatel-Lucent (detailed in Section 4.2 “History and Development”, sub-section “Highlights of transactions during 2015” and “Recent Events - Update on the Nokia transaction and related matters”). 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

 

Following the success of the Nokia Offer (as defined in Section 4.2 “History and Development” - sub-section “Recent events - Update on the Nokia transaction and related matters”), we have begun, and we will continue, to allocate significant resources, including management attention, to integrate the business of the Nokia Group and the Alcatel Lucent Group. The integration process involves certain risks and uncertainties, and there can be no assurance that the integration will take place in the manner or within the timeframe currently anticipated, or that the planned new structure will result in the intended benefits.

Such risks and uncertainties include potentially, among others, the distraction of our management’s attention from important issues resulting in performance shortfalls, the disruption caused to our ongoing business, and inconsistencies in our services, standards, controls, procedures and policies, any of which could have a material adverse effect on our ability to maintain relationships with customers, vendors, regulators and employees or could otherwise have a material adverse effect on our business, financial condition and/or results of operations. Potential challenges that we might encounter due to the integration process include the following:

 

·   the challenges relating to the consolidation of corporate, financial, control and administrative functions, including cash management, foreign exchange/hedging operations, internal and other financing, insurance, financial control and reporting, information technology (“IT”), communications, compliance and other administrative functions;

 

·   contractual issues with respect to various agreements with third parties, including joint venture agreements, pension funds agreements, contracts for the performance of engineering and related work/services, IT contracts, and technology and intellectual property rights licenses, that may arise as a result of the integration process;

 

·   the inability to retain or motivate key employees and recruit needed resources;

 

·   disruptions caused by reorganizations triggered by the integration process may result in inefficiency within the new organization;

 

·   the inability to achieve the targeted organizational changes, efficiencies or synergies in the targeted time or extent or within the budgeted costs associated with implementing such changes;
·   the inability to rationalize as required product lines or retire legacy products and related after-sales services as a result of pre-existing customer commitments;

 

·   loss of, or lower volume of business from, key customers, or the inability to renew agreements with existing customers or achieve new customer relationships;

 

·   new or additional conditions and regulatory burden imposed by laws, regulators or industry standards on businesses or adverse regulatory or industry developments or litigation may affect us as a result of the integration ; and

 

·   the coordination of research and development, marketing and other support functions may fail or cause inefficiencies or other administrative burdens.

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 2015. During the year, the continued growth in smartphone penetration, mobile data and all-IP network transformation led to improved spending in certain technologies, as evidenced by increased revenues in businesses such as IP Routing and IP Transport. From a regional perspective, investments in ultra-broadband access technologies, such as LTE, led to robust investments in the U.S. notably in the second half of the year, while spending in China continued to be focused on 4G LTE deployments, accelerating from 2014 levels. On the other hand, the telecommunications equipment market in Europe continued to show signs of easing. Actual market conditions could be very different from what we expect and are planning for due to the uncertainty that exists about 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

 

 

 

 

10


Table of Contents

RISK FACTORS

 

 

Risks relating to the business

 

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, 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 historically have 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 and the payment terms variations;

 

·   the timing and size of capital expenditures;

 

·   costs associated with potential restructuring actions; and

 

·   customer credit risk.

Over time, we may derive our capital resources from a variety of sources, including the generation of positive cash flow from on-going operations, proceeds from asset sales, the issuance of debt in various forms and credit facilities, including the US$ 2 billion Nokia Corporation Revolving Liquidity Support Facility and the 1 billion Nokia Corporation Revolving Credit Facility. Our ability to continue to draw upon these resources is dependent upon a variety of factors, including our customers’ ability to make payments on outstanding accounts receivable, who may ask for extended payment terms during the year; the perception of our credit quality by lenders and investors, and the debt market conditions generally. Given current conditions, access to the debt markets may not be relied upon at any given time. Based on our current view of our business and capital resources (including an Alcatel Lucent net cash position and cash equivalents and marketable securities of 1.409 million euros at the end of 2015, the two Nokia revolving facilities and the recent upgrade by Standard & Poor’s of Alcatel Lucent’s credit rating) and the overall market environment, we believe we have sufficient resources to fund our operations for the next twelve months. 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 further recourse to external sources, such as capital market proceeds, asset sales or financing from third parties or Nokia Corporation, beyond those funds already obtained. We cannot provide any assurance that such funding will be available on terms satisfactory to us. In addition, Nokia has stated its intention to cause us to reduce materially our discounting of accounts receivable, which has been a source of liquidity for us in the past. If we were to incur higher 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.

Also, as part of the integration of the Alcatel Lucent Group into the Nokia Group, we redeemed a substantial portion of our long term debt, financed in part by our cash resources and in part by the Nokia Corporation Revolving Liquidity Support Facility. This resulted in a reduction of our immediately available cash on our balance sheet, making us more dependent on the Nokia facility, the availability of which is a function of Nokia’s own financial health.

Our ability to have access to the capital markets and our financing costs is, 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 continue to be sufficient to give us access to the capital markets on acceptable terms, or that 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 provide 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. In the past, certain of our customers

 

 

 

 

11


Table of Contents

3

RISK FACTORS

 

 

Risks relating to the business

 

have sought protection under the bankruptcy or reorganization laws of the applicable jurisdiction, or have experienced financial difficulties. We cannot predict how that situation may evolve in 2016, 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.

Our financial condition and results of operations may be harmed if we do not successfully reduce market risks, including 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 on a quarterly or annual basis.

We also experience other market risks, including changes in interest rates and in prices of marketable 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, notably in connection with the combination between Alcatel and Lucent. 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 restructuring actions or adverse market conditions that are either specific to us or the broader telecommunications industry or more general in nature.

More details on past impairment charges can be found in Note 11 to our consolidated financial statements.

If any material unfavorable change in any of the key assumptions used to determine the recoverable value of our Product Divisions,

as described in Chapter 6 “Operating and Financial Review and Prospects”, under the heading “Critical Accounting Policies”, were to occur, 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.

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, which allow them to be very competitive in terms of pricing. 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

 

 

 

 

12


Table of Contents

RISK FACTORS

 

 

Risks relating to the business

 

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: predominantly, external manufacturing suppliers, and also internal manufacturing locations. 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. The manufacturing equipment and common and custom-made test equipment in our internal manufacturing locations are owned by us.

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, in the event of a disruptive event we may not be able to mitigate entirely the disruption risks for all of our products and, depending on the nature of such 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, unusual allocation of components to competitors leading to shortages, 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. In addition to the multisource strategy, we further seek to mitigate sourcing disruptions by concentrating the supplier base for new products and for volume production among a group mostly made of “preferred” suppliers who satisfy our requirements. These preferred suppliers are under quality and performance monitoring, and are subject to periodic business review and executive management meetings.

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.

We continued the process of outsourcing a significant portion of our finance and human resources (HR) processes and services, increasing our dependence on the reliability of external providers. Interruptions in the availability of these processes and services could have a material adverse impact on the responsiveness and quality of these processes and services that are crucial to our business operations, and on our future ability to adapt to changing business needs.

Due to the customized nature of the services outsourced in the area of finance and HR, a failure to structure an efficient relationship with the outsourcing company we have selected may lead to on-going operational problems or even to severe business disruptions. In addition, as management’s focus shifts from a direct to an indirect operational control in these areas, there is a risk that without active management and monitoring of the relationship, the services provided may be below appropriate quality standards. There is the added risk that the outsourcing company may not meet the agreed service levels, in which case, depending on the impacted service, the contractual remedies may not fully cure all of the damages we may suffer. This is particularly true for any deficiencies that would impact the reporting requirements applicable to us as a company listed on Euronext NYSE in Paris.

In order to implement this outsourcing, changes in our business practices and processes were required to capture economies of scale and operational efficiencies, and to reflect a different way of doing business. Consequently, business processes that were customized for individual business units or for the Group were

 

 

 

 

13


Table of Contents

3

RISK FACTORS

 

 

Risks relating to the business

 

converted to a more standardized format. Throughout the transition to outsourcing, our employees had to train the outsourcing company’s staff or get trained on the outsourcing company’s systems. Future similar training could potentially result in the distraction of our human resources. Adjustments to staff size and transfer of employees to the outsourcing companies could impact morale and raise complex labor law issues, which we would seek to address, but the adverse effects of which might impact the business case for this outsourcing. If inadequately handled, the transition may result in the loss of certain personnel who are highly skilled and familiar with our practices and requirements.

There is also a risk that, in spite of our independent validation of the control procedures, we may not be able to determine whether controls have been effectively implemented, and whether the outsourcing company’s performance monitoring reports are accurate. Concerns equally could arise from giving third parties access to confidential data, strategic technology applications, and the books and records of the Alcatel-Lucent Group.

In the longer term, this type of organization potentially creates a dependency on the outsourcing company. This dependency may increase over time, since our ability to learn from day-to-day responsibilities and hands-on experience, and from responding to changing business needs, may be diminished.

Although we have selected a reputable company to provide the outsourced finance and HR services, and are working closely with it to identify risks and implement measures to minimize them, we cannot give assurances that the availability of the processes and services upon which we rely will not be interrupted, which could result in a material adverse impact on our business operations, in particular during the transition phase. Recurring performance problems may result in missed reporting deadlines, financial losses, missed business opportunities and reputational concerns.

As most of these activities were transferred in the beginning of 2015, the risks described above have decreased, and to date we have not experienced any interruption to the business. However, in the context of the transaction with Nokia, there is a separate risk relating to the ability of our outsourced company to timely adapt to the tools and process changes that are being defined by the new Nokia organization.

Information system risks, data protection breaches, cyber-attacks and industrial espionage may result in unauthorized access to or modification, misappropriation or loss of, the intellectual property and confidential information that we own or that has been entrusted to us by third parties 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 user 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 through 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, misappropriation or loss of, such information could have a material adverse impact on our business and results of operations. As we expand our use of cloud-based providers and services, the amount of information outside of our direct control increases, resulting in increasing risk. Also, increased business activities such as divestitures, outsourcing and downsizing raises the likelihood that critical information could be compromised by external or internal factors.

Unauthorized outside parties have targeted our information systems, using sophisticated methods and tools, referred to as advanced persistent threats (“APTs”). APTs use “phishing” attacks, and download exploits as main vectors of attacks. Such attempts to access our information systems have been successful on one occasion in 2013, on two occasions in 2014, and on one occasion in 2015. We investigated the impact of these attacks. Although we have no reason to believe that sensitive information was actually compromised by these attacks, we are not in a position to be conclusive, since the investigations showed that some data were extracted. As the overall number of attacks grows around the world and since our industry has been designated as a targeted industry, we have continued to take corrective actions that we believe will substantially mitigate the risk that such attacks will materially impact our business or operations, or that of our customers. However, we cannot rule out that there may have been other cyber-attacks that have been successful and have evaded detection. Our business is also vulnerable to theft, fraud, trickery or other forms of deception, sabotage and intentional acts of vandalism by outside parties, as well as parties inside the organization.

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 ourselves and in coordination with our suppliers and business partners. We are also increasing the resources allocated in this area. 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 and other 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, 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

 

 

 

 

14


Table of Contents

RISK FACTORS

 

 

Risks relating to the business

 

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.

Because our business operations, including those we have outsourced, rely on our complex IT systems and networks (and related services), our reliance on the precautions taken by external companies to insure the reliability of our and their IT systems, networks and related services is increasing.

Despite these precautions, our business is susceptible to disruption from IT equipment failure, vandalism, cyber attacks, natural disasters, power outages and other events affecting the IT systems, networks and related services we manage, as well as third party systems. Although we have selected reputable companies to provide outsourced IT systems and 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 systems and services upon which we rely, with material adverse impacts on our business 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.

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, in the loss of sales, or in the need to create provisions, which would harm our business and adversely affect our revenues and profitability. From time to time, we have experienced such occurrences.

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 53% of our revenues in 2015 (among which Verizon, AT&T and Sprint represented 15%, 14% and 5% 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, or inability to expand and diversify our customer base to non service providers could significantly reduce our revenues, profitability and cash flow.

Our ten largest customers accounted for 53% of our revenues in 2015 (among which Verizon, AT&T and Sprint represented 15%, 14% and 5% 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 obliged to purchase a fixed amount of products or services over any period of time from us and usually have the right to reduce, delay or even cancel previous orders, which could impact revenues from one reporting period to the next. 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 or delays in spending in that industry. Although we are continuing to focus on expanding and diversifying our customer base to new emerging customer segments such as cable service providers, web-scale, large tech enterprises or vertical businesses, which are also investing in carrier-grade networks we may not succeed in achieving such expansion and diversification.

As a result of the transaction with Nokia, we may lose certain other existing contracts, or be unable to renew or gain new contracts due to customer diversity policies that limit the ability for the same network provider to exceed a certain threshold of business in a given market with such customer. Policies or practices in certain countries may also limit the possibility for foreign vendors to participate in the provision of networks business over a certain threshold.

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

 

 

 

 

15


Table of Contents

3

RISK FACTORS

 

 

Risks relating to the business

 

important products. Since former restructuring actions entail 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 expanding business in emerging markets in Asia, Africa, Middle East, Latin America and Eastern Europe. In these emerging markets, we are faced with several risks that are more significant than in other countries, such as the local economies being dependent on only a few products (more specifically those economies that almost exclusively export raw materials such as oil and minerals), weak legal systems that can affect our ability to enforce contractual rights, possible exchange controls, international trade restrictions, unstable governments and privatization actions or other government actions affecting the flow of goods and currency. Also, it is possible that political developments in certain countries may have, at least temporarily, a negative impact on our operations in those countries, with an increased risk of heightened conflicts and terrorism. For this reason, potentially we may not be able to enter into, manage or terminate contracts for a particular country or to work in a particular country during a period of time.

Alcatel Lucent 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, assumptions regarding the life expectancy of covered employees and retirees, medical price increases, and changes in legal requirements. Even if these plans are currently fully funded, they are costly, and our efforts to satisfy further funding requirements or control these costs may be ineffective.

Many former and current employees and retirees of the Alcatel Lucent Group in the U.S. participate in one or more of its major defined benefit pension and post-retirement welfare benefit plans that provide pension, healthcare, and group life insurance benefits. Such defined benefit pension and post-retirement welfare benefit plans have funding requirements based on a variety of criteria, including asset allocation, performance of financial markets, interest rates, assumptions regarding life expectancy, medical prices, and changes in legal requirements. To the extent that any of the aforementioned criteria or other criteria change, the funding requirements of our major defined benefit pension and post-retirement plans may increase. We may be unsuccessful in our ability to control costs resulting from the increased funding requirements, and such inability to control costs could materially adversely impact our results of operations or financial position.

Volatility in discount rates and asset values will affect the funded status of Alcatel Lucent’s pension plans.

The U.S. Internal Revenue Code provides a number of methods to use for measuring plan assets and for determining the discount rate to be applied for measuring defined benefit pension plan liabilities for regulatory funding purposes. 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 2014 funding valuation, we selected the two-year asset fair value smoothing method for the U.S. management pension plan and the U.S. occupational pension plans (active and inactive). Alcatel Lucent is generally required to use this same asset valuation method to measure the 2015 funding valuation. With respect to the discount rate to be applied for measuring plan liabilities, the Moving Ahead for Progress in the 21st Century Act, enacted on July 6, 2012 and thereafter modified and extended by The Highway and Transportation Funding Act, enacted on August 8, 2014, and the Bipartisan Budget Act of 2015, enacted on November 2, 2015 (collectively, “MAP-21/HATFA/BBA”), affects U.S. tax-qualified pension plan funding requirements for plans that use time segment interest rates for measuring plan liabilities for regulatory funding purposes. For such plans, MAP-21/HATFA/BBA, stabilizes such interest rates by establishing “corridors” around a 25-year average rate. MAP-21/HATFA/BBA, is applicable to the Alcatel Lucent Group’s U.S. management and active occupational pension plans, which use time segment interest rates for purposes of determining regulatory funding requirements, but not to the U.S. inactive occupational pension plan, which uses a full yield curve for such purposes. For the U.S. management and active occupational pension plans, MAP-21/HATFA/BBA, increases the interest rates used for regulatory funding purposes. A preliminary assessment of those plans under MAP-21/HATFA/BBA suggests no required funding contribution through at least 2017. Although MAP-21/HATFA/BBA, is currently not applicable to the Alcatel Lucent Group’s U.S. inactive occupational pension plan, the Group does not foresee any required funding contribution for that plan, given the level of assets compared to liabilities for regulatory funding purposes.

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

If our pension and retiree healthcare plan participants live longer than assumed, pension and retiree healthcare benefits obligations would likely increase. We cannot be certain that the longevity of the participants in its pension plans or retiree healthcare plan will not exceed that indicated by the mortality tables we currently use or that future updates to those tables will not reflect materially longer life expectancies.

 

 

 

 

16


Table of Contents

RISK FACTORS

 

 

Risks relating to the business

 

For pension funding purposes, we use the mortality tables 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. These tables determine the period of time over which Alcatel Lucent assumes 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. For accounting purposes, until September 30, 2014, we used the RP-2000 Combined Health Mortality table with Generational Projection based on the U.S. Society of Actuaries (“SOA”) Scale AA. Starting December 31, 2014, we changed these assumptions to the RP-2014 White Collar table with MP-2014 mortality improvement scale for management records and the RP-2014 Blue Collar table with MP-2014 mortality improvement scale for occupational records. On October 8, 2015, the SOA released an updated set of mortality improvement assumptions—scale MP-2015. This new mortality improvement scale reflects two additional years of data that the U.S. Social Security Administration has released since the development of the MP-2014 mortality improvement. These two additional years of data show a lower degree of mortality improvement than in previous years. For pension accounting purposes, starting December 31, 2015, we changed the MP-2014 mortality improvement scale for the MP-2015 mortality improvement scale for both management and occupational records.

To estimate our future U.S. retiree healthcare plan obligations, until September 30, 2014, we used the same RP-2000 Combined Health Mortality table with Generational Projection based on the SOA Scale AA that we used for pension funding purposes. Starting December 31, 2014, we similarly changed these assumptions to the RP-2014 White Collar table with MP-2014 mortality improvement scale for management records and the RP-2014 Blue Collar table with MP-2014 mortality improvement scale for occupational records. For U.S. retiree healthcare plan obligations, starting December 31, 2015, we changed the MP-2014 mortality improvement scale by the MP-2015 mortality improvement scale for both management and occupational records. 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 tables we currently use, or that future updates to these tables will not reflect materially longer life expectancies.

The new mortality rates (RP-2014 White Collar and Blue Collar) were published on October 27, 2014 and new mortality improvement scale (MP-2015) was published on October 8, 2015. The new assumptions are not expected to become effective for regulatory (pension) funding purposes before at least the 2017 plan year.

We may not be able to fund the healthcare and group life insurance costs of our formerly represented retirees with excess pension assets.

In accordance with Section 420 of the U.S. Internal Revenue Code, we currently fund, and expect to continue to fund, our

healthcare and group life insurance 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 U.S. inactive occupational pension plan. Excess assets are defined by Section 420 as those assets in excess of either 120% or 125% of the plan’s funding obligation (without the application of MAP-21/HATFA/BBA), depending on the type of transfer selected. Based on current actuarial assumptions and based on the present level and structure of benefits and of our benefit plans, we believe that we can continue to fund healthcare and group life insurance for retirees who were represented by the Communications Workers of America and the International Brotherhood of Electrical Workers through Section 420 transfers from its U.S. inactive occupational pension plan. However, a deterioration in the funded status of that plan could negatively affect our ability to make future Section 420 transfers. Section 420 is currently set to expire on December 31, 2025.

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 that 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, in the past, led to lawsuits against us. Any initiatives that we might undertake to control these costs may lead to additional claims against us.

The activities of our IP Transport 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 also expanding to the supply of broadband infrastructure to oil and gas platforms 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 installing 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 its exposure, we cannot provide any assurance that these protections will be sufficient to cover such exposure fully.

 

 

 

 

17


Table of Contents

3

RISK FACTORS

 

 

Legal Risks

 

 

3.2 Legal Risks

 

We are involved in lawsuits which, if determined against us, could require us to pay substantial damages.

We are defendants in various lawsuits including in connection with commercial, intellectual property, environmental and labor matters. 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 could adversely affect our profitability and cash flow.

We have been, and continue to be, involved in investigations concerning alleged violations of anti-corruption laws, and have been, and could again be, subject to material fines, penalties and other sanctions as a result of such investigations.

Anti-corruption laws in effect in many countries prohibit companies and their intermediaries from making improper payments to public officials for the purpose of obtaining new business or maintaining existing business relationships. Certain anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (the “FCPA”) also require the maintenance of proper books and records, and the implementation of controls and procedures in order to ensure that a company’s operations do not involve corrupt payments. Since we conduct operations throughout the world, and given that some of our clients are government-owned entities and that our projects and contracts often require approvals from public officials, there is a risk that our employees, consultants or agents may take actions that are in violation of our Group’s policies and of anti-corruption laws.

In the past, we have already experienced actual or alleged violations of anti-corruption laws, including of the FCPA. As a result, we had to pay substantial amounts to the U.S. Securities and Exchange Commission in disgorgement of profits and interest, and to the U.S. Department of Justice in criminal fines. (See Section 4.2 “History and Development,” subsection “Highlights of Transactions during 2014—Other Matters—FCPA Investigations”).

We also had to make certain payments to the Costa Rican Attorney General and the Instituto Costarricense de Electricidad in settlement of anticorruption claims in Costa Rica. Further, we are subject to certain other ongoing investigations and proceedings in France and Nigeria, as described in Section 6.7 “Legal Matters,” which may result in further material damages, fines, penalties and other sanctions, and in our inability to participate in certain public procurement contracts in those countries.

In addition, our training and compliance programs may not be sufficient to prevent our employees, consultants or agents from further engaging in activities for which entities of our Group or their relevant corporate officers could be held liable under anti-corruption laws. Any further breaches or alleged breaches of such laws could have a material adverse effect on the reputation of our Group or on our operations and financial condition.

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.

 

 

 

 

18


Table of Contents

RISK FACTORS

 

 

Legal Risks

 

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.

Despite measures taken to protect the best interests of our Company, the minority shareholders of our Company may bring actions alleging that the Alcatel Lucent share value has been negatively impacted by decisions taken by our management and our Board of Directors favoring Nokia.

As a result of the success of the Nokia Offer, Nokia held on February 10, 2016, 90.34% of our ordinary shares. Our Company therefore is now controlled by Nokia, and five members (out of a total of nine) of our Board of Directors are Nokia employees.

Despite holding this high percentage of our capital, Nokia did not achieve the level of ownership necessary, under French law, to be able to implement a squeeze-out of the remaining shareholders of our Company, and approximately 9 % of our capital is still publicly-held. (This percentage will decrease upon the consummation of the sale of ordinary Alcatel Lucent shares, mentioned below in Section 3.3 “Risks relating to the ownership of our ADSs and our ordinary shares,” by the Depositary (defined in Section 3.3 below) to Nokia).

Although all the members of our Board share the same fiduciary duty to act in the best interest of our Company, and although a Committee of Independent Directors has been created within our Board (see Section 7.1.4.5 “Committee of Independent Directors”) and a Master Services Agreement has been put in place between Nokia and our Company (see Section 4.5 “Material Contracts”, subsection “Master Services Agreement and Framework Agreement”), to safeguard the interests of the Company, and of the minority shareholders, our minority shareholders may allege that decisions taken by our management and by our Board of Directors favor Nokia to their detriment and have a negative impact on the Company and on shareholder value at the Alcatel Lucent level, and may commence legal proceedings (including class actions) against our Company and the members of our Board, seeking damages. The defense of any such actions could entail significant costs and distraction of management.

 

 

3.3 Risks relating to the ownership of our ADSs and of our ordinary shares

 

Due to the delisting of our ADSs from the New York Stock Exchange and the termination of our ADR program, ADR holders who do not timely surrender their ADRs in exchange for our ordinary shares will only be entitled to the proceeds from the sale of Nokia shares, representing the proceeds of the sale of the underlying shares by the Depositary.

On March 7, 2016, our American Depositary Shares (“ADSs”) were delisted from the New York Stock Exchange. Following the notification we sent on January 18, 2016 to JPMorgan Chase Bank, N.A. as the Depositary under our American depositary receipts (“ADR”) program, the Depositary provided notice of termination of the program to the holders of the ADRs on January 26, 2016. The Deposit Agreement terminated on February 24, 2016.

ADR holders had the right to surrender their ADRs in exchange for our ordinary shares until April 25, 2016. Following that date, the Depositary has agreed to sell to Nokia, pursuant to a Share Purchase Agreement dated March 16, 2016 (the “Nokia SPA”) all of our ordinary shares that underlie remaining outstanding ADRs. The Depositary will receive 0.55 Nokia shares for each of

our ordinary shares, which is the same exchange ratio offered in the Nokia Offer for our ordinary shares. Thereafter, the Depositary will sell the Nokia shares received by it. Accordingly, holders of ADRs who did not exchange their ADRs by April 25, 2016 will only be entitled to their pro rata portion of the proceeds from the sale of the Nokia shares by the Depositary. If the transaction contemplated by the Nokia SPA is not consummated or if for any reason the Depositary does not effect such sale, the underlying shares could be registered with Alcatel Lucent in registered form (nominatif pur).

The deposit agreement for the ADSs expressly limits our obligations and the obligations of the Depositary, and it limits our liability and their liability. Among such limitations, the deposit agreement provides that the Depositary will not be liable for the price received in connection with the sale of securities, the timing thereof, or any error, delay in action, omission to act, default or negligence on the part of the parties retained in connection with any such sale.

Please see Section 10.2.6 “American Depositary Shares (ADSs)” for more information on the termination of the ADR program.

 

 

 

 

19


Table of Contents

3

RISK FACTORS

 

 

Risks relating to the ownership of our ADSs and of our ordinary shares

 

There is no longer a regulated market on which the remaining Alcatel Lucent ADS holders may trade their ADSs, and there may be a limited market and a lack of liquidity for the holders of Alcatel Lucent ordinary shares.

Because our ADSs have been delisted from the New York Stock Exchange, there is no longer a U.S. market for our ADSs. As noted above, until April 25, 2016, holders of our ADRs had the right to exchange them for our ordinary shares, which are currently listed on the Euronext Paris. However, as a result of the success of the Nokia Offer, Nokia held on February 22, 2016, 90.34% of our ordinary shares. Due to this level of concentrated

ownership, there may be a limited market for our ordinary shares on the Euronext Paris, and the ability for an Alcatel Lucent shareholder to sell the ordinary shares owned by it at a price and time acceptable to it may be substantially limited.

Further, there is no guarantee that our ordinary shares will continue to be listed on the Euronext Paris. Additionally, if and when Nokia meets the required conditions under French law to allow it to acquire the remaining publicly-held Alcatel Lucent ordinary shares in a squeeze-out , Nokia intends to purchase all such remaining outstanding ordinary shares under the conditions prescribed by law.

 

 

 

 

20


Table of Contents

Information about the Group

4  

 

 

 

4.1    General      22   
4.2    History and development      22   
4.3    Structure of the main consolidated companies as of December 31, 2015      29   
4.4    Real estate and equipment      30   
4.5    Material contracts      31   

 

 

 

21


Table of Contents

4

INFORMATION ABOUT THE GROUP

 

 

General

 
4.1 General

 

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.

As a result of the Nokia Offer, our Company is controlled by Nokia Corporation.

Effective as of May 19, 2014, our registered office and principal place of business is 148/150 route de la Reine 92100 Boulogne-Billancourt, France. Our telephone number is +33 (0)1 55 14 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 Barbara Larsen, our authorized representative in the United States, is Alcatel-Lucent USA Inc., 600 Mountain Avenue, Murray Hill, New Jersey 07974.

 

 

4.2 History and development

 

Recent events

Update on the Nokia transaction and related matters

Initial and reopened Nokia Offer. As an update to the information regarding the Nokia transaction provided below in “Highlights of Transactions during 2015”, on January 5, 2016, the French Autorité des marchés financiers (the “AMF”) published the final results of the initial public exchange offer initiated by Nokia for all outstanding ordinary shares, American depositary shares (“ADSs”) and OCEANE convertible bonds of Alcatel Lucent (collectively, the “Alcatel Lucent Securities”), in exchange for Nokia shares or Nokia American depositary shares, described in more detail under “Highlights of Transactions during 2015” below (we refer to this initial exchange offer, together with the reopened offer described below, as the “Nokia Offer”), and declared that, since more than 50% of Alcatel Lucent’s outstanding securities (on a fully-diluted basis) had been tendered into the initial offer, the condition required to be satisfied for Nokia to have to consummate the exchange offer in fact had been satisfied. On January 7, 2016, the exchange of the Alcatel Lucent Securities tendered during the initial offer period of the Nokia Offer for Nokia shares was completed. On January 14, 2016 Nokia reopened its offer until February 3, 2016. On February 10, 2016, the exchange of the Alcatel Lucent Securities tendered during the reopened offer period of the Nokia Offer for Nokia shares was completed. As a result of the Nokia Offer, as of February 12, 2016 Nokia held 90.34% of the Alcatel Lucent share capital and at least 90.25% of the voting rights, 99.62% of the outstanding OCEANE 2018 convertible bonds, 37.18% of the outstanding OCEANE 2019 convertible bonds, and 68.17% of the outstanding OCEANE 2020 convertible bonds. As of the same date, Nokia held 87.33% of the share capital of Alcatel Lucent on a fully diluted basis. Nokia and our company started operations as a combined entity on January 14, 2016.

Governance. At its meeting of January 8, 2016, our Board of Directors modified its composition to reflect the new ownership structure of our Company following the success of the initial

Nokia Offer: Jean C. Monty, Louis R. Hughes, Olivier Piou, Stuart E. Eizenstat, Kim Crawford Goodman and Francesco Caio resigned from their position as Directors and Risto Siilasmaa, Rajeev Suri, Timo Ihamuotila, Maria Varsellona and Samih Elhage were coopted to the Board, subject to ratification by the shareholders at the Shareholders’ Meeting to be held in 2016. Nokia has stated that it will vote in favor of such ratification. Philippe Camus was confirmed in his position of Chairman of the Board and CEO of our Company.

Termination of our ADS program. Subsequent to the Nokia Offer, our Board of Directors resolved to terminate our ADS program. We instructed JPMorgan Chase Bank N.A., as the depositary of our ADS program (the “Depositary”), to terminate our ADS program in accordance with the terms of the deposit agreement. Notice of the termination of our ADS program was provided by the Depositary to holders of our ADSs evidenced by the Alcatel Lucent ADRs on January 26, 2016. The deposit agreement terminated on February 24, 2016.

Following the termination of the deposit agreement, and except as described in the paragraph below, neither the Depositary nor any of its agents will perform any further acts under the deposit agreement or the ADRs evidencing our ADSs, except to receive and hold (or sell) distributions on our ordinary shares and deliver deposited securities being withdrawn upon the cancellation of our ADSs in the manner required under the deposit agreement.

The option for holders of ADRs representing ADSs to surrender their ADRs to the Depositary in exchange for our ordinary shares expired on April 25, 2016. According to the notice provided by the Depositary to holders of our ADRs on January 26, 2016, a cancellation fee will be charged for ADSs surrendered (U.S. $5.00 per 100 ADSs or portion thereof, plus a $20.00 cable fee). In addition, holders of our ADRs are responsible for any taxes or other governmental charges which may be owing. On March 16, 2016, the Depositary and Nokia entered into a Share Purchase Agreement (the “Nokia SPA”). Pursuant to the Nokia SPA, the Depositary will sell to Nokia all of our ordinary shares underlying remaining outstanding ADRs after April 25, 2016. The Depositary will receive 0.55 Nokia shares for each of our ordinary shares,

 

 

 

 

22


Table of Contents

INFORMATION ABOUT THE GROUP

 

 

History and development

 

which is the same exchange ratio offered in the Nokia Offer for our ordinary shares. The closing of the sale of our ordinary shares contemplated by the Nokia SPA is subject to customary closing conditions, and the parties to the Nokia SPA expect the settlement of the transacted shares to occur during the first half of May 2016. Thereafter, the Depositary will sell the Nokia shares received by it at closing. Holders of ADRs who did not exchange their ADRs by April 25, 2016 will only be entitled to their pro rata portion of the proceeds from the sale of the Nokia shares by the Depositary. After consummating the sale, the Depositary will be discharged from all obligations in respect of the deposit agreement and the ADRs evidencing our ADSs, except to account for the proceeds held for the benefit of the ADR holders who do not exchange their ADRs. If the transaction contemplated by the Nokia SPA is not consummated or if for any reason the Depositary does not sell the ordinary shares underlying our ADSs as described above, the Depositary may (a) instruct its custodian acting under the Deposit Agreement to register all ordinary shares with Alcatel Lucent in registered form (nominatif pur) and (b) provide Alcatel Lucent with a copy of the ADS register. Upon receipt of the ADS register, Alcatel Lucent is required to register or cause to be registered in registered form the ordinary shares represented by our ADSs reflected on the ADS register in each such holder’s name and to notify such registration to the holder of ADSs at the address set forth on the ADS register. In accordance with the terms of the deposit agreement, each holder authorized the Depositary, its custodian and Alcatel Lucent to take any and all necessary action to effect such registration.

Delisting of ADSs from NYSE. Following completion of the Nokia Offer and termination of our ADR program, our ADSs have been delisted from the NYSE. On February 25, 2016, the NYSE filed a Form 25 Notification of Removal from Listing and/or Registration under Section 12(b) of the Exchange Act with the SEC. The delisting of our ADSs from the NYSE pursuant to the Form 25 became effective on March 7, 2016. The NYSE had previously suspended trading of our ADSs after the market closed on February 25, 2016, and our ADSs are no longer traded on the NYSE. We have not arranged for the listing or registration of our ADSs on another U.S. national securities exchange or for their quotation in a quotation medium in the United States.

Intention to Terminate US Reporting Obligations. Following satisfaction of the relevant deregistration conditions under the U.S. securities laws, we intend to deregister all classes of our registered securities under U.S. securities laws, thereby terminating our reporting obligations under the U.S. securities laws. Following the termination of our reporting obligations under the U.S. securities laws, much less information would be made available about Alcatel Lucent pursuant to the U.S. securities laws.

Other Recent Events

Change in credit rating. On March 21, 2016, Standard & Poor’s raised its long-term corporate ratings on Alcatel-Lucent and Alcatel-Lucent USA Inc. to BB+ from B+, with positive outlook. The ratings on the debt issued by Alcatel-Lucent and Alcatel-Lucent USA Inc. were also raised to BB+ from B+, and the B short-term corporate credit rating on Alcatel-Lucent was affirmed.

2015 dividend. Our Board has determined not to pay a dividend on our ordinary shares based on 2015 results (there will no longer be any ADSs outstanding at the time of our Annual Shareholders’ Meeting - see Section 10.2.6 “American Depositary Shares (ADSs)”. Our Board will present this proposal at our Shareholders’ Meeting to be held in 2016.

Termination of our revolving credit facility. On February 4, 2016, we sent a termination notice, effective February 9, 2016, on the 504 million revolving credit facility we entered into on December 17, 2013 with a syndicate of twelve international banks, which had remained undrawn.

Termination of Qualcomm license. On February 4, 2016, Qualcomm notified us that they were exercising their right to terminate one of our two license agreements (that were signed on April 1, 2015) with immediate effect upon the closing of the Nokia Offer. Pursuant to the license agreement, Qualcomm had the right to terminate the license agreement upon a change of control. The termination resulted in the acceleration of all remaining unpaid quarterly royalty payments of 278 million (U.S. $302.5 million) payable to Qualcomm within 30 days of termination. The full carrying amount of the patent rights recognized in “other intangible assets” will be impaired for 287 million in the first quarter ended March 31, 2016. With respect to our rights under the terminated license, we will now be covered by rights previously negotiated between Nokia and Qualcomm.

Repayment of 8.50% Senior Notes. On January 15, 2016, we repaid the 190 million remaining outstanding under our 8.50% Senior Notes, on the maturity date of these notes.

Redemption in full of Senior Notes due 2017 and 2020. On January 11, 2016, in connection with the success of the initial Nokia Offer, we announced that our wholly-owned subsidiary, Alcatel-Lucent USA Inc., exercised its option to redeem early in full the entire outstanding $700 million principal amount of its 6.750% Senior Notes due 2020, the entire outstanding $500 million principal amount of its 8.875% Senior Notes due 2020 and the entire outstanding $650 million principal amount of its 4.625% Senior Notes due 2017, in accordance with the terms of the Notes and of the respective Indentures. The redemption was completed February 10, 2016.

Nokia Revolving Liquidity Support Facility. On February 3, 2016, Nokia and Alcatel Lucent USA Inc. entered into a U.S. $2 billion Revolving Liquidity Support Facility, divided in the following three tranches: Facility A, for U.S. $686 million, with a maturity date of June 30, 2017; Facility B for U.S. $546 million, with a maturity date of December 31, 2019; and Facility C, for U.S.$768 million, with a maturity date of November 15, 2020. This Facility was available for the financing of the redemption of 2017 and 2020 Senior Notes, and is also available for the general purposes of the Alcatel Lucent Group.

Nokia Revolving Facility. On April 13, 2016, Nokia Corporation and Alcatel-Lucent Participations entered into a 1 billion Revolving Credit Facility for a two-year term. This Revolving Credit Facility is available for the general purposes of Alcatel-Lucent Participations.

 

 

 

 

23


Table of Contents

4

INFORMATION ABOUT THE GROUP

 

 

History and development

 

Redemption of the 2018 OCEANE. Following the announcement by the AMF of the results of the reopened Nokia Offer on February 10, 2016, and the conversion by Nokia of all the OCEANE 2018 it held on February 12, 2016, less than 15% of the OCEANE 2018 initially issued remained outstanding. Consequently, and pursuant to the prospectus of the 2018 OCEANE, we informed the holders of OCEANE 2018 that we would redeem at par plus accrued and unpaid interest all of the outstanding OCEANE 2018. The redemption was completed on March 21, 2016.

Highlights of transactions during 2015

The Nokia Transaction

On April 15, 2015, Alcatel Lucent and Nokia announced their intention to combine to create an innovation leader in next generation technology and services. According to the Memorandum of Understanding entered into by them on that date, Nokia would acquire Alcatel Lucent through a public exchange offer in France and in the United States. The all-share transaction was valued at EUR 15.6 billion on a fully diluted basis, on the basis of EUR 0.55 per new Nokia share for every Alcatel Lucent share. On June 4, Alcatel Lucent announced the completion of the required consultation of its Works Council, which indicated that it did not oppose the proposed combination with Nokia. On July 30, our Company announced the governance structure to lead our Group as it prepared for the proposed combination with Nokia, with Mr. Philippe Camus taking over the office of Chief Executive Officer, in addition to his position of Chairman of the Board of Directors, further to Mr. Michel Combes’ resignation (see “Governance” below). On August 14, Nokia filed a Form F-4 Registration Statement containing its preliminary Exchange Offer/Prospectus with the U.S. Securities and Exchange Commission (the “SEC”), concerning the offer in the United States. On October 7, 2015, Nokia announced the planned leadership and organizational structure for the combined Nokia and Alcatel Lucent. On October 21, Nokia announced that all regulatory approvals required to allow Nokia to proceed with its acquisition of Alcatel Lucent had been received. On October 28, our Board of Directors issued a favorable opinion on the public exchange offer. On October 29, Nokia filed its draft French offer document (projet de note d’information) with the AMF. On November 12, Alcatel Lucent filed its draft response offer document (projet de note en réponse) with the AMF. On November 18, Nokia launched its public exchange offer for the Alcatel Lucent Securities in both France and the United States. On December 2, Nokia’s shareholders approved the issuance of the Nokia shares to be exchanged in the context of the offer. On December 23, the initial offer period closed in both France and the United States.

Other Matters

Changes in credit ratings. On August 28, 2015, Moody’s upgraded Alcatel-Lucent’s Corporate Family rating to B2 from B3, the convertible notes (OCEANE) ratings to B3 from Caa1, and the senior unsecured ratings to B2 from B3. All ratings

remain on review for upgrade. On April 20, 2015, Moody’s had placed on review for upgrade all of Alcatel-Lucent’s ratings.

On August 5, 2015, Standard and Poor’s raised its long-term corporate credit ratings on Alcatel-Lucent and Alcatel-Lucent USA Inc. to B+ from B, as well as the debt issued by Alcatel-Lucent and Alcatel-Lucent USA. All ratings remain on CreditWatch with positive implications. On April 17, 2015, Standard & Poor’s had placed Alcatel-Lucent ratings on CreditWatch with positive implications.

Tender offer on Senior Notes due 2020. Pursuant to a tender offer launched on July 31, 2015, on September 4, 2015, Alcatel-Lucent USA Inc. repurchased an aggregate of U.S. $300 million (268 million) nominal amount of 6.75% Senior Notes due 2020 for a total cash amount of U.S. $324 million (289 million) excluding accrued interest. The Notes tendered in the offer were cancelled.

Amendments to the terms of the long-term compensation schemes of the Group employees and of the CEO in the context of the contemplated Nokia Offer. In the context of the contemplated combination, the Alcatel-Lucent Board of Directors, at its meetings of April 14, July 29, October 28 and December 1st, 2015, approved several amendments to the existing long-term compensation schemes of the Group employees and the CEO including particularly (i) the acceleration of the vesting of all stock options held by Group employees, (ii) the opportunity for beneficiaries holding performance shares not vested prior to the completion of the Nokia Offer, to waive their rights under their unvested performance shares, under certain conditions, in exchange for a number of Alcatel-Lucent shares equal to the number of performance shares they would have been entitled to receive under the relevant plans and (iii) the grant of unrestricted shares for compensation of the stock options commitment taken in 2014 to the beneficiaries concerned. The benefit of these amendments was subject notably to the beneficiaries undertaking to sell the shares thus received on the market two trading days at the latest before the last day of the reopened Nokia Offer. Beneficiaries of certain plans which could not be accelerated were offered a liquidity mechanism by Nokia. For more information, see Section 8.1.8 “Mechanisms put in place with respect to long-term compensation instruments in the context of the Nokia Offer”.

Governance. At its meeting of July 29, 2015, our Board of Directors accepted the resignation of Mr. Michel Combes from his position of CEO and Director of Alcatel-Lucent, effective on September 1, 2015. Mr. Philippe Camus, then Chairman of the Board of our Company, was appointed as Chairman and Interim CEO, effective September 1, 2015, for the transition period pending the completion of the Nokia transaction. For more information, see Section 7.1.2 “Principles of organization of our Company’s management”. Mr. Philippe Guillemot, Chief Operating Officer, was put in charge of leading the operational management of the Alcatel Lucent Group. Mr. Jean Raby, Chief Finance and Legal Officer, was given the responsibility for completing the proposed transaction with Nokia. Messrs. Philippe Guillemot and Basil Alwan (President of the IP Routing & Transport business line) were designated to jointly lead the integration team. During the transition period pending

 

 

 

 

24


Table of Contents

INFORMATION ABOUT THE GROUP

 

 

History and development

 

completion of the Nokia transaction, the leadership team was given the responsibility for achieving Alcatel-Lucent’s 2015 targets under The Shift Plan, closing the proposed transaction with Nokia and preparing for the integration with Nokia. For more information, see Section 7.1 “Chairman’s corporate governance report”.

Upon recommendation of the Compensation Committee and the Corporate Governance and Nominations Committee, the Board approved the terms and conditions of the departure of Mr. Michel Combes, as well as the execution of a non-compete agreement with him in order to ensure the protection of the Company’s business going forward, given Michel Combes’ level of expertise in the telecom sector and his involvement in the business of the Company. For more information, see Section 8.2 “Status of the Executive Directors and Officers”.

Significant shareholding. According to the notification filed with the AMF, and sent to Alcatel-Lucent on April 23, 2015, Odey Asset Management LLP (UK), acting on behalf of funds it manages, exceeded the 5% thresholds of the share capital and voting rights, respectively, and then declared that it went below, on July 3, 2015, the 5% thresholds of the share capital and voting rights. Odey Asset Management LLP (UK) held, at July 3, 2015, 139,392,474 Alcatel-Lucent shares representing 4.92% of the share capital and 4.84% of the voting rights of Alcatel-Lucent. It is Alcatel-Lucent’s understanding that Odey Asset Management LLP (UK) tendered substantially all of their shares into the Nokia Offer. According to an AMF filing, dated January 7, 2016, Odey Asset Management LLP (UK) owned 161,791 Alcatel-Lucent shares as of that date.

2014 dividend. Our Board determined not to pay a dividend on our ordinary shares and ADSs based on the 2014 results. This proposal was approved at our Annual Shareholders’ Meeting on May 26, 2015.

Appointment of a new Director. The shareholders approved the appointment of Mrs. Sylvia Summers as Director of our Company at the Shareholders’ Meeting held May 26, 2015, for a period of three years. Mrs. Sylvia Summers, 63 years old, is both a French and U.S. citizen, and has a strong expertise in the high tech industry sector.

Acquisition of the remaining shareholding of Alda Marine. On March 18, 2015, our subsidiary Alcatel-Lucent Submarine Networks acquired all of the shares of Alda Marine, our former joint-venture with Louis Dreyfus Armateurs (LDA), previously held by LDA, for 76 million in cash. LDA remains our strategic marine partner. In conjunction with such acquisition, Alcatel-Lucent Submarine Networks entered into a 86 million credit facility agreement with a seven year-maturity that was fully drawn at that date. This 86 million also partially covered the acquisition by Alcatel-Lucent Submarine Networks of a cable vessel.

Highlights of transactions during 2014

Disposals

Disposal of cyber-security services. On December 31, 2014, we completed the disposal of our cyber-security services &

solutions and communications security activities to Thales for a cash price of 41 million.

Disposal of Alcatel Lucent Enterprise. On September 30, 2014, Alcatel Lucent completed the disposal of 85% of its Enterprise business to China Huaxin, following the binding offer received early February 2014, for a cash price of 205 million.

Disposal of LGS. On March 31, 2014, we completed the disposal of LGS Innovations LLC to a U.S.-based company owned by a Madison Dearborn Partners-led investor group that includes CoVant, for a cash price of U.S.$110 million (81 million) after working capital adjustment. The agreement includes an earnout of up to U.S.$100 million, based on the divested company’s results of operations for the 2014 fiscal year, but for which we are not expecting to receive a significant amount.

Other matters

Repayment of Senior Secured Credit Facility. On August 19, 2014, using the proceeds of the Oceane 2019 and 2020 described below, together with cash, we repaid the remaining U.S.$1,724 million outstanding of the Senior Secured Credit Facility due 2019.

Tender offer on Senior Notes 2016. On June 24, 2014, we launched a tender offer on our Alcatel-Lucent 8.50% Senior Notes due 2016. On July 4, 2014, we accepted for purchase an aggregate nominal amount of Senior Notes 2016 of 210 million for a total cash amount of 235 million. The notes tendered in the offer were cancelled. In addition, during the second quarter of 2014, a nominal amount of 19 million of the Senior Notes 2016 was bought back and cancelled for a cash amount of 22 million. Similarly, during the fourth quarter of 2014, a 3 million nominal amount of the Senior Notes 2016 was also bought back and cancelled for a cash amount of 3 million. As a result, the outstanding aggregate nominal amount for the Senior Notes 2016 is 192 million as of December 31, 2014.

Issuance of OCEANE 2019 and 2020. On June 2, 2014, we launched an offering of OCEANE (OCEANE are bonds convertible into, and/or exchangeable for, new or existing shares of Alcatel Lucent). On June 10, 2014, we issued convertible / exchangeable bonds in two tranches:

 

·   The first tranche due January 30, 2019 for a nominal value of 688 million. The conversion price per bond was set at 4.11, giving a conversion premium of approximately 40% over Alcatel-Lucent’s reference share price on the regulated market Euronext in Paris;

 

·   The second tranche due January 30, 2020 for a nominal value of 460 million. The conversion price per bond was set at 4.02, giving a conversion premium of approximately 37% over Alcatel-Lucent’s reference share price on the regulated market Euronext in Paris

The bonds bear interest at an annual rate of 0.00% and 0.125% respectively, payable semi-annually in arrears on January 30th, and July 30th, commencing January 30, 2015. At our option, the bonds may be subject to early redemption under certain

 

 

 

 

25


Table of Contents

4

INFORMATION ABOUT THE GROUP

 

 

History and development

 

conditions. The proceeds were used, together with available cash, to reimburse the remaining tranche of the 2013 Senior Secured Credit Facility entered into by Alcatel-Lucent USA Inc. as borrower. The purpose of the issuance was also to contribute to the extension of the maturity of our debt and to reduce the cost of indebtedness.

Repayment of 6.375% Senior Notes. On April 7, 2014, we repaid on the maturity date the remaining 274 million outstanding of the 6.375% Senior Notes.

Repayment of convertible trust preferred securities. On January 13, 2014, we repaid in full the U.S.$931 million principal amount outstanding of the Lucent Technologies Capital Trust I 7.75% convertible trust preferred securities due 2017.

Changes in credit ratings. On November 17, 2014, Moody’s changed the outlook on Alcatel-Lucent and Alcatel-Lucent USA Inc. to Positive from Stable, and affirmed the B3 ratings.

On August 18, 2014, Standard & Poor’s raised its corporate credit ratings on Alcatel-Lucent and Alcatel-Lucent USA Inc. from B- to B. The unsecured bonds issued by the Group were also upgraded, from CCC+/B- to B. The Outlook was changed from Positive to Stable.

FCPA investigations. In December 2010 we entered into final settlement agreements with the SEC and the DOJ regarding violations and alleged violations of the FCPA. We signed a deferred prosecution agreement (“DPA”) with the DOJ, pursuant to which the prosecution would be deferred for a term of three years and seven days, with the possibility of a one-year extension at the sole discretion of the DOJ. The DPA entered into effect on December 27, 2010, the date the DOJ filed the charging document with the court. Among other things, the DPA contained provisions requiring the engagement of a French anticorruption compliance monitor (the “Monitor”) for three years. Similarly, under the agreement with the SEC, we agreed, among other things, to engage a Monitor for three years. In June 2014, following discussions with the Monitor, the DOJ and the SEC, we agreed to a six-month extension of the monitorship until December 31, 2014 to provide the Monitor with additional time to confirm certain improvements to our compliance systems. On December 8, 2014, the Monitor submitted his final report and certified that Alcatel Lucent’s compliance program, including its policies and procedures, is reasonably designed and implemented to prevent and detect violations of anti-corruption laws within Alcatel Lucent as defined in and required by the DPA. Following receipt of the Monitor’s final report, the DOJ filed a motion to dismiss with prejudice the FCPA charges underlying the DPA, which the court granted on February 9, 2015.

Outsourcing agreement with HCL. On July 1, 2014, in connection with the targeted cost savings of The Shift Plan, we entered into a 7-year Master Service Agreement with HCL Technologies Limited regarding the transfer of a part of our R&D department for certain wireless legacy technologies. For further details, please refer to Section 6.5 “Contractual obligations and off-balance sheet contingent commitments”, sub-section “Outsourcing transactions,” of our 2014 20-F and to Note 28 to our 2014 consolidated financial statements.

Outsourcing agreement with Accenture. On February 28, 2014, in connection with the targeted cost savings of The Shift Plan, we entered into a 7-year service implementation agreement with Accenture regarding the business transformation of our finance function, including the outsourcing of our accounting function. This agreement supplements two similar service agreements with Accenture regarding human resources and information technology. For further details, please refer to Section 6.5 “Contractual obligations and off-balance sheet contingent commitments,” sub-section “Outsourcing transactions,” of our 2014 20-F and to Note 28 to our 2014 consolidated financial statements.

Significant shareholding. According to the notification filed with the French securities market authorities and sent to Alcatel-Lucent on April 21, 2014, the Capital Group Companies, Inc.- (USA) holds, after acquiring a significant shareholding in Alcatel Lucent, a total of 290,280,811 shares of Alcatel Lucent, representing 10.31% of our capital and 10.14% of the voting rights.

Highlights of transactions during 2013

Appointment of new CEO, CFO, and Vice-Chairman of the Board of Directors. On February 22, 2013, we announced the nomination of Mr. Michel Combes as Chief Executive Officer (CEO) effective on April 1, 2013. His nomination as Director was approved at our Annual Shareholders’ Meeting on May 7, 2013. He succeeded Mr. Ben Verwaayen, who had decided not to seek re-election as a Director at such meeting and stepped down as CEO.

On February 22, 2013, our Board of Directors approved the appointment of Mr. Jean C. Monty as Vice-Chairman of the Board, effective immediately.

On August 28, 2013, we announced the nomination of Mr. Jean Raby as Chief Financial & Legal Officer effective on September 1, 2013.

Launch of The Shift Plan. On June 19, 2013, we launched The Shift Plan which, upon implementation, is designed to transform our Company into an IP and cloud networking and ultra-broadband specialist refocused on innovation, transformation and unlocking growth to become a cash generative business from 2015. The details and objectives of The Shift Plan are described in Section 6.6 “Strategy and Outlook”, of our 2013 20-F.

As part of The Shift Plan, a new organization comprised of three reportable segments, Core Networking, Access and Other, became effective as of July 1, 2013. For further details on the breakdown about the new organization, please refer to Section 5.1 “Business Organization”, sub-section “Organization,” of our 2013 20-F and to Note 5 to our 2013 consolidated financial statements.

Completion, repricing and termination of multi-year financing commitments. On January 30, 2013, we entered into three Senior Secured Credit Facilities totaling approximately 2 billion. In connection with that transaction, our then existing unsecured

 

 

 

 

26


Table of Contents

INFORMATION ABOUT THE GROUP

 

 

History and development

 

revolving credit facility was terminated. We later terminated all of these facilities, as discussed in further detail under Section 6.4 “Liquidity and capital resources” of our 2013 20-F.

Rights issuance. As part of the implementation of The Shift Plan, in December 2013 we increased our capital with a rights offering guaranteed by a bank syndicate. The rights offering raised 957 million (including the issue premium), through the issuance of 455,568,488 new ordinary shares.

Issuance of notes and convertible bonds, and repurchases of notes and convertible bonds. On April 30, 2013, we made a cash tender offer to repurchase our 6.375% Senior Notes due 2014, our 2015 OCEANE, and our 8.50% Senior Notes due 2016. (OCEANE are bonds convertible into, and/or exchangeable for, new or existing shares of Alcatel Lucent). As a result, in May and June 2013, we repurchased and cancelled notes and OCEANE having an aggregate nominal value of 446 million.

On May 14, 2013, Alcatel-Lucent USA Inc. launched an offer to purchase its 2.875% Series B convertible debentures due in 2025, as required under the terms of the indenture, due to the June 15, 2013 optional redemption date. On June 15, 2013, Alcatel-Lucent USA Inc. repurchased and cancelled a principal amount of U.S.$764 million of such debentures, representing approximately 99.8% of the debentures outstanding. On June 26, 2013, as a first measure under The Shift Plan toward the objective of reprofiling our debt, we launched an offering of OCEANE. The OCEANE mature on July 1, 2018, bear a 4.25% annual interest rate, and have an initial conversion price of 1.80, equivalent to a conversion premium of approximately 37% over the reference share price of Alcatel-Lucent. The proceeds of this offering, closed on July 3, 2013, were approximately 621 million, with a nominal value of 629 million. We used the proceeds of this offering to repurchase and cancel some of our existing 5.00% OCEANE due 2015. We paid approximately 780 million in total for such repurchases. In December 2013, a portion of the then outstanding 2015 OCEANE was converted into 48 million of Alcatel-Lucent ordinary shares, and we repaid the remaining part of the 2015 OCEANE for 11 million. Following the rights offering described above, due to the anti-dilution provisions of the OCEANE 2018, the exchange ratio, which was one Alcatel-Lucent share with a nominal value of 2.00 for one OCEANE 2018, was adjusted to 1.06 Alcatel-Lucent shares with a nominal value of 0.05 for one OCEANE 2018, effective December 9, 2013. The conversion price remained unchanged at 1.80.

Between July and December, 2013, Alcatel-Lucent USA Inc. issued the following series of bonds: U.S.$500 million Senior

Notes due January 1, 2020, with an 8.875% coupon; U.S.$1,000 million Senior Notes due November 15, 2020 with a 6.750% coupon; and U.S.$650 million Senior Notes due July 1, 2017 with a 4.625% coupon. The proceeds of these offerings were used to (i) repay the U.S.$500 million Asset Sale Facility and the remaining outstanding amount of the 300 million Credit Facility which were two of the three Senior Secured Credit Facilities mentioned above; (ii) repay or redeem Alcatel-Lucent USA Inc.’s outstanding Series A and Series B convertible debentures and Lucent Technologies Capital Trust I convertible trust preferred securities; and (iii) prefund the maturity of 274 million principal amount of Alcatel Lucent’s 6.375% Senior Notes due in 2014. The offerings made in the United States were limited to qualified institutional buyers.

Capital decrease. Effective as of June, 2013, Alcatel-Lucent’s capital was reduced to 116,471,561.65 by reducing the nominal value of its shares from 2.00 to 0.05 per share, pursuant to the capital decrease approved at the Extraordinary Shareholders’ Meeting held on May 29, 2013.

Revolving Credit Facility. On December 17, 2013, Alcatel-Lucent closed a 504 million three-year revolving credit facility with a syndicate of 12 international banks. As of the date hereof, this facility remains undrawn.

Strategic partnership with Qualcomm. On September 30, 2013, we entered into a strategic partnership agreement with Qualcomm Incorporated to develop small cells for ultra-broadband wireless access. As a result, Qualcomm may purchase up to U.S.$20 million of our shares per year, in four tranches, over the period from 2013 to 2016. Each tranche is subject to a minimum lock-up period of six months. On September 30, 2013, Qualcomm Incorporated purchased approximately six million treasury shares (representing approximately 0.25% of our share capital) for U.S.$20 million.

End of joint venture with Bharti Airtel. In February 2013, we decided to discontinue our joint venture with Bharti Airtel formed in 2009 for the management of Bharti Airtel’s pan-India broadband and telephone services and to help Bharti Airtel’s transition to a next generation network across India. As a result, the former joint venture’s operations were absorbed into a new business entity set up by Bharti Airtel.

Termination of agreement with RPX. On March 7, 2013, we terminated our contract with RPX by mutual agreement, resulting in the extinguishment of all obligations of the parties, except for continuing obligations under certain non-disclosure provisions of the contract.

 

 

 

 

27


Table of Contents

4

INFORMATION ABOUT THE GROUP

 

 

History and development

 

Set forth below is an outline of certain significant events of Alcatel-Lucent beginning in 2006, the year of the merger of historical Alcatel and Lucent, until 2012:

 

2006   

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
 
2009   

Sale of our 20.8% stake in Thales to Dassault Aviation

 

Sale of Dunkermotoren GmbH, our electrical fractional horsepower motors and drives subsidiary, to Triton

 

Joint announcement with Hewlett-Packard (HP) of a 10-year co-sourcing agreement expected to help improve the efficiency of IS/IT infrastructure and create a joint go-to-market approach

 
2010   

Sale of our 26.7% stake in 2Wire, a U.S.-based provider of advanced residential gateways for the broadband service provider market, to Pace plc

 

Sale of our Vacuum pump solutions and instruments business to Pfeiffer Vacuum Technology AG

 
2011    -
 
2012    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)
 

 

 

 

28


Table of Contents

INFORMATION ABOUT THE GROUP

 

 

Structure of the main consolidated companies as of December 31, 2015

 

 

4.3 Structure of the main consolidated companies as of December 31, 2015

The organization chart below reflects the main companies consolidated in the Group as of December 31, 2015, such as listed in note 33 of the consolidated financial statements. Percentages of shares capital’s interest equal 100% unless otherwise specified.

 

LOGO

 

 

 

29


Table of Contents

4

INFORMATION ABOUT THE GROUP

 

 

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.

Most of our production and assembly is outsourced, while the remaining portion is carried out in our production sites. At December 31, 2015 our total production capacity was equal to approximately 180 000 sq. meters and the table below shows

the breakdown by region for the Core Networking and Access segments, 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 9.2 “Environment” of this annual report.

The sites mentioned in the tables below were selected among our portfolio of 390 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, 2015   

 

(in thousands of sq. meters)   EMEA     Americas     APAC     Total  
           
Core Networking     61        0        5        66   
Access     37        30        47        114   
                                 
TOTAL     98        30        52        180   
                                 

 

Production/Assembly sites   

 

Country    Site      Ownership  
   
China      Shanghai Pudong         Full ownership   
China      Shanghai Songjiang         Full ownership   
France      Calais         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 23,000 sq. meters is used for the production for Fixed Access and Wireless Access activities, the remainder of the site is used mainly for offices and laboratories;

 

·   site of Shanghai Songjiang (China): 22 340 sq. meters used for the manufacturing of products for RFS (Radio Frequency Systems);

 

·   site of Calais (France): 45,000 sq. meters is used for the production of submarine cables;

 

·   site of Greenwich (United Kingdom): 16 000 sq. meters is used for the production of submarine cables;

 

·   site of Meriden (United States): 21 000 sq. meters, used for the manufacturing of products for RFS (Radio Frequency Systems);
 

 

 

 

30


Table of Contents

INFORMATION ABOUT THE GROUP

 

 

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      Plano         Full ownership   
United States      Naperville         Full ownership   
United States      Murray Hill         Full ownership   
France      Villarceaux         Lease   
France      Lannion         Full ownership   
France     
 
Boulogne Billancourt
Headquarters
  
  
     Lease   
France      Orvault         Lease   
India      Bangalore         Lease   
India      Chennai         Lease   
Italy      Vimercate         Lease   
Mexico      Cuautitlan Izcalli         Full ownership   
Netherlands      Hoofddorp         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 77%); the space which is not occupied by Alcatel-Lucent is leased to other companies or remains vacant.

The average rate of 77% is based on the global portfolio of Alcatel-Lucent. The facilities presented are the major sites and form a representative sample of our activities.

 

 

4.5 Material contracts

National 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 Special 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. As of November 20, 2012, the Department of Commerce ceased to be a party to the NSA. 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, LGS Innovations LLC (“LGS”), to perform certain work for the U.S. government, and hold government contracts and certain sensitive assets associated with Bell Labs. The SSA, effective December 20, 2006, that

 

 

 

 

31


Table of Contents

4

INFORMATION ABOUT THE GROUP

 

 

Material contracts

 

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.

Disposal of LGS. On March 31, 2014, Alcatel-Lucent sold LGS to a U.S. – based company. Alcatel-Lucent worked with the U.S. Government to receive the necessary approvals and amend the NSA to allow Alcatel-Lucent to continue to sell products and services to the U.S. Government through LGS. In addition, by virtue of the sale of LGS, Alcatel-Lucent no longer is a party to the referenced SSA or has directors on the LGS board.

Combination with Nokia and CFIUS. Nokia and Alcatel Lucent entered into an Amended and Restated National Security Agreement (the “Amended NSA”) with the three remaining USG Parties. The Amended NSA amends a pre-existing national security agreement between Nokia and certain U.S. Government agencies and replaces the original Alcatel Lucent NSA. The Amended NSA became effective on January 7, 2016 with Nokia’s acquisition of the majority of shares of Alcatel Lucent. The Amended NSA is substantively similar to the former Alcatel Lucent NSA, which terminated at that time. The Amended NSA continues to provide 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. There is no provision for reopening review of the business combination between Alcatel Lucent and Nokia in the Amended NSA.

Master Services Agreement and Framework Agreement

On January 8, 2016, Alcatel Lucent and Nokia entered into a Master Services Agreement (the “MSA”) and a Framework Agreement (the “FA”), which set the terms and conditions of intra-group services to be provided between the two companies (and their respective subsidiaries), and of joint activities, in order – among other things – to ensure the corporate interest of Alcatel-Lucent and of its minority shareholders.

The MSA covers management services, brand cross-licensing and transfer of intellectual property rights, and the FA covers human resources, marketing and IT services. The transactions covered by the MSA qualify as regulated transactions pursuant to Article L. 225-38 of the French Commercial Code, and consequently will be submitted to the approval of Alcatel-Lucent’s shareholders at the next Annual Shareholders’ Meeting (with shares of our Company held by Nokia excluded from quorum and majority calculations), whereas the transactions covered by the FA do not fall within the scope of that article. Our Board of Directors approved the execution of the MSA, upon the recommendation of the Committee of Independent Directors, and of the FA. The Nokia-appointed directors, that is, Messrs. Risto Siilasmaa, Rajeev Suri, Timo Ihamuotila and Samih Elhage, and Ms. Maria Varsellona, did not participate in the vote concerning the approval of the MSA. (See Section 7.1.4.5

“Committee of Independent Directors – The Committee’s work in early 2016”, and Section 7.2 “Regulated Agreements – Other commitments and related party transactions”).

Both agreements state that services are to be provided at arm’s length conditions, including fair and proportional allocation of commitments and revenues between Alcatel-Lucent and Nokia (and their respective subsidiaries), and of synergies realized by the parties, including synergies achieved through product portfolio decisions. The pricing mechanisms applicable under both agreements are in line with the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organization for Economic Co-operation and Development (OECD). Both agreements also contain provisions protecting the Alcatel-Lucent Group from any significant increase in costs or fees incurred in connection with the agreements. In addition, the MSA provides for specific information rights to the members of our Company’s Committee of Independent Directors.

A Steering Committee comprised of top managers of Alcatel-Lucent and Nokia, equally represented, supervises the overall performance of these agreements. If a dispute arises under the MSA or the FA that cannot be resolved by the Steering Committee, the matter is escalated to the Nokia Board of Directors and to the Alcatel-Lucent Board of Directors, but in the case of the latter, if the dispute concerns the MSA, with the participation only of the independent directors.

The MSA and the FA were entered into for a twelve-month period, and are automatically renewable for similar periods, except that they may be terminated by either party at any time with three-months’ prior notice.

Nokia Liquidity Support Facility

On February 3, 2016, Nokia Corporation and Alcatel Lucent USA Inc. entered into a U.S.$2 billion Revolving Liquidity Support Facility (the “Facility”), which comprises:

 

·   Facility A, for U.S.$686 million, with a maturity date of June 30, 2017;

 

·   Facility B, for U.S.$546 million, with a maturity date of December 31, 2019; and

 

·   Facility C, for U.S.$768 million, with a maturity date November 15, 2020.

Applicable interest rate is 2.40% per annum on drawn amounts. The commitment fee is 30% of 2.40% on available undrawn amounts.

The Facility was made available to Alcatel Lucent USA Inc. to finance the redemption of U.S.$700 million of its 6.750% Senior Notes due 2020, U.S.$500 million of its 8.875% Senior Notes due 2020, and U.S.$650 million of its 4.625% Senior Notes due 2017 (together, the “Notes”), including any related fees, costs and expenses, as well as for general purposes of the Alcatel Lucent Group. The Notes were redeemed in February, 2016 (see Section 6.4 “Liquidity and Capital Resources”).

 

 

 

 

32


Table of Contents

INFORMATION ABOUT THE GROUP

 

 

Material contracts

 

Borrowings under the Facility rank pari passu with all other unsecured and unsubordinated indebtedness of Alcatel Lucent USA Inc. The Facility does not contain any financial covenants. It does contain certain undertakings of Alcatel Lucent USA Inc. (including, for example, certain negative covenants, such as with respect to guarantees, indemnities and financial indebtedness), but none of these undertakings prevent Alcatel Lucent USA Inc. from engaging in any activities which would have been permitted under the indentures relating to the Notes.

The description of the Facility set forth in this subheading is qualified in its entirety by reference to the Facility, a copy of which is filed as Exhibit 4.1 to this Annual Report on Form 20-F, and is incorporated herein by reference.

Nokia Revolving Credit Facility

On April 13, 2016, Nokia Corporation and Alcatel-Lucent Participations entered into a 1 billion Revolving Credit Facility for a two-year term.

Applicable interest rate is EURIBOR plus a 0.95% margin per annum on drawn amounts. A utilization fee of 0.10%, 0.20% or 0.40% per annum depending on the level of use of the facility, is also applicable. There is a commitment fee of 35% of 2.40% on available undrawn amounts.

This Revolving Credit Facility is available for the general purposes of Alcatel-Lucent Participations.

Borrowings under the Revolving Credit Facility rank pari passu with all other unsecured and unsubordinated indebtedness of Alcatel-Lucent Participations. The Facility does not contain any financial covenants.

The description of the Revolving Credit Facility set forth in this subheading is qualified in its entirety by reference to the Revolving Credit Facility, a copy of which is filed as Exhibit 4.2 to this Annual Report on Form 20-F, and is incorporated herein by reference.

 

 

 

 

33


Table of Contents

4

INFORMATION ABOUT THE GROUP

 

 

 

 

 

 

 

34


Table of Contents

Description of the Group’s activities

5  

 

 

 

5.1    Business Organization      36   
5.2    Core Networking Segment      38   
5.3    Access Segment      42   
5.4    Marketing, sales and distribution of our products      44   
5.5    Competition      44   
5.6    Technology, research and development      45   
5.7    Intellectual Property      47   
5.8    Sources and availability of materials      47   
5.9    Seasonality      48   
5.10    Our activities in certain countries      48   

 

 

 

35


Table of Contents

5

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Business Organization

 
5.1 Business Organization

The operating segments of our business in 2015 were as follows:

 

·   Core Networking which includes:

 

    IP Routing, comprised of our IP routing portfolio and Nuage Networks

 

    IP Transport, comprised of our terrestrial optics, submarine optics and wireless transmission portfolios

 

    IP Platforms, which includes software as well as services

 

·   Access which includes:

 

    Wireless Access, which includes all of our mobile radio access products and technologies (LTE, CDMA, W-CDMA, GSM/EDGE, small cells)

 

    Fixed Networks, focusing on copper and fiber access technologies

 

    Managed Services, which includes Network Operations and other focused solutions for the carrier and strategic industries market,

 

    Licensing, positioned around the monetization of our patent portfolio.

In addition, we have three organizations with specific focuses:

 

·   Operations: the operations organization includes delivery, operations and critical functions to help drive and monitor the implementation of The Shift Plan.

 

·   Sales: our sales organization focuses on driving customer relationships and serving as the face of the company to the customer.

 

·   Strategy and Innovation: responsible for shaping the agenda of the future of the company. This organization oversees Bell Labs and manages our intellectual property.

We also have the following corporate functions: Finance and Legal, Human Resources, and Marketing.

Impact of Nokia transaction: On April 15, 2015, we and Nokia Corporation announced the signing of a memorandum of understanding under which Nokia would make an offer for all of Alcatel-Lucent’s securities through a public exchange offer in France and in the United States, subject to certain conditions. More information regarding the transaction can be found in Chapter 4.2 “History and development - Recent events - Update on the Nokia transaction and related Matters - Initial and reopened Nokia Offer” of this Annual Report.

On October 7, 2015 Nokia announced the planned leadership and organizational structure that it intends to implement to create an innovation leader in next generation technology and services for an IP connected world, and to position the combined company to create the foundation of seamless connectivity for people and things wherever they are.

Under the new organizational structure, the Networks business of the combined company is being conducted through four business groups: Mobile Networks, Fixed Networks, Applications & Analytics and IP/Optical Networks. These business groups provide an end-to-end portfolio of products, software and services to enable the combined company to deliver the next generation of leading networks solutions and services to customers. Alongside these, Nokia Technologies, which focuses on advanced technology development and licensing, continues to operate as a separate business group. Each business group has strategic, operational and financial responsibility for its portfolio and is fully accountable for meeting its targets. The four Networks business groups have a common Integration and Transformation Office to drive synergies and to lead integration activities.

The combined company has a common sales organization across the business groups, except for Nokia Technologies. In addition, since the closing of the exchange offer, there are additional units within the combined company, who report directly to the President and CEO.

For financial reporting purposes, from the first quarter 2016, Alcatel-Lucent intends to align its financial reporting under three reportable segments: (i) Ultra Broadband Networks comprising Mobile Networks and Fixed Networks, (ii) IP Networks and Applications comprising IP/Optical Networks and Applications & Analytics, all within the Networks business, and (iii) Other, which comprises Group-wide support functions and certain unallocated businesses.

Strategic focus of the combined company: As a result of the Nokia acquisition, the combined company has the innovation capability, the portfolio, and the global scale to lead in shaping and deploying the technologies that are at the heart of an increasingly connected world. We are well positioned to lead the change in our industry, which is undergoing rapid technological development and continuous disruption, driven by some key trends:

 

·   Unprecedented increase of data, driven by consumer demand for video, social networking, and other Cloud-based services that are increasingly accessed through mobile devices;

 

·   Ongoing digitization of business processes as well as people’s lives, generating vast quantities of data that need to be analyzed and managed, as services and entire industries become ever more connected through Cloud-based applications, and Internet of Things (IoT) becomes a reality;

 

·   Demand and stricter guidelines for enhanced network and application security and privacy to protect individuals, businesses, public services, and national interests that are all increasingly reliant on connectivity and data;

 

·   The convergence of disparate network technologies - across mobile, fixed, and IP and optical networks - to enhance network performance and profitability, and simplify networking services; and
 

 

 

 

36


Table of Contents

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Business Organization

 

·   The convergence of telecommunications and IT domains, as networks become increasingly virtual, managed through software applications and platforms via the Cloud, decoupled from hardware, and increasingly connected to open-source ecosystems through application programming interfaces (“APIs”).

As the industry changes, so does the market opportunity. Operators are facing slowing growth of wireless subscribers, declining revenues per user from connectivity services, and ever-increasing demand for data that is driving traffic on their networks. While driving network efficiency is key, scaling the subscriber base and diversifying service provision is also critical.

In parallel, enterprises and webscale players are requiring greater flexibility with network infrastructures to adjust to the convergence of IT and telecommunications technologies, and to take advantage of the scalability and efficiency that Cloud-based software platforms offer.

To address these challenges, we are focusing our strategy in four areas:

1. Leading in network infrastructure, converging mobile, fixed, IP and optical networks, optimized by and for the Cloud

With a complete portfolio spanning mobile, fixed and IP and optical networks, we are a global market leader in network infrastructure for telecommunications operators. We will continue to drive profitability by extracting cost through our ultra-lean operating model. We will also enhance network efficiency and performance by converging technologies from across our business groups to create one seamless network for all services. By maximizing the synergies across our products and services - e.g., copper, fiber, LTE, and in the future, 5G - we will give our customers the flexibility to create customized broadband access solutions to the most economical point. Other areas in which we will leverage our converged portfolio are Software Defined Networks (“SDN”), Cloud transformation, and backhaul solutions. Furthermore, we will enhance our leadership through innovation in next-generation technologies: 5G in mobile networks, TWDM-PON and XG-FAST in fixed networks, and 400G/1TB-transport in optical networks.

2. Expanding in adjacencies and gaining software leadership for network optimization, service innovation, and customer experience enhancement

Our goal is to lead in the network software platforms that will help our customers extract greater value from their network infrastructure. We are building a coherent suite of software and services that bring together Network Function Virtualization (“NFV”), SDN, and advanced applications and analytics, to enable customers to more easily manage, scale, automate, secure, and monetize their networks through intuitive Cloud-based applications. We have strong products and services in this area including subscriber management, device management, IP Multimedia Subsystems, and Customer Experience Management, which further build our strong operator

customer relationships and leverage our infrastructure expertise; and with CloudBand and Nuage Networks products, our software expertise extends into the enterprise market. Furthermore, we are developing transversal platforms for security in IoT for connectivity management and application enablement, as well as for analytics to provide network, customer, and business intelligence.

3. Diversifying by providing network performance and flexibility for large-scale enterprises

The increasing digitization of enterprises offers growth opportunities beyond a core customer base of telecommunications operators. We are focused on serving the needs of webscale players, technology-centric fortune 500 enterprises, and public sector bodies that require high performance networks and seek to take advantage of the convergence of telecommunications and IT technologies. More specifically, we are building on the SDN expertise of Nuage Networks to further enter the enterprise datacenter business, leveraging our IP and optical assets to increase our presence in key industry verticals, such as utilities and transport. We are also deploying our expertise in LTE to capture a greater share of mobile networks in the public safety market, and offering our software platforms to enterprise customers.

4. Leveraging new business opportunities created through the Internet of Things

Our strategy is guided by our vision of the “Programmable World” –a world in which connectivity will greatly expand and, link people and billions of physical objects. In this world automated analytics will both improve and simplify peoples’ lives, reduce costs and optimize business operations. For instance, we envision widespread use of autonomous driving cars that offer the promise of reducing road fatalities significantly and optimizing traffic flows; smart monitoring systems for utilities, decreasing the waste of precious resources such as water and energy; smart cities, optimizing traffic flows and energy consumption; digital health applications to offer patients remote monitoring and preventive care benefits; increasing the well-being of humans, traffic management systems for drones to increase public safety and drone reliability; public safety applications for positioning and augmented reality, to improve first responders’ work processes and, thus, increase the chances of survival of accident victims and the safety of the first responders; and virtual reality, enabling unprecedented experiences.

The IoT plays a pivotal role in translating our vision into a reality. It creates new opportunity in all customer and technology segments, and we have a two-fold strategy to capitalize on these opportunities. Firstly, we are designing, building, and optimizing network infrastructure to meet the increased and diverse performance requirements that will enable the IoT: scalable, flexible, Cloud-based, efficient, and secure. To meet the requirements of IoT, mass communication and low-latency communication are critical. Hence, we are creating a strong portfolio of IoT connectivity solutions that adapt to specific customer needs, from LTE-based mobile edge computing, to

 

 

 

 

37


Table of Contents

5

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Business Organization

 

narrowband IoT, LTE-M, and 5G. Moreover, we provide solutions for IoT core, security and platforms, to enable a broad array of uses. Secondly, we are building an ecosystem of products and services that will enable the specific use cases in the areas of connected mobility, public safety, digital health, connected industry, and smart cities.

All of these use cases outlined will provide opportunities for new business models for the players in the IoT ecosystem and create

new pockets of revenue growth for network vendors such as us. We believe we can leverage the strength of our complete and converged portfolio of network infrastructure, software, services and advanced technologies, to help our customers – telecommunications operators, governments, enterprises and webscale players to capitalize on the opportunities from an industry in transition.

 

 

5.2 Core Networking Segment

Overview

 

Profound changes in the telecommunications market are impacting service providers’ networks. Mobile broadband data traffic -particularly video - continues to grow rapidly due to affordable smartphones, tablets and mobile devices, higher-speed wireless connectivity and more compelling services, content and applications. Mobile network operators are also deploying an increasing number of small cell sites to increase wireless capacity and coverage. In addition, increasing competition and next-generation broadband initiatives continue to place demands on fixed network operators. Together, these factors indicate that service providers operating either fixed or mobile networks must continue to invest in core networking infrastructure and Internet Protocol (IP) applications to keep up with data demands, as users expect high speed, high quality connections at any time and from anywhere.

Although service providers continue to sell network connectivity services, competition is robust and prices remain under constant pressure. In addition, service providers have found it difficult to sell value-added services that generate additional revenue streams, such as enterprise communications services and consumer entertainment services. Alternative web-based applications and services from Internet companies are becoming more appealing to consumers and cost effective for enterprises. Web scale companies, such as Google and Amazon, are successfully delivering web-based applications and services to end users from large global data centers and related interconnected networks that are simpler to operate and more cost effective than traditional service provide infrastructure.

To support the growth in these web-based applications and services and to make communication within and between data centers more efficient, new platforms are rapidly emerging. These new platforms integrate telecommunications-oriented IP networking and IT-oriented data center systems using a next generation approach to networking known as Software Defined Networking (SDN). SDN aims to make networking easier to deploy, more scalable, less prone to error and cheaper to operate by automating many of the processes used to configure, manage and maintain networks and deliver services today. In addition, Network Functions Virtualization (NFV), in which certain network functions are implemented in software running on commercial off-the-shelf hardware, is emerging as an alternative deployment approach for select IP applications and services. By placing these virtualized functions in data centers, NFV aims to

significantly increase the efficiency and flexibility of telecommunications networks and services which are critical for success in a cloud-based world.

In response to these changes in the telecommunications market, we have positioned ourselves as a specialist provider of Internet Protocol (IP) Networking, Cloud, and Ultra-Broadband Access. Our Core Networking segment includes the following divisions: IP Routing, IP Transport and IP Platforms. In 2015, the Core Networking segment continued to invest in a next-generation network product portfolio spanning each of this segment’s divisions as well as related professional services. Our next-generation Core Networking product portfolio continues to address the key challenge of how to simultaneously deliver innovative, revenue-generating services and provide scalable, low-cost bandwidth. In addition, we are investing in our Core Networking portfolio to help service providers to evolve to a more efficient, cloud-based network infrastructure that embraces Software Defined Networks (SDN) and Network Function Virtualization (NFV) operational models and enables them to launch services faster, generate new revenue and increase business efficiency.

In 2015, the Core Networking segment focused its R&D efforts on:

 

·   New and enhanced IP routing platforms for the core, edge, metro and access parts of the network enabling the transformation to an all-IP network across a range of mobile, residential, business and network infrastructure applications;

 

·   The expansion of our virtualized IP edge routing applications for deployment in NFV environments.

 

·   The introduction of the Network Services Platform (NSP), a carrier SDN-based software platform that will allow communication service providers in delivering on-demand network services more rapidly, cost-effectively, and at scale.

 

·   Optical switching and transport systems and technologies, including 100 Gbps and 200 Gbps WDM, metro platform enhancements, wavelength routing and IP/Optical integration;

 

·   SDN platforms and solutions that help service providers become more flexible, open and responsive to enterprise networking needs within the data center, between data centers and across the service provider Wide Area Network (WAN);
 

 

 

 

38


Table of Contents

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Core Networking Segment

 

·   The introduction of Rapport™, a software-based, open platform that gives large enterprises and service providers a new and more flexible way to deliver communications and collaboration services.

 

·   Enriched NFV capabilities including the ability to operationalize a fully virtualized environment.

In 2015 our Core Networking segment revenues were 6,780 million, representing 47% of our total revenues.

IP Routing

Our IP Routing division is focused on delivering the IP routing infrastructure and applications required to meet the challenges of sustaining massive network traffic growth while supporting the efficient delivery of cloud-enabled business, mobile and residential services. Our IP routing portfolio is targeted to service providers, mobile network operators, cable/multiple system operators (MSOs), transportation operators, utilities and large-scale enterprises worldwide.

The main product families within our IP routing portfolio are:

 

·   Internet Protocol/Multiprotocol Label Switching (or IP/MPLS) access, aggregation, edge and core routers. These products direct traffic within and between carriers’ national and international networks to enable delivery of a broad range of IP-based services across the residential services (including Internet access, Internet Protocol TV (IPTV), Voice over IP) mobile services (mobile phone and data) and business services (VPNs, business Internet access) on a single common network infrastructure with superior scalability, performance, reliability and application intelligence;

 

·   Carrier Ethernet access and aggregation switch/routers. These platforms and devices enable carriers to deliver advanced residential, business and mobile backhaul services, which connect end users to core networks. These products are mainly used in metropolitan area networks, which span across a city or large campus;

 

·   Service Aggregation Routers. These platforms facilitate the transition from legacy networking technologies to next generation Carrier Ethernet/packet networking, and are deployed for mobile backhauling, business services and fixed network aggregation;

 

·   Service Aware Management. These products help manage all parts of the IP/MPLS network and help service providers with simplified processes to allow new services, proactive troubleshooting, and streamlined integration within their existing networks;

 

·   Content Delivery Networks (CDN). These products distribute and store web and video content. They deliver 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; and
·   Software Defined Networking (SDN). SDN enables service providers, web-scale operators and large enterprises to build robust, automated and highly scalable data center and networking infrastructures that deliver secure virtual compute, storage and networking resources for multiple tenants and user groups.

The applicability of our IP Routing portfolio continues to expand to meet the needs of service providers. The following are some of our key areas of focus and investment in 2015:

 

·   Network Services Platform (NSP) – In 2015, Alcatel-Lucent introduced the NSP, a carrier SDN-based software platform that will allow communication service providers to deliver on-demand network services more rapidly, cost-effectively, and at scale.

 

·   7750 Service Router – In 2015, we expanded our portfolio of IP/MPLS edge routers to deliver more performance, features and flexibility for our IP/MPLS networks with a range of new compact, high-density, power efficient platforms.

 

·   Virtualized Services Platform (VSP) – The Nuage Networks VSP enables cloud providers, large enterprises and service providers to virtualize and automate networks in accordance with established policies in order to provide secure connectivity to multiple users. In 2015, we saw strong customer momentum for the Nuage VSP platform across these customer types in all regions. We also enhanced the offering by introducing the Virtualized Networks Services (VNS) solution which will help enterprises and service providers extend the benefits of SDN to branch locations anywhere.

 

·   Virtualized Service Router (VSR) – In 2015 we continued to expand our portfolio of virtualized IP edge routing applications for deployment in NFV environments. The VSR enables rapid service innovation, extends service reach, opens new markets, and accelerates time to market for our customers.

 

·   Core router platform – We created advanced features for the 7950 Extensible Routing System (XRS), a next-generation core IP router designed to help service providers address the rapid growth of data traffic on core networks.

 

·   Enhanced IP edge routing features – We continue to develop advanced features for our IP edge routers such as policy and subscriber management, advanced video delivery, carrier Wi-Fi, security, and datacenter interconnect.

 

·   Mobile backhaul – We expanded our broad IP mobile backhaul portfolio to address the challenges of deploying mobile backhaul for small cell networks while, at the same time, ensuring seamless backhaul management and operations across the broader 3G or 4G/LTE mobile network.

 

·   Mobile packet core – Our mobile packet core solution supports LTE Evolved Packet Core (EPC) and next-generation packet core functionality to seamlessly deliver mobile traffic across all wireless technologies. In 2015, we delivered to market a virtualized evolved Packet Core (vEPC) product suite including virtualized mobile gateways and virtualized mobility management.
 

 

 

 

39


Table of Contents

5

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Core Networking Segment

 

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 service providers transform their networks to support new types of IP-based services. Our service routers enable service providers to deliver personalized services to business, residential and mobile users, ensuring high capacity, reliability and high performance with enhanced quality of experience.

IP Transport

Our IP Transport division designs equipment for the transmission of high-speed data over fiber optic connections. The division focuses on terrestrial optical equipment for land (terrestrial) and undersea (submarine), for short distances in metropolitan and regional areas, and for traffic aggregation of fixed and mobile multi-service networks. Our transport portfolio also includes microwave wireless transmission equipment.

Terrestrial optics

Our terrestrial optical products offer a portfolio designed to support service growth from the metro access to the network core. With our products, service providers can manage voice, data and video traffic patterns based on different applications or platforms. Service providers that use our products can offer a wide variety of managed data services, including multiple service quality capabilities, variable service rates and traffic congestion management by leveraging their existing network infrastructure to offer new services and to support ultra-broadband services.

As a leader in optical networking, we play a key role in the transformation of optical transport networks. Our wavelength-division multiplexing (WDM) products address a variety of markets, from the enterprise to the ultra-long-haul, and 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 which eliminates the need for frequent on-site configuration. The 100 Gbps, 200 Gbps and 400 Gbps technology available in our WDM products along with 10 Gbps, 40 Gbps, 100 Gbps, and 200 Gbps high speed WDM uplinks allow operators to solve bandwidth bottlenecks, while offering the lowest cost per transported bit. This approach facilitates the design and installation of a more flexible WDM network that is easier to operate, manage and monitor.

In 2015, the terrestrial optics division expanded the scalability, agility, versatility and performance features of our optical networking product portfolio, allowing service providers to more efficiently transport increasing volumes of IP-based traffic. During 2015, the terrestrial optics division continued and expanded its R&D efforts on:

 

·   Wavelength Routing. This capability, known in the industry as CDC-F for colorless, directionless, contentionless with flex spectrum, allows service providers to re-route transport wavelengths in an automated manner, enabling the
   

provisioning and reconfiguration of operations that previously required the on-site presence of a technician.

 

·   Metro platform enhancements. Two new versions of our flagship 1830 PSS platform accommodate the space and cost constraints of service provider metro networks, and support any mix of packet, OTN, and photonic services via a suite of new compact, highly integrated line cards.

 

·   100 Gbps and 200 Gbps WDM. We continue to make investments to enable wider adoption of 100 Gbps WDM in the core network and metro network as well in increasingly more challenging and complex use cases. We were the first to deliver a programmable 100 Gbps/200 Gbps DWDM line card solution that allows service providers to meet today’s bandwidth demands and seamlessly grow capacity when needed without additional investment.

 

·   IP / Optical integration. By implementing an enhanced version of the standards-based generalized multiprotocol label switching (“GMPLS”) User Network Interface, our IP and optical platforms can share information, automate service creation, and optimize network resources across IP and optical networks. This functionality is a critical building block of software-defined networking (“SDN”) management, and allows service providers to architect combined IP and optical networks that operate more efficiently and thus require significantly fewer resources than separately designed and managed networks.

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

Submarine

With over 575,000 km of submarine cables already installed and 330,000 km of submarine cables under maintenance agreements, we are the industry leader in installing and maintaining undersea telecommunications cable networks using optical fiber transmission. According to industry analysts, we have an approximately 40% market share. Our submarine cable networks connect continents, mainland to islands and between islands or several points along a coast. The market is mainly driven by capacity demand in response to surging broadband traffic volumes, and connectivity demand. Competition between service providers and need for routes redundancy are secondary drivers.

Customers in this market are primarily service providers grouped into consortiums. We also see an increasing level of investment from webscale content providers such as Google, Microsoft and Facebook. As a unique integrated player, we provide to our customers design, development, manufacturing, marine survey, marine lay, civil works, installation, commissioning and maintenance of cables.

Our submarine activity includes:

 

·   Repeatered cables, which are turnkey systems for distances that exceed 500 km, using repeaters to amplify the signal over trans-oceanic distances,
 

 

 

 

40


Table of Contents

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Core Networking Segment

 

·   Unrepeatered cables, for distances of less than 500 km,

 

·   Upgrades of terminal equipment at both ends of a cable to increase the capacity of the systems (typically to 100G gigabits per second),

 

·   Marine maintenance to repair damaged systems when needed, and after sales services.

We have also started to broaden our customer base by entering the oil and gas market, notably to connect oil and gas offshore platforms to the coast, and to provide permanent reservoir monitoring solutions.

This market is characterized by relatively few large contracts that often require more than a year to complete.

Amidst the on-going upward cycle market recovery, telecom projects have been developing on links between North and South America (like Seabras), between Europe and Asia through India and Middle-East (like Sea-Me-We-5), on the African coasts (like ACE – Phase II), as well as in South Asia, Pacific and Australia routes (like Moana).

In the oil and gas market, we started the construction of a project to connect off-shore platforms along the northwest Australian coast.

In 2015, we sold our 40% ownership interest in Apollo submarine cable.

Wireless transmission

We offer a comprehensive portfolio of microwave radio products meeting both the European Telecommunications Standards (ETSI) and the American standards-based (ANSI) requirements. These products provide high-capactiy 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 2015, the Wireless Transmission unit focused its R&D efforts on continuing to support ultra-broadband networks, including new capabilities to provide higher capacity across both air and network interfaces, increase performance and prepare for the support of 5G technology.

IP Platforms

Our IP Platforms portfolio provides systems hardware, software platforms and applications that help service providers and large enterprises accelerate innovation, monetize services and perfect customer care. These IP Platforms solutions include:

Communications and Collaboration

Our Rapport™ portfolio of cloud communications and collaboration software allows service providers to reduce the cost and complexity of delivering services, improve retail services, and grow new revenues with enterprises and wholesale markets.

Network Function Virtualization (NFV)

Our CloudBand portfolio combines the power of telecom networks with the flexibility and cost efficiencies of cloud and IT services for service providers. CloudBand is an NFV platform which supports a wide variety of virtual network functions including IP Multimedia Subsystem and Evolved Packet Core. We established the first open community advancing NFV, which we call the CloudBand Ecosystem. It involves almost 60 partners across the supply chain, with global service providers engaged in innovative co-creation projects.

Motive® Customer Experience Management (CEM)

Our products offer analytics and reporting data regarding customer care, home devices, applications, and networking equipment. We manage over 800 million devices and hold the lead position in this market. Our Motive portfolio of products includes Customer Care, Service Management Platform, Care and Support Applications, Dynamic Operations and Network Intelligence.

Policy and Charging

Over 100 service providers around the world are using our policy, charging and diameter control portfolio which we call our Smart Plan, to generate new revenue and enhance the customer experience.

Consulting Services

We work with customers to address their strategic and business issues by enabling them to transform and harness their network as a business platform, as well as accelerate innovation. IP Platforms Services has embraced the future of the NFV and Cloud technologies. During 2015, we rolled out the NFV enablement framework focused on successful implementation of Cloud/NFV. This framework includes application onboarding, hardware validation, operationalization of Cloud/NFV environments and Cloud transformation.

Mformation

In 2015, we acquired Mformation, a pioneer and leader in mobility management solutions with more than 20 service provider customers around the world, managing more than 500 million devices. Mformation provides service providers with a secure, scalable, application-independent Internet of Things (“IoT”) control platform that provides control and security across multiple industries including automotive, healthcare, utilities, manufacturing and the digital home.

As part of The Shift Plan, we have continued our effort to stream-lined our payment and OSS business and disposed of certain portfolios within IP Platforms. In addition, we continued to phase out business support system (BSS) business.

 

 

 

 

41


Table of Contents

5

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Access Segment

 

 

5.3 Access Segment

 

Overview

Smartphones, tablets, and other mobile, intelligent devices are increasingly pervasive, connecting people, businesses and societies in new and exciting ways. Service providers are challenged with connecting users and their devices to networks, services and applications. Demand for faster broadband services reflect a market environment in which both fixed and mobile broadband traffic is growing exponentially. More and more data, applications and services are moving to the cloud, stored in massive data centers. The access network is now the essential bridge between users and the cloud, making content, services and applications accessible on any device, at any time and from any location. The role of the access network is changing to deliver the highest capacity at the lowest cost without compromising performance and functionality.

As such, our wireless and fixed access portfolios are focused on Ultra-Broadband Access, providing our customers with high-speed, high capacity, high performance access solutions which deliver exceptional quality of experience for end users. These ultra-broadband solutions leverage the latest innovations in fixed and wireless access technologies and build on our leadership position in the fixed and wireless access markets.

In 2015, the Access segment focused its R&D efforts on:

 

·   Ultra-fast fixed broadband solutions using copper and fiber technologies such as VDSL2, vectoring, G.fast and next-generation passive optical networking (NG-PON2 );

 

·   Ultra-fast mobile broadband solutions which include wireless technologies such as LTE and LTE Advanced (LTE-A) as well as LTE and multi-standard small cells;

 

·   Pioneering the path to 5G, focusing on foundational technologies like LTE/LTE-A and carrier aggregation, small cells, Networks Function Virtualization (NFV) and Software Defined Networking (SDN); and

 

·   Highly distributed architectures for fixed access (also known as fiber-to-the-x, or FTTx) and wireless access (small cells, LTE overlay) that often require scalable approaches to aggregation and backhaul.

In addition to the Wireless Access and Fixed Access divisions, the Access Segment also includes our Licensing and Managed Services divisions.

In 2015 our Access segment revenues were 7,482 million, representing 52% of our total revenues.

Wireless

Our wireless access portfolio is focused on those products and services which deliver the best possible capacity, coverage, speed and flexibility of deployment for our customers, enabling them to move faster to meet demand, deliver the highest quality of experience for the end user and be first to capture new

market opportunities. Our primary activities focus on delivering 4G/LTE/LTE-A overlay solutions and 3G/4G/multi-standard small cell solutions along with related professional services. We are blazing the path to 5G; developing industry leading portfolios in foundational 5G technologies such as Networks Function Virtualization (NFV), including vRAN, and Software Defined Networks (SDN) as well as working with operators considered to be leaders of 5G principles. We continue to transition the portfolio away from legacy 2G/3G wireless technologies in line with our business and investment strategy.

LTE (Long-Term Evolution)

Fuelled by the continuing surge of mobile broadband data traffic, the market for 4G LTE has reached maturity faster than any previous wireless technology. According to the GSA (Global Mobile Suppliers Association), through October 2015, there were 442 commercial LTE networks launched in 147 countries and during the year, LTE subscriptions grew faster than any other mobile technology, closing in on one billion subscribers worldwide.

Our focus is on LTE/LTE-A Overlay solutions, the opportunity for which continues to grow as more and more operators recognize the need to move to LTE quickly. We believe that LTE/LTE-A Overlay is faster, safer and its dedicated network resources perform better. Of particular note this year, we launched a new portfolio of LTE radio access network technologies that will enable operators to make a smooth transition to next-generation network architectures. Our refreshed LTE RAN portfolio aims to address what we believe is the biggest challenge mobile operators will face in the near-future – the ability to meet demand for capacity-consuming data services such as video, particularly in urban environments – in a sustainable and cost effective way. This new platform also provides a smooth transition to a virtualized RAN and, ultimately, to a 5G family of solutions. In 2015 we announced the global availability of an LTE software release which delivers key performance enhancements including carrier aggregation.

Our LTE portfolio of services allow our customers to implement LTE networks more quickly through end-to-end pre-testing, design tools, remote integration and proactive trouble shooting.

Small cells

Small cells cost-effectively extend wireless network coverage and capacity, and improve the quality of experience for end users wherever there are capacity hotspots and coverage holes.

Our small cells portfolio is a comprehensive, end to end solution targeted at operators who want to extend 3G/4G network coverage and increase capacity in home, in-building or in the public domain. Our portfolio encompasses a full suite of small cell access points, including multi-standard home and enterprise small cells as well as new LTE compact outdoor metro cells and metro radios. We also offer a 3G/4G multi-standard gateway, an

 

 

 

 

42


Table of Contents

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Access Segment

 

operations, administration and management system and a set of wireless services that address operator challenges including access to sites, power, backhaul, and the need for rapid network design and installation.

During 2015, we announced the commercial availability of our multi-standard home and enterprise small cells and we launched our new compact outdoor metro cell, a high capacity small cell which can be deployed in challenging environments to improve LTE capacity and performance. We also launched our new Wireless Unified Networks strategy to enhance the user’s wireless experience in the home, at work, and in dense venue networks by combining existing Wi-Fi and cellular networks into one high performance network. And finally, we announced the expansion of our Small Cell Site Certification Program with the addition of new member companies who will increase support for outdoor small cell deployment while adding expertise to solve the challenges related to indoor deployment – often in the workplace. The Site Certification Program has already successfully accelerated the deployment of outdoor small cells and the number of program members has tripled since launch at the end of 2013.

Legacy wireless

Investment in the W-CDMA, GSM and CDMA portfolios has continued to reduce as we focus R&D on the growth segments within Wireless (LTE and Small Cells) as well as on longer term network advancements like vRAN and 5G.

RFS (Radio Frequency Systems)

RFS is a global designer and manufacturer of cable and antenna systems plus active and passive RF conditioning modules, providing end-to-end packaged solutions for wireless and broadcast infrastructure. RFS serves original equipment manufacturers (OEMs), distributors, system integrators, operators and installers in the broadcast, wireless communications, land-mobile and microwave market sectors. RFS provides RF systems for various uses including cell-based mobile communications, in-building and in-tunnel radio coverage, microwave links, TV & radio.

Fixed access

Our Fixed Access division designs and develops fixed access products that allow service providers to offer ultra-broadband connectivity over digital subscriber lines (DSL) and fiber connections. Also known as fiber-to-the-x (FTTx) equipment, these products provide internet access and other services to residential and business customers around the world. These products also help complete the transformation of legacy networks to IP by providing IP connectivity for the “last mile”.

We are the worldwide leader in the fixed broadband access market supporting the largest mass deployments of voice, video and data services. According to industry analysts, we are the largest global supplier of DSL technology, with 41% of global DSL market share based on ports shipped, and the third largest

global supplier of Gigabit Passive Optical Networking (or GPON) technology, with 17% of global market share. We are the leader in VDSL2 technology with 47% market share based on ports shipped. In 2015, we concluded the largest trial in the world for our newest DSL innovation G.fast, with British Telecom. Additionally, we have shown record speeds of 5.6Gbps over the British Telecom copper network using our XG-FAST Bell Labs Technology.

We are one of the leading suppliers to the Chinese market, which is the fastest growing broadband market in the world. We have the highest capacity fiber access platform on the market and the most advanced vectoring solution. Our strong position in both fiber and DSL technologies is key to providing service providers with the solutions they need to increase their revenue and reduce operational costs while improving the quality and experience for end-user customers. We have built solutions that allow operators to select among diverse technologies and deployment models (such as FTTN with vectoring to FTTH) to achieve the fastest possible return-on-investment and time-to-market and to connect more users, faster.

In 2015, the Fixed Access division focused its R&D efforts on:

 

·   Fixed access products that support both copper and fiber access. The breadth of products and technologies supported by our fixed access portfolio allows service providers to deploy a mix of both copper and fiber technologies efficiently and in the most cost-effective way to suit whatever deployment model they need.

 

·   High end micro-nodes portfolio with VDSL2 vectoring or Vplus technology. The new micro-nodes give operators the opportunity to bring fiber deeper into the network and make use of technologies to boost network speed without having to invest in bringing fiber completely into the home.

 

·   Continued investment in VDSL2 vectoring that increases data speeds to 100 Mbps or more and G.Fast which can increase the speed to 1Gbps over existing copper infrastructure to homes and businesses.

 

·   Continued investments in FTTH, focusing on being first on the market with next generation passive optical networking solutions (NG-PON2).

 

·   DPoE (Docsis Provisioning of EPON) and 10G EPON on the high capacity 7360 ISAM FX platform. DPoE is a very important feature for cable Multiple System Operators (MSOs) as it supports the greater scale required for fiber-based service offerings, while bringing higher speeds.

 

·   Developed the PSTN Smart Transform solution, consisting of expertise and tools to quickly and efficiently migrate legacy PSTN networks and services to all-IP Ultra-Broadband FTTH/FTTx infrastructure. With equipment fast approaching end-of-life and cost-to-serve increasing, service providers are looking to decommission legacy PSTN networks without disrupting profitable services.

 

·  

Development of an Optical Network Terminal (ONT) that can be used as the digital home hub. With more and more Internet of Things devices in the home, there is an increasing

 

 

 

 

43


Table of Contents

5

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Access Segment

 
    need to have more and better connectivity inside the home. By integrating the newest Wi-Fi capabilities and various interfaces into the ONT, service providers can offer all services from one device.

Licensing

The Licensing division actively pursues a strategy of licensing patents to generate revenues. We also license selected technologies to third parties to generate revenues. Additional revenues are generated through the sale of selected patents when that path best serves our needs.

Managed services

Our Managed Services division delivers innovative solutions for both the carrier and strategic industries markets. Our solutions help customers by delivering accelerated time to market, continuous improvement in service quality and a sustainable lower total cost of operations. Our portfolio primarily offers two segments to cover the multi-vendor, multi-technology and multi-services environment, which are:

·   Network Management Services:

 

    The Operations Transformation Solution. We control a customer’s network operations and transform their multivendor network operation functions. We manage any legacy infrastructure a customer may have, and adapt the pace of the transformation to the customer’s needs. Finally, at the end of the contract, we transfer the operations back to the customer, with options to license our intellectual property.

 

    Network Operations Services. We provide a cost-efficient approach to network monitoring and surveillance by delivering basic network operations fault management service and problem resolution from our global network operations centers. This includes services management and customer experience management offerings.

 

·   The BOMT (Build-Operate-Manage-Transfer) Solution. We help customers deploy and operate our new products, technologies and solutions faster. As part of the BOMT program, we operate and manage a customer’s network and at the end of our contract we transfer the operations to the customer, with options to license our intellectual property.
 

 

5.4 Marketing, sales and distribution of our products

 

We sell most 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. Over the last two years, we have made a significant investment in diversifying our customer base by focusing on growth segment markets – large enterprise, government, utilities, transportation and oil and gas. We invested in a direct sales force for these markets along with an expanded partnership program to build our indirect business. We also

expanded partnerships with companies such as HP and Accenture to sell various products to service providers as well as other non-telecommunications segments.

In 2015, we continued to expand our go-to-market capabilities, with an increased investment in partner marketing, digital channels and marketing automation. These investments have resulted in stronger market presence and a solid foundation for direct marketing programs. More information about our organization can be found in Chapter 5.1 “Business Organization”.

 

 

5.5 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 Cisco Systems, Ericsson, Fujitsu, Huawei, Nokia (our new parent company from 2016), Samsung and ZTE as well as more specialized competitors such as Adtran, Calix, Ciena and Juniper. Some of our competitors, such as Ericsson 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.

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. 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.

 

 

 

 

44


Table of Contents

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Competition

 

Consolidation or partnerships also allow 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. Elsewhere, some service providers are considering network asset sharing or joint ventures to reduce overall costs. In areas where capital expenditures remain under pressure, the competitive impact of a smaller set of customers may be compounded. 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 have gained significant market share worldwide. They have gained 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.

 

 

5.6 Technology, research and development

 

Our research and development efforts have two primary focuses: research conducted by Bell Labs to lay the foundation for new and disruptive market opportunities; and product-focused development that transitions concepts to fully viable commercial offerings and enhances existing product lines with unique differentiators that enable us to distinguish our offerings from those of our competitors.

In 2015, our R&D community expanded on our historic record of innovation with achievements that keep us at the technological forefront of key market segments, from IP routing, transport and platforms to the cloud to ultra-broadband access technologies. Some highlights for 2015 are identified below, both in terms of products that are available to customers today, and research activities that have a longer horizon.

Product innovations

 

·   We introduced the 400G IP line card for IP networks. This technology allows data transmission between our existing IP routers at speeds of 400 gigabits-per-second (400G) over hundreds of kilometers. This speed allows operators, who are facing increasing pressure from the explosive demand for Internet and cloud data, a greater ability to utilize their IP network capabilities.

 

·   We extended our 1830 Photonic Service Switch (PSS) optical transport platform with the addition of new products specifically for deployment in metro networks. The new platforms support communications network services such as access aggregation, content delivery, and mobile backhaul to meet the needs of service providers. In addition, the multi-functional technology supports the network services needed by large enterprises, including data center interconnectivity and wide area networking.

 

·   We introduced our Network Services Platform, which allows service providers to deliver on-demand network services more rapidly, cost-effectively and at scale.

 

·   We introduced innovative scalable wavelength routing technology, that provides operators with new flexibilities in the deployment of optical transport networks. Verizon is deploying the technology on its ultra-longhaul optical network.
·   We expanded our 7750 Service Router portfolio, offering full IP edge routing capabilities to deliver more performance, features and flexibility for our IP/MPLS networks with a range of new compact, high-density, power efficient platforms.

 

·   Our Nuage Networks group introduced the Virtualized Services Assurance Platform (VSAP), which provides relevant and accurate information about the operational state of SDN overlays and the underlying physical IP network infrastructure.

 

·   We launched the Rapport™ software portfolio that gives large enterprises and service providers a new and more flexible way to deliver communications and collaboration services.

 

·   At the Broadband World Forum, we showcased first-to-market fixed access technologies across fiber and copper to support operators in meeting demand for ultra-broadband services, including a new G.fast multi-port micronode, the first commercially available Vplus products and an expansion of our TWDM-PON portfolio.

 

·   We demonstrated the NFV-based vRAN at Mobile World Congress 2015 with Intel, China Mobile and Telefonica and conducted the industry’s first field trial with China Mobile at a university in Beijing. In December we announced collaborations with Red Hat, Advantech and 6WIND to accelerate delivery of the technology, while a 5G collaboration agreement with KT saw initial testing focusing on the vRAN.

 

·   In small cells, we launched the Compact Metro Cell Outdoor (CMCO) family, offering more deployment flexibility with the ability to be integrated into street furniture, while an expanded site certification program offers greater support for deployments.

 

·   We introduced the Distributed Antenna System (DAS) Radio Frequency Module, a radio interface for distributed antenna systems (DAS) to allow mobile operators to improve signal performance while reducing power consumption, space and operational costs by as much as 90% when connecting subscribers at large public venues, such as shopping malls, hotels and office blocks.

Research activities

Bell Labs Research published its first book in 2015, outlining its vision for the network of the future, in “The Future X Network, A

 

 

 

 

45


Table of Contents

5

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Technology, research and development

 

Bell Labs Perspective”. The book represents the vision of its top experts in communications and information, and touches on virtually all aspects of communications, from the home to the enterprise, from the cloud to the internet-of-things (IoT), and from sustainability to operations. The book describes today’s vision, and other research activities listed below describe some of the efforts aimed at changing the future of technology.

Sustainability

We are one of the founding members of the GreenTouch Consortium, an industry effort with the explicit goal of reducing the effective energy consumption in ICT networks by a factor of 1000. GreenTouch ended its five year mission according to schedule in 2015, and publicly announced that the sustainability goals were met and exceeded by a large factor.

Fixed Networks

Bell Labs continues to lead in “Turning Copper into Gold” with research improving the capacity and usability of existing copper networks in multiple ways. G.Fast has led to XG.Fast, a 10Gbps transmission method over existing DSL links that offers an affordable way forward for broadband operators to improve their services for years to come. Researchers are extending the technologies into diverse environments, including multiple-dwelling unit (MDU) applications.

Software Defined Networks (SDN) and Network Function Virtualization (NFV)

As a pioneer in the areas of SDN and NFV, Bell Labs has increased its focus on SDN efficiency, control, implementation, and security. It is addressing SDN across all parts of the network and exploring different methods and algorithms to improve responsiveness and predictability. Researchers are developing prototypes to place network functions into the cloud with NFV, and demonstrating better performance with virtualized services.

Data analytics and Customer Care

Bell Labs is defining algorithms and data visualization techniques to improve the customer care of service providers. Researchers have developed tools to identify successful customer care interactions and to highlight opportunities for improving such engagements. The tools help service providers analyze records so that they can greatly reduce the cost of customer care. This research is also paving the way towards real-time optimization of customer care workflows.

Network Algorithms, Network Applications and Software Platforms

Now that the cloud has become ubiquitous, dynamic deployment is also becoming a mainstream requirement. Bell Labs continues to develop systems and algorithms to predictively cache, deploy, and tear-down application instances. Algorithm research is also leading to major improvement in

natural language processing, especially with massive datasets. Research is aimed at not only improving ways to deal with “Big Data”, but in also in ways of transforming Big Data problems though realistic and intelligent approaches.

Bell Labs is developing new optimizations for communications networks. Methods of improving network resource utilization using multipath Transmission Control Protocol (TCP) are being developed and validated, achieving large factors of improved utilization. Optimal path computation is an area of active research because it is immediately relevant to SDN control.

Multimedia services

As video is the dominant traffic over networks, Bell Labs researchers continue to improve effective delivery of multimedia services with wireless-optimized quality assurance in the form of an adaptive-guaranteed-bit-rate delivery mechanism that provides a fair and network-friendly experience. Other research looks at the interplay of media delivery and network protocols to optimize the end-to-end performance.

Bell Labs is also exploring ways of reducing the network load for massive security video, where security analytics can be computed locally, improving the performance of both the network and the application.

Optics

Researchers continue to set new speed records in optical transmission. Research spans across devices, modulation, fiber, protocols, and control. Researchers have developed new laser technology (e.g., quantum dash lasers) for application in significantly improved multiple wavelength sources. Further progress is being made in greatly advancing transmission rates with spatial-division-multiplexing in multiple-mode fibers, and also in development of optical amplifiers that are compatible with these unique fibers. Optical protocol research has resulted in an advanced TWDM-PON system that can support both residential and enterprise services, and has the potential for another leap forward in bandwidth.

Small cells and 5G wireless

Bell Labs plays a leading role in 5G in several ways. Researchers are looking at millimeter wave spectrum, new flexible filter designs that work better with small cells, and advances in multiple input, multiple output (MIMO) technology. They have developed a new 5G air interface to simultaneously address traffic diversity from multiple classes of access, from IoT to mobile video and web traffic.

European public policy initiatives

Bell Labs participates in the European Union’s Horizon 2020 (H2020) industry-wide consortium. H2020 aligns enterprises and academia to focus on common technology roadmaps to spur innovation and network commerce, along with driving EU network

 

 

 

 

46


Table of Contents

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Technology, research and development

 

improvements. The EU H2020 is addressing many areas, including ICT (Information and Computing Technologies) and Sustainability.

Standards

Throughout 2015, representatives of our R&D community played leading roles in telecommunication standards bodies, helping foster and steer the development and advancement of key technologies. Researchers, engineers and developers from Bell Labs and our development teams participated in many dozens of standards organizations and an even greater number of working groups such as the 3GPP, 3GPP2, ATIS, Broadband Forum, CCSA, ETSI, IEEE, IETF, OMA, and TIA.

Partnerships and collaborations

As part of The Shift Plan, we were committed to refocusing and expanding innovation by redefining and leveraging our research capacities. We aim to implement a new engagement model for Bell Labs Research that is closer to its portfolio life cycle. We also focused on in-house start-ups, as well as on industry partnerships, collaborations and co-developments with leading-edge customers. To exemplify this new model, the following announcements were made during 2015:

 

·   With HP: We continued our partnership and expanded it to deliver technology solutions to enterprises providing data center networking, data replication and new storage architectures connected with IP and optical backbones.

 

·   With Mirantis: Nuage Networks announced a partnership to accelerate the adoption and deployment of OpenStack clouds that fulfill the demanding needs of enterprises and cloud providers.
·   With Arista: Nuage aims to maximize the benefits of open networking while expanding cloud infrastructure to address growing IT application demands.

 

·   With Sequans Communications S.A.: We announced a collaboration to enable key technologies for the ‘Internet of Things’ (IoT) by providing the ‘4G Kit for IoT’, a principal building block in the new Internet of Things prototyping platform launched by communications operator Orange in order to stimulate interest by the IoT market in 4G connectivity.

 

·   With Technische Universität Dresden: Bells Labs will collaborate to advance the development of 5G networks.

 

·   With IBM: The consortium formed by IBM brings together the world leaders in information technology, construction and design, network infrastructure, wireless and telecommunications to modernize stadiums and sports experiences in the future. Collectively, consortium members already are working with more than 250 of the world’s top venues.

 

·   With Red Hat, Advantech and 6WIND: We announced a collaboration to accelerate the delivery of commercial virtualized radio access network (vRAN) products.

 

·   With NCR and Camusat: We formed partnerships with NCR and Camusat to strengthen our position and presence worldwide in managed services by reducing time-to-market and generating new revenue opportunities.

 

·   With Partech Shaker: We announced a technology partnership with the world’s first campus dedicated to digital open innovation.
 

 

 

5.7 Intellectual Property

 

In 2015, we obtained more than 2,600 patents worldwide, resulting in a portfolio of more than 34,000 active patents and over 13,000 patent applications totaling over 47,000 issued and pending 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 intellectual property rights or rights under licensing arrangements covering 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.

 

 

5.8 Sources and availability of materials

 

We make significant purchases of electronic components and other material from many sources. While we have experienced some temporary 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. We continue to develop and maintain alternative sources of supply where technologically feasible for essential materials and components.

 

 

 

 

47


Table of Contents

5

DESCRIPTION OF THE GROUP’S ACTIVITIES

 

 

Sources and availability of materials

 

 

5.9 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 2015, our revenues were in-line with the typical seasonal pattern. This seasonality could differ depending on varying business trends in any given quarter.

 

 

5.10 Our activities in certain countries

 

We operate in a large number of countries, some of which have been accused of human rights violations, are subject to economic sanctions and export controls 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. Our net revenues in 2015 attributable to Iran, Sudan, and Syria, listed as state sponsors of terrorism, represent much less than one percent of our total net revenues. Though we are not aware of any significant shareholder intending to divest the shares it owns in Alcatel Lucent on the basis of our activities in these countries, some U.S.-based pension funds and endowments have in the past 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 these countries.

Disclosure of activities under Section 13(r) of the Securities Exchange Act of 1934

Under Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended, we are required to disclose whether Alcatel Lucent or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or certain designated individuals or entities. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities and even when such activities were conducted in compliance with applicable law. The following information is disclosed pursuant to Section 13(r). None of these activities involved U.S. affiliates of Alcatel-Lucent.

1. Alcatel-Lucent has provided certain telecommunications network equipment and related services for end use by the Telecommunication Infrastructure Company of I.R. Iran (“TIC”). TIC is a government-owned telecommunications infrastructure provider in Iran that serves as Iran’s intercity, interprovincial and international telecom network operator. These export sales, and the associated financial transactions, were licensed by EU authorities.

Prior to 2015, Alcatel-Lucent had a contract for the provision of technical support services to, or for the benefit of, TIC in support of telecommunications network equipment that was sold previously to customers in Iran for end-use by TIC.

2. In 2013, Alcatel-Lucent Deutschland AG, an Alcatel-Lucent subsidiary, reached a settlement agreement with Iranian Telecommunication Manufacturing Company Public Stock Corporation (“ITMC”) on claims raised by ITMC related to contracts that were completed prior to 2007 for the delivery of telecommunications equipment and services. In the course of these contracts, performance bonds had been opened between 2001 and 2006 at Bank Tejarat, Bank Saderat and Bank Mellat and had been retained by ITMC as security against their claims. The settlement agreement stipulates that Alcatel-Lucent Deutschland AG shall pay 1,600,000 to ITMC as settlement for the claims and that, in return, performance bonds held by ITMC shall be released. In December 2014, the German Federal Bank approved payment of the settlement amount by Alcatel-Lucent Deutschland AG to a third party named as beneficiary by ITMC. No payments were made under the settlement agreement in 2015. Payment of the settlement amount remains pending.

3. Alcatel-Lucent has two frame agreements for the supply of telecommunications network equipment and related services to two private companies in Iran, PATSA and Elmatco. The PATSA agreement is for end-use by the Shiraz Urban Rail Organization (“SURO”) in support of operations of the Shiraz city metro rail system. We understand that SURO is owned by the government of the city of Shiraz. The Elmatco agreement is for end-use by a group of state-owned regional electricity companies, including Esfahan Regional Electric Company, Iran Power Distribution Company and Gharb Regional Electric Company.

4. Gross revenues received during 2015 from the activities described above, all of which involve the supply of telecommunications equipment and/or related services to Iranian governmental entities, were approximately 47,728,000 and the net profits for 2015 relating to such activities were approximately 27,939,000. We intend to fulfill our remaining obligations under existing contracts, subject to compliance with applicable laws.

5. Two non-U.S. subsidiaries of Alcatel-Lucent have branches in Iran that maintain bank accounts at Bank Tejarat for purposes of carrying out financial transactions in connection with their general business activities.

 

 

 

 

48


Table of Contents

Operating and financial review and prospects

6      

 

 

 

6.1    Overview of 2015      54   
6.2    Consolidated and segment results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014      55   
6.3    Consolidated and segment results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013      60   
6.4    Liquidity and capital resources      65   
6.5    Contractual obligations and off-balance sheet contingent commitments      69   
6.6    Qualitative and quantitative disclosures about market risks      73   
6.7    Legal Matters      75   
6.8    Research and development — expenditures      76   

 

 

 

49


Table of Contents

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”, “aim”, “may”, “target”, “seek”, “estimate”, “predict”, “potential”, “intend”, “should”, “plan”, “project”, “strive” or the negative of these terms 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. A detailed description of such risks and uncertainties is set forth in Chapter 3 “Risk Factors” in this Form 20-F. Such forward-looking statements also include the 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”. These and similar statements are based on management’s current views, estimates and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those anticipated by such statements. We caution readers not to place undue influence on these statements, which speak only as of the date of this report.

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 (EU).

As of December 31, 2015, all IFRSs that the International Accounting Standards Board (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 “Financial Instruments: Recognition and Measurement (revised December 2003)”, which the EU only partially adopted. The part not adopted by the EU has no impact on our 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 IASB. References to “IFRS” in this Form 20-F refer to IFRS as issued by the IASB and as adopted by the EU.

As a result of the purchase accounting treatment of the Lucent business combination required by IFRS, our results for 2015, 2014, 2013 and 2012 included several negative and non-cash impacts of purchase accounting entries.

Changes in accounting standards as of January 1, 2015

Published IASB financial reporting standards, amendments and interpretations applicable to the Group that the EU has endorsed, that are mandatory in the EU for annual periods beginning on or after July 1, 2014, and that the Group has adopted in 2015:

 

·   Amendments to IAS 19 “Defined Benefit Plans: Employee Contributions” (issued November 2013); and

 

·   Annual improvements to IFRSs (2010-2012) and Annual improvements to IFRSs (2011-2013) issued December 2013.

These new IFRS standards and amendments had no 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 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 (see Note 18 to our consolidated financial statements)

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.

b/ Impairment of customer receivables (see Note 19 to our consolidated financial statements)

An impairment loss is recorded for customer receivables if the expected present value of the future receipts is lower than 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 deterioration in our major customers’ creditworthiness could have an adverse impact on our future results.

 

 

 

 

50


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

 

 

c/ Goodwill, other intangible assets and capitalized development costs

Goodwill (see Note 11 to our consolidated financial statements)

Goodwill net, is allocated, where applicable, to cash generating units that are equivalent to a product division or groups of product divisions within our reporting structure. Product divisions are two levels below our three reportable segments. In assessing whether goodwill should be subject to impairment, the carrying value of each cash generating unit 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 cash generating unit is calculated using a five-year discounted cash flow analysis with 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 cash generating unit is determined based upon the weighted average of the Gordon Shapiro approach described above and the following two approaches, being additional inputs that represent assumptions that a market participant would use when pricing the asset:

 

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

 

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

The discount rates used for the annual impairment tests are based on the Group’s weighted average cost of capital (WACC). 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.

Growth and perpetual growth rates used are based on expected market trends.

Other intangible assets (see Note 12 to our consolidated financial statements)

Impairment tests are performed if we have indications of a potential reduction in the value of our intangible assets due to change in market trends or new technologies. The recoverable amounts are based on discounted future cash flows or fair values of the assets concerned.

Capitalized development costs (see Note 12 to our consolidated financial statements)

The Group evaluates the commercial and technical feasibility of these development projects, for which costs are capitalized, and estimates the useful lives of the products resulting from the projects. Should a product fail to substantiate these evaluations, the Group may be required to impair some of the net capitalized development costs in the future.

d/ Provision for warranty costs and other product sales reserves (see Note 25 to our consolidated financial statements)

These provisions are calculated based on historical return rates and warranty costs expensed as well as on estimates. Costs and penalties ultimately paid can differ considerably from the amounts initially reserved and could therefore have a significant impact on future results.

e/ Provisions for litigations (see Notes 25 and 31 to our consolidated financial statements)

Certain legal proceedings are pending and cover a wide range of matters. Due to the inherent nature of litigation, the outcome or the cost of settlement may materially vary from estimates.

f/ Deferred tax assets (see Note 8 to our consolidated financial statements)

The 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. 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 forecasted 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 our financial results.

g/ Pension and retirement obligations and other employee and post-employment benefit obligations (see Note 23 to our consolidated financial statements)

Actuarial assumptions

Our results of operations include the impact of significant pension and post-retirement benefits that are measured using actuarial valuations. Inherent in these valuations is a key assumption concerning discount rates in retirement plans and healthcare plans. This assumption is 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 these assumptions would have a material impact on our financials.

Discount rates

Discount rates for our 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

 

 

 

 

51


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

 

 

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 our non U.S. plans were determined based on Bloomberg AA Corporate yields until December 31, 2012. Since Bloomberg stopped publishing these yields, discount rates for our non U.S. plans are determined based on Iboxx AA Corporate yields starting January 1, 2013.

Holding all other assumptions constant, a 0.5% increase or decrease in the discount rate would have increased or decreased the 2015 net pension and post-retirement benefits costs (determined in accordance with IAS 19 “Employee Benefits” (revised)) by approximately 70 million and (38) million, respectively.

Healthcare cost trends

Regarding healthcare cost trends for our U.S. plans, our external 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 our U.S. post-retirement healthcare plans in making their recommendations. In determining our assumptions, we review our recent experience together with our actuaries’ recommendations.

Expected participation rates in retirement healthcare plans

Our 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 U.S. plans and recent participation history. We review this recommendation annually after the annual enrollment has been completed and update it if necessary.

Mortality assumptions

Until September 30, 2014, we retained the RP-2000 Combined Health Mortality table with Generational Projection based on the U.S. Society of Actuaries Scale AA. On October 27, 2014, the U.S. Society of Actuaries (SOA) issued new mortality tables. Starting December 31, 2014, we changed these assumptions to the RP-2014 White Collar table with MP-2014 mortality improvement scale for Management records and the RP-2014

Blue Collar table with MP-2014 mortality improvement scale for Occupational records. This update had a U.S.$2.6 billion negative effect on the benefit obligation of our U.S. plans. These effects were recognized in our 2014 Statement of Comprehensive Income.

On October 8, 2015, the U.S. SOA released an updated set of mortality improvement assumptions: scale MP-2015. This new mortality improvement scale reflects two additional years of data that the Social Security Administration has released since the development of the MP-2014 mortality improvement. These two additional years of data show a lower degree of mortality improvement than in previous years. The change to scale MP-2015 reduced the liabilities by $218 million of our U.S. plans. These effects were recognized in the 2015 Statement of Comprehensive Income.

Plan assets investment

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 84% are based on closing date fair values and 16% 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, 2015 actual fair values of private equity, venture capital, real estate and absolute return investments were confirmed to be, after the one to three-month delay, 10% lower than the ones used for accounting purposes as of December 31, 2015, and since our U.S. Management pension plan has a material investment in these asset classes (and the asset ceiling described below is not applicable to this plan), other comprehensive income would be negatively impacted by approximately 344 million.

Asset ceiling

For retirees who were represented by the Communications Workers of America and the International Brotherhood of Electrical Workers, we expect to fund our current retiree healthcare and group life insurance obligations with Section 420 transfers from our U.S. Occupational pension plans. 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 and into a group life insurance account established to pay retiree life insurance benefits. This is considered as a refund from the pension plan when setting the asset ceiling.

Depending on the type of Section 420 transfer, assets in excess of 120% or 125% of the funding obligation can be transferred. Using the methodology we selected to value plan assets and obligations for funding purposes (see Note 23 to our consolidated financial statements), we estimated that, as of December 31, 2015, the excess of assets above 120% of the plan obligations was U.S.$1.1 billion (1.0 billion), and the excess above 125% of plan obligations was U.S.$0.9 billion (0.8 billion).

 

 

 

 

52


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

 

 

h/ Revenue recognition (see Note 6 to our consolidated financial statements)

Most of the Group’s sales are generated from complex contractual arrangements that require significant revenue recognition judgments, particularly in the areas of the sale of goods and equipment with related services constituting multiple-element arrangements, construction contracts and contracts including software. Judgment is also needed in assessing the ability to collect the corresponding receivables.

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 our financial condition.

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. 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 and we require fair value to separate the multiple software elements. 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.

i/ Restructuring reserve and impact on goodwill impairment test

On June 19, 2013, we announced the launch of the Shift Plan. Through this plan and the remainder of the Performance Program, we aimed at (i) reducing our fixed-cost base by 1 billion between 2013 and 2015 (including fixed cost savings to be realized under the Performance Program) through the adoption of direct-channel operations, additional consolidation of SG&A (selling, general and administrative) functions, and by refocusing our R&D capacity, (ii) generating revenues for the Core Networking segment of more than 7 billion with an operating margin exceeding 12.5% in 2015, and (iii) generating segment operating cash flow from the Access segment exceeding 200 million by the end of 2015.

The total restructuring costs related to The Shift Plan were 944 million for all actions taken between 2013 and 2015 compared to the initial estimate of 950 million. For the year ended December 31, 2015, the restructuring costs for these actions were 358 million of which 306 million was expensed. The remaining restructuring reserves related to The Shift Plan will be used in future quarters.

In compliance with sections 44 and 45 of IAS 36 “Impairment of Assets” and considering that we believe we are not committed to a restructuring program as long as we have not been able to expense it, we exclude future restructuring costs (and corresponding cost savings), if they are not expensed, from the value in use determined for the annual impairment test of goodwill. On the other hand, we fully took into account these future cash outflows and inflows in assessing the recoverability of our deferred tax assets and in determining the fair value less costs to sell of cash generating units (CGU), corresponding to the methodology described in Note 2c to our consolidated financial statements. We arrive at fair value less costs to sell of a CGU by basing it on a weighted average of three discounted cash flow approaches (two of the three using discounted residual values that are based respectively on a Sales multiple and an Operating Profit multiple), to arrive at a fair value that reflects assumptions that market participants would use when pricing a CGU.

 

 

 

 

53


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Overview of 2015

 

 

6.1 Overview of 2015

 

In 2015, the telecommunications equipment and related services market witnessed mixed trends across different regions. Investments in ultra-broadband access technologies, such as LTE, led to robust investments in the U.S. notably in the second half of the year. Spending in China continued to be focused on 4G LTE deployments, accelerating from 2014 levels, while the telecommunications equipment market in Europe continued to show signs of easing.

In addition to regional trends, industry trends also played a significant role in shaping the spending for telecommunications equipment and related services in 2015. The telecommunications industry continues to experience fast changes driven by the massive adoption of new mobile devices and of new applications and services. Growth of data traffic has put significant pressure on telecommunications providers to improve their networks in terms of coverage, capacity and quality. To meet these demands, network operators continue their transition to all-IP architectures, with an emphasis on fast access to their networks through copper, fiber, LTE and new digital services delivery. We are also seeing similar trends with cable operators, who are investing to deploy high-speed networks. Additionally, network and cloud infrastructure are intersecting, allowing for the hosting of enterprise and consumer applications. Web scale companies, such as Amazon and Google, and large enterprises are driving the development of huge data centers, providing seamless IP interconnection and digital services delivery on a large scale. IP routing is at the heart of the telecommunications equipment and related services industry transformation, impacting fixed and mobile broadband as well as cloud services.

This combination of regional and industry trends resulted in mixed spending in the market for telecommunications equipment and related services in 2015. These trends, in addition to other factors, such as changes in foreign exchange rates, were drivers of how our own businesses performed in 2015, with total sales increasing 8.3% compared to 2014. Details on segment performance can be found in Chapter 6.2 “Consolidated and segment results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014.”

To better align ourselves with these industry trends, on June 19, 2013 we announced The Shift Plan, a detailed three-year plan to reposition our Company as a specialist provider of IP and Cloud Networking and Ultra-Broadband Access, the high-value equipment and services that are essential to high-performance networks.

As of December 31, 2015, the Group successfully completed The Shift Plan, with an update of key elements below:

 

·   Investing in our Core Networking businesses (which include IP Routing, IP Transport, IP Platforms and associated services). We are expecting that these businesses will be our growth engines in the future. We originally aimed to generate revenues at or above 7 billion from our Core Networking
   

segment in 2015, and to improve Core Networking segment’s contribution to our segment operating margin to at or above 12.5% in 2015. As part of our third quarter 2015 earnings presentation, the Group updated these targets, expecting revenues from our Core Networking segment for 2015 to be in a range of 6.8-7.0 billion and segment operating margin as a percentage of segment revenues to be at a level similar to 2014, which was 10.6%. We define segment operating margin as income (loss) from operating activities before restructuring costs, litigations, transaction related costs, gain/loss on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments (excluding the negative non-cash impacts of Lucent’s purchase price allocation) divided by revenues. In 2015, Core Networking revenues were 6,780 million and segment operating margin was 10.0% of revenues;

 

·   Increasing segment operating cash flow from our Access segment. We defined segment operating cash flow as income (loss) from operating activities before restructuring costs, litigations, transaction related costs, gain/loss on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments (excluding the negative non-cash impacts of Lucent’s purchase price allocation) plus the change in operating working capital (as defined in Note 17 to our consolidated financial statements). Our objective was to generate operating cash flow from the Access segment at or above 200 million in 2015 (We had previously set a target of 250 million which we adjusted to take into account the sale of the Enterprise business and LGS Innovations in 2014). As part of our third quarter 2015 earnings presentation, the Group updated this target, expecting to largely exceed the target of 200 million of operating cash flow in 2015. Operating cash flow for the Access segment was 627 million in 2015, which represented an increase of 579 million compared to 2014, stemming primarily from improved profitability as well as improved operating working capital;

 

·   Market diversification: We believed that a successful implementation of The Shift Plan would enable us to improve the way we access the market, resulting in a business that is better leveraged, by addressing new customers including cable operators, webscale and large technology enterprises. In 2015, approximately 9% of our revenues were with non-telecommunications customers. Furthermore, market diversification has led us to redesign our sales and marketing strategy to leverage our new focused product and services portfolio and help us to identify new market segments such as data centers;

 

·  

Rightsizing of the cost structure: Through successful implementation of The Shift Plan, the Group targeted 950 million of fixed cost savings in 2015 compared to our 2012 cost base at constant exchange rates (we had previously set a target of 1 billion which we adjusted to take into account the sale of the Enterprise business and LGS

 

 

 

 

54


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Overview of 2015

 

  Innovations in 2014), by significantly reducing SG&A expenses, optimizing research and development investments, refocusing and unlocking innovation, implementing delivery and supply chain/manufacturing efficiencies and reducing product complexity while improving quality. As of December 31, 2015, 1,031 million of fixed cost savings had been generated compared to our 2012 base, of which 356 million was generated in 2015, 340 million in 2014, and 335 million in 2013;

 

·   Generating cash from dispositions: We targeted at least 1 billion of cash over the 2013-2015 period through asset dispositions. We announced the following closed disposals:

 

    the sale of LGS Innovations Inc., our Government business, to a U.S.-based company owned by a Madison Dearborn Partners-led investor group that includes CoVant which was completed on March 31, 2014;

 

    the sale of 85% of Alcatel-Lucent Enterprise to China Huaxin, a technology investment company which was completed on September 30, 2014;

 

    the sale of our cyber-security services and communications security activities to Thales, which was completed on December 31, 2014;

 

    the sale of our 40% ownership interest in Apollo submarine cable in 2015; and

In 2014, we also announced our intent to explore the capital opening of our subsidiary Alcatel-Lucent Submarine Networks (ASN) through an IPO. However, in October 2015, we announced that we would continue to operate ASN as a wholly-owned subsidiary and would continue to execute on ASN’s strategic roadmap.

 

Given the contemplated transaction with Nokia, no other asset disposals were considered.

 

·   Self-funded plan and financial sustainability: We successfully completed The Shift Plan’s goal to strengthen our balance sheet from 2013 through 2015. By the end of 2014, our debt was reprofiled, maturity was lengthened and interest costs were reduced. At the end of 2015, the Group had a net cash position of 1,409 million compared to a net debt position of 794 million at the end of the second quarter of 2013, when The Shift Plan started.

Through the efforts mentioned above, enabling the company to generate free cash flow on a sustainable basis, with a target of being free cash flow positive overall in 2015 was the most important goal of The Shift Plan. We largely exceeded our target, as we had free cash flow of 626 million in 2015, compared to an outflow of 668 million in 2012, prior to implementing The Shift Plan. Management believes that providing our investors with our free cash flow calculation facilitates the understanding of the company’s ability to generate cash on a sustainable basis in addition to the operational cost savings realized as part of The Shift Plan. The operating model we implemented as part of The Shift Plan allowed for a cost structure that was more aligned with our peers and provided a lower breakeven point, primarily through sales and marketing efficiency, R&D resource allocation and procurement optimization. The reconciliation of net cash provided (used) by operating activities, which is the most comparable financial measure to free cash flow found on the cash flow statement (1,177 million in 2015 as compared to (144) million in 2012) can be found in Note 27 to our consolidated financial statements in this 2015 annual report and in our 2014 annual report for 2012 information).

 

 

6.2 Consolidated and segment results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014

 

The following discussion takes into account our results of operations for the year ended December 31, 2015 and December 31, 2014, including the impact of the sale of 85% of the Enterprise business in September 2014, which was treated as a discontinued operation in 2014. The 2014 results have been restated to take into account the retroactive impact of a change in accounting treatment for the recognition of certain deferred tax assets, the details of which can be found in Note 4 to our consolidated financial statements in this 2015 annual report.

Revenues. Revenues totaled 14,275 million in 2015, an increase of 8.3% from 13,178 million in 2014. Approximately 69% of our revenues for 2015 were 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. If there had been constant exchange rates in 2015 as compared to 2014 our consolidated revenues would have decreased by approximately 3.7% instead of the 8.3% increase actually reported. This is based on applying (i) to our sales made directly in currencies other than the euro effected during 2015, the average exchange rate that applied for 2014, instead of the average exchange rate that applied for 2015, and (ii) to our exports (mainly from Europe) effected during 2015 which are denominated in other currencies and for which we enter into hedging transactions, our average hedging rates that applied for 2014. Our management believes that providing our investors with our revenues for 2015 at a constant exchange rate facilitates the comparison of the evolution of our revenues with that of our competitors in the industry.

 

 

 

 

55


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014

 

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 and constant perimeter:

 

(In millions of euros)  

Year ended

December 31,

2015

   

Year ended

December 31,

2014

    % Change  
                 
Revenues as reported     14,275        13,178        8.3%   
Conversion impact euro/other currencies     (1,425)       
Hedging impact euro/other currencies     (157)       
Revenues at constant rate and constant perimeter     12,693        13,178        -3.7%   
   

Revenues by Segment and division

The following table sets forth revenues by segment and division:

 

(In millions of euros)   2015     2014  
                 
Core Networking     6,780        5,966   
   

IP Routing

    2,669        2,368   

IP Transport

    2,450        2,114   

IP Platforms

    1,661        1,484   
   
Access     7,482        7,157   
   

Wireless

    4,896        4,685   

Fixed

    2,268        2,048   

Managed Services

    262        369   

Licensing

    56        55   
   
                 
Other and Unallocated     13        55   
                 
TOTAL     14,275        13,178   
   

 

Core Networking segment

Revenues in our Core Networking segment, which consists of our IP Routing, IP Transport and IP Platforms divisions, were 6,780 million in 2015, an increase of 13.6% from 5,966 million in 2014, using current exchange rates. When we translate the non-euro portion of Core Networking 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. If there had been constant exchange rates in 2015 as compared to 2014, our Core Networking segment revenues would have increased by 4.1% instead of the 13.6% increase actually reported.

Revenues in our IP Routing division were 2,669 million in 2015, an increase of 12.7% from 2,368 million in 2014. Excluding the impact from foreign exchange rates, this business would have grown approximately 2.0%, driven primarily by strength in Europe, Middle East and Africa (EMEA) and Central and Latin America (CALA), which were slightly offset by declines in other regions, notably North America and Asia Pacific (APAC). Our IP Core router, the 7950 XRS, grew at a strong rate, albeit from a small base, and continued to build market momentum throughout the year, with 55 total contracts as of the end of 2015. Nuage Networks™, our wholly owned subsidiary focused on software defined networking (SDN) solutions, continued to register wins across various customers beyond our traditional service providers, closing 2015 with 50 customers.

Revenues in our IP Transport division, which includes our Terrestrial and Submarine Optics businesses, were 2,450 million in 2015, an increase of 15.9% from 2,114 million in 2014. Excluding the impact from foreign exchange rates, this business would have grown approximately 9.6% in 2015. Within IP Transport, 2015 marked a year of recovery for our terrestrial business, as revenue growth was driven by our WDM portfolio, notably in EMEA, Asia Pacific excluding China, and CALA. Our 1830 Photonic Service Switch continued to grow as a percentage of total optical revenues in 2015, reaching 61% in 2015, compared to 49% in 2014. Our 100 Gigabit optical single carrier coherent technology continues to be one of the growth drivers in our WDM portfolio, as its relative share of port shipments continues to increase, to 46% in 2015 from 34% in 2014. Our Submarine Optics business showed strong growth in 2015 as the upward cycle recovery started to occur and our order backlog prepared us positively for 2016.

Revenues in our IP Platforms division, which includes software and related services, were 1,661 million in 2015, an increase of 11.9% from 1,484 million in 2014. Excluding the impact from foreign exchange rates, this business would have declined 0.3%, as growth in next-generation technologies such as IP Multimedia Subsystems (IMS) for Voice over LTE (VoLTE), particularly in North America, was more than offset by declines related to the tail-end of the phase-out of legacy businesses. We also experienced strong commercial traction in IP Platforms such as IMS for VoLTE as we exited 2015, notably in EMEA and APAC.

 

 

 

 

56


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014

 

Access segment

Revenues in our Access segment, which consists of our Wireless Access, Fixed Access, Managed Services and Licensing divisions, were 7,482 million in 2015, an increase of 4.5% from 7,157 million in 2014, using current exchange rates. When we translate the non-euro portion of Access 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. If there had been constant exchange rates in 2015 as compared to 2014, our Access segment revenues would have decreased by 7.6% instead of the 4.5% increase actually reported.

Revenues in our Wireless Access division increased 4.5% in 2015, to 4,896 million from 4,685 million in 2014. Excluding the impact from foreign exchange rates, this business would have declined 10.0% as strength in 4G LTE, which was concentrated in the U.S. and in China, was more than offset by declines in legacy technologies and services. We continued to expand our global footprint in LTE in 2015, ending the year with 90 customers in 48 countries. In 2015, we also expanded our focus on small cell adoption across our residential, enterprise and metrocell portfolio, now with 87 operators.

 

Revenues in our Fixed Access division were 2,268 million in 2015, an increase of 10.7% from 2,048 million in 2014. Excluding the impact from foreign exchange rates, this business would have increased 2.3% in 2015, as growth in broadband access technologies, including copper and fiber, was driven by Asia Pacific, notably in Australia, and in CALA, but was partially offset by declines in Europe and North America. Next generation technologies, such as G.fast, Vplus and TWDM-PON, continued to see market traction as evidenced by numerous commercial deployments and trials announced during the year.

Revenues in our Managed Services division were 262 million in 2015 compared to 369 million in 2014, a decrease of 29.0%, as this business continued to be impacted by our strategy to terminate or restructure margin-dilutive contracts. Excluding the impact from foreign exchange rates, this business would have declined 32.8%.

Revenues in our Licensing division were 56 million in 2015 compared to 55 million in 2014, an increase of 1.8%. Excluding the impact from foreign exchange rates, this business would have declined 1.8%.

 

 

Revenues by geographical market

Revenues in 2015 and in 2014 by geographical market (calculated based upon the location of the customer) are as shown in the table below:

 

(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  
         
2015     817        2,101        281        1,459        1,499        5,913        1,192        1,013        14,275   
   
2014     771        1,929        282        1,342        1,289        5,488        1,009        1,068        13,178   
   

% Change 2015 vs. 2014

    6%        9%        0%        9%        16%        8%        18%        -5%        8%   
   

 

In 2015, the United States accounted for 41.4% of revenues, down from 41.6% in 2014. Revenues increased 8% in the U.S. as sales benefitted from a stronger US dollar despite an overall tougher spending environment compared to 2014, with some pockets of growth, including 4G LTE. Europe accounted for 22.4% of revenues in 2015 (5.7% in France, 14.7% in Other Western Europe and 2.0% in Rest of Europe), down from 22.6% in 2014 (5.9% in France, 14.6% in Other Western Europe and 2.1% in Rest of Europe). Europe witnessed full year growth driven primarily by strength in both IP Routing and IP Transport. Within Europe, revenues increased 6% in France, 9% in Other Western Europe and were flat in Rest of Europe. Asia-Pacific accounted for 20.7% of revenues in 2015 (10.2% in China and 10.5% in Other Asia Pacific), up from 20.0% in 2014 (10.2% in China and 9.8% in Other Asia Pacific), as growth in 4G LTE in China in addition to overall strength in Australia and India were partially offset by declines in Japan. Revenues in Other Americas were driven by strength in Central and Latin America in 2015 as revenues grew 18% from 2014 and its share of total revenue increased from 7.7% to 8.4%. The Rest of World share of total revenue decreased to 7.1% in 2015 compared to 8.1% in 2014, as revenues decreased 5% in the region, driven by weakness in the Middle East and Africa.

Gross Profit. In 2015, gross profit as a percentage of revenues increased to 36.0% of revenues compared to 33.4% in 2014, and increased in absolute terms, to 5,143 million in 2015 from 4,408 million in 2014. The increase in gross profit was mainly attributable to improved profitability in addition to favorable product mix, notably related to software sales, in several business lines.

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 overall 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. In 2015, we witnessed trends, where, as noted above, a shift in product mix positively impacted gross profit.

Administrative and selling expenses. In 2015, administrative and selling expenses were 1,761 million or 12.3% of revenues compared to 1,621 million or 12.3% of revenues in 2014. The 8.6% increase in administrative and selling expenses year-over-year reflects the impact of a stronger US dollar on our expenses in 2015, which were partially offset by efforts to reduce fixed costs as part of The Shift Plan. Included in administrative and

 

 

 

 

57


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2015 compared to the
year ended December 31, 2014

 

selling expenses for 2014 are non-cash purchase accounting entries resulting from the Lucent business combination of 27 million.

Research and development costs. Research and development costs were 2,378 million or 16.7% of revenues in 2015, after the net impact of capitalization of 31 million of development expense, an increase of 7.4% from 2,215 million or 16.8% of revenues after the net impact of capitalization of (2) million of development expense in 2014. The 7.4% increase in research and development costs reflects the impact of a stronger US dollar on our R&D expenses in 2015, which were partially offset by efforts to reduce fixed costs as part of The Shift Plan. Capitalization of R&D expense had a positive impact of 31 million in 2015 compared to 2014, reflecting the fact that new R&D costs capitalized were greater than the amortization of our capitalized R&D costs during this period. Included in research and development costs are non-cash purchase accounting (PPA) entries resulting from the Lucent business combination of 27 million in 2015 and 24 million in 2014.

Income (loss) from operating activities before restructuring costs, litigations, transaction related costs, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments. In 2015, income from operating activities before restructuring costs, litigations, transaction related costs, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments was 1,004 million in 2015 compared to income of 572 million in 2014. The improvement in 2015 reflects higher gross profits partially offset by higher administrative and selling expenses and research and development costs, the increase of which was due to the impact of the stronger US dollar on our operating expenses. Non-cash purchase accounting (PPA) entries resulting from the Lucent business combination had a negative impact of 25 million in 2015, which was lower than the impact of 51 million in 2014 mainly due to the phasing out of amortization related to R&D expenses in 2015.

 

 

The tables below set forth our revenues and segment operating income (loss) for the years ended December 31, 2015 and December 31, 2014:

 

(In millions of euros)                              
Twelve months ended December 31, 2015  

Core

Networking

    Access     Total
Reportable
Segments
   

Other and

unallocated

amounts

    Total  
         
Revenues     6,780        7,482        14,262        13        14,275   
   
Segment Operating Income (Loss)     678        423        1,101        (72)        1,029   
   
PPA Adjustments (excluding restructuring costs and impairment of assets)             (25)   
   
Income (loss) from operating activities before restructuring costs, litigations, transaction related costs, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments             1,004   
   
                               
(In millions of euros)                              
Twelve months ended December 31, 2014  

Core

Networking

    Access     Total
Reportable
Segments
   

Other and

unallocated

amounts

    Total  
         
Revenues     5,966        7,157        13,123        55        13,178   
   
Segment Operating Income (Loss)     630        42        672        (49)        623   
   
PPA Adjustments (excluding restructuring costs and impairment of assets)             (51)   
   
Income (loss) from operating activities before restructuring costs, litigations, transaction related costs, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments             572   
   

 

In 2015, a segment operating income of 1,029 million for the Group, adjusted for 25 million in PPA yielded income from operating activities before restructuring costs, litigations, transaction related costs, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments of 1,004 million. In 2014, a segment operating income of 623 million for the Group, adjusted for 51 million in PPA yielded an income from operating activities before restructuring costs, litigations, gain/(loss) on disposal of

consolidated entities, impairment of assets and post-retirement benefit plan amendments of 572 million.

Operating income in our Core Networking segment was 678 million or 10.0% of revenues in 2015, compared with an operating income of 630 million or 10.6% of revenues in 2014. The year-over-year improvement in Core Networking segment operating income reflects the efforts we have made to improve our cost structure, leading to higher operating income contributions from both IP Transport and IP Platforms.

 

 

 

 

58


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2015 compared to the
year ended December 31, 2014

 

Operating income in our Access segment was 423 million or 5.7% of revenues in 2015, compared with an operating income of 42 million or 0.6% of revenues in 2014. The year-over-year improvement in our Access segment operating income reflects the work accomplished to improve our cost structure to achieve profitability in our Wireless Access division as part of The Shift Plan in addition to continued strong contribution from our Fixed Networks division.

Restructuring Costs. Restructuring costs were 401 million in 2015, compared to 574 million in 2014. The lower amount of restructuring costs in 2015 reflects a reduction in costs as a number of restructuring and outsourcing initiatives under The Shift Plan began in 2014, driving costs higher.

Litigations. In 2015, we booked a litigation charge of 31 million mainly related to environmental litigations compared to 2014, when we booked a litigation credit of 7 million.

Gain/(loss) on disposal of consolidated entities. In 2015, we recognized a loss on the disposal of consolidated entities of 1 million, compared to 2014, when we recognized a gain on the disposal of consolidated entities of 20 million mainly related to a 39 million gain from the sale of our cyber-security services and solutions and communications services activities partially offset by an 11 million loss recognized related to the sale of LGS Innovations LLC.

Transaction-related costs. In 2015, we recognized 104 million of costs related to the Nokia exchange offer that was announced in April, 2015. There were no transaction-related costs in 2014.

Impairment of assets. In the third quarter of 2015, we booked an impairment of assets charge of 193 million related to the goodwill of Alcatel-Lucent Submarine Networks, taking into account all relevant circumstances, in connection with our announcement that we would continue to operate this business as a wholly-owned subsidiary. In 2014, we did not book any charges related to the impairment of assets.

Post-retirement benefit plan amendments. In 2015, we booked a 404 million credit related to the resulting gain arising out of the lump-sum payments that we made to those U.S. Management Pension Plan and U.S. Inactive Occupational Pension Plan beneficiaries who opted to accept our one-time offer to convert their current monthly pension payment to a lump-sum payment. In 2014, we booked a 112 million credit that included (i) an 80 million gain related to a reduction in our obligation to pay for formerly represented retirees who are subject to annual dollar caps in exchange for a three year extension of post-retirement healthcare benefits, (ii) a 25 million gain related to the discontinuation of the subsidy for retiree healthcare benefits for former Management retirees who retired on or after March 1, 1990 and who are under 65 years old and (iii) a 7 million gain related to the conversion of defined benefit pension plans for current active Dutch employees into a defined contribution pension plan under which the Group no longer guarantees any pension increase.

Income (loss) from operating activities. Income (loss) from operating activities was 678 million in 2015, compared to

137 million in 2014. The improvement in income (loss) from operating activities in 2015 is due to higher gross profits, lower restructuring costs and higher contributions from post-retirement benefit plan amendments, partially offset by higher operating expenses, an impairment of assets charge, transaction related costs, a loss on disposal of consolidated entities and higher litigation charges.

Finance costs. Finance costs were 269 million in 2015, a decrease from 291 million in 2014. The decrease in finance costs in 2015 is mainly related to the full effect of the refinancing and the repayment prior to maturity of certain debt in the first half of 2014.

Other financial income (loss). Other financial losses were 136 million in 2015, compared to 211 million in 2014. In 2015, other financial loss consisted primarily of a loss of 121 million related to the financial component of pension and post-retirement benefit costs, mainly reflecting the impact from new mortality tables implemented in the U.S. at the end of 2014 and, to a lesser extent, from the updated mortality assumptions implemented in the fourth quarter of 2015 and a 25 million loss related to the partial repurchase of our Senior Notes due 2020. These losses were partially offset by a 102 million capital gain corresponding to the re-evaluation of the value of our 51% ownership interest in Alda Marine, a joint venture with Louis Dreyfus Armateurs, in connection with our buyout of Louis Dreyfus Armateurs’ interest in Alda Marine and a 26 million capital gain on the disposal of our 40% stake in a joint venture held by Alcatel-Lucent Submarine Networks. In 2014, other financial loss consisted primarily of (i) a 101 million loss related to the impact of the re-evaluation of the Alcatel-Lucent USA, Inc. Senior Secured Credit Facility that we repaid on August 19, 2014, (ii) a loss of 44 million related to the financial component of pension and post-retirement benefit costs and (iii) a loss of 30 million related to partial repurchase of our Senior Notes due 2016. These losses were partially offset by a reversal of impairment loss of 15 million.

Share in net income (losses) of associates and joint ventures. Share in net income of equity affiliates was 2 million in 2015, compared with 15 million in 2014.

Income (loss) before income tax and discontinued operations. Income (loss) before income tax and discontinued operations was an income of 275 million in 2015 compared to a loss of 350 million in 2014.

Income tax (expense) benefit. We had an income tax expense of 24 million in 2015, compared to an income tax benefit of 327 million in 2014. The income tax expense for 2015 resulted from a current income tax charge of 82 million which was partially offset by a net deferred income tax benefit of 57 million. The 57 million net deferred income tax benefit was mainly related to the reassessment of the recoverability of deferred tax assets in the United States. The income tax benefit for 2014 resulted from a current income tax charge of 61 million which was offset by a net deferred income tax benefit of 388 million. The 388 million net deferred income tax benefit mainly includes 363 million of deferred tax assets recognized due to the reassessment of the recoverability of deferred tax assets in the United States.

 

 

 

 

59


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014

 

Income (loss) from continuing operations. We had an income from continuing operations of 251 million in 2015 compared to a loss of 23 million in 2014.

Income (loss) from discontinued operations. We had a loss from discontinued operations of 16 million in 2015 mainly related to additional carve-out costs for the Enterprise business we disposed of in 2014. We had a loss from discontinued operations of 49 million in 2014 mainly related to the disposal of our Enterprise business.

 

Non-controlling Interests. Non-controlling interests accounted for an income of 29 million in 2015, compared to an income of 35 million in 2014. Non-controlling interests for both periods are due largely to income from our operations in China through Alcatel-Lucent Shanghai Bell, Co. Ltd. and its subsidiaries.

Net income (loss) attributable to equity holders of the parent. A net income of 206 million was attributable to equity holders of the parent in 2015, compared to a net loss of 107 million in 2014.

 

 

6.3 Consolidated and segment results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013

 

The following discussion takes into account our results of operations for the year ended December 31, 2014 and December 31, 2013, on the following basis:

 

·   Due to the sale of 85% of the Enterprise business in 2014, results pertaining to this business for 2014 were treated as discontinued operations and results for 2013 have been re-presented accordingly. Results for 2013 have also been re-presented to reflect the subsequent immaterial perimeter adjustments resulting from the sale of Enterprise.

 

·   The results for both periods have been restated to take into account the retroactive impact of a change in accounting treatment for the recognition of certain deferred tax assets, the details of which can be found in Note 4 to our consolidated financial statements in this 2015 annual report.

Revenues. Revenues totaled 13,178 million in 2014, a decline of 4.6% from 13,813 million in 2013. Approximately 64% of our revenues for 2014 were 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. If there had been constant exchange rates in 2014 as compared to 2013 our consolidated revenues would have decreased by approximately 4.2% instead of the

4.6% decrease actually reported. This is based on applying (i) to our sales made directly in currencies other than the euro effected during 2014, the average exchange rate that applied for 2013, instead of the average exchange rate that applied for 2014, and (ii) to our exports (mainly from Europe) effected during 2014 which are denominated in other currencies and for which we enter into hedging transactions, our average hedging rates that applied for 2013. In the fourth quarter of 2014, the strengthening in the value of other currencies including the U.S. dollar, relative to the euro had a positive effect on our reported revenues. Our management believes that providing our investors with our revenues for 2014 at a constant exchange rate facilitates the comparison of the evolution of our revenues with that of our competitors in the industry.

Additionally, if there had been constant exchange rates in 2014 as compared to 2013 and a constant perimeter, meaning that we would exclude revenues related to LGS Innovations that was sold at the end of the first quarter of 2014, our consolidated revenues would have decreased by approximately 3.0% instead of the 4.6% decrease actually reported. Our management uses our revenues for 2014 at a constant exchange rate and constant perimeter internally and they believe that providing our investors with this information facilitates the comparison of the evolution of our revenues with that of our competitors in the industry.

 

 

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

 

(In millions of euros)  

Year ended

December 31,

2014

   

Year ended

December 31,

2013

    % Change  
                 
Revenues as reported     13,178        13,813        -4.6%   
Conversion impact euro/other currencies     60          0.5%   
Hedging impact euro/other currencies     (1)          0.0%   
Perimeter (LGS)     (41)        (210)     
Revenues at constant rate and constant perimeter     13,196        13,603        -3.0%   
   

 

 

 

60


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013

 

Revenues by Segment and division

The following table sets forth revenues by segment and division:

 

(In millions of euros)   2014     2013  
   
Core Networking     5,966        6,151   
   

IP Routing

    2,368        2,253   

IP Transport

    2,114        2,120   

IP Platforms

    1,484        1,778   
   
Access     7,157        7,447   
   

Wireless

    4,685        4,510   

Fixed

    2,048        2,069   

Managed Services

    369        791   

Licensing

    55        77   
   
Other     41        210   
   
Other and Unallocated     14        5   
   
TOTAL     13,178        13,813   
   

 

Core Networking segment

Revenues in our Core Networking segment, which consists of our IP Routing, IP Transport and IP Platforms divisions, were 5,966 million in 2014, a decrease of 3.0% from 6,151 million in 2013, using current exchange rates. When we translate the non-euro portion of Core Networking 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. If there had been constant exchange rates in 2014 as compared to 2013, our Core Networking segment revenues would have decreased by 2.4 % instead of the 3.0% decrease actually reported.

Revenues in our IP Routing division were 2,368 million in 2014, an increase of 5.1% from 2,253 million in 2013. The year-over-year growth was driven by the continued success of our IP/MPLS service router portfolio, as service providers invest to keep up with the growing demand for bandwidth for services such as video. In 2014, we expanded our portfolio with the introduction of the Virtualized Service Router (VSR) which allows service providers and large enterprises to build a flexible network and operate service router software on standard servers. Our IP Core router, the 7950 XRS, continued to build momentum through 2014, with 36 total contracts as of the end of 2014. Nuage Networks™, our wholly owned subsidiary focused on software defined networking (SDN) solutions, continued its traction in the marketplace, closing 2014 with 16 customers. Nuage Networks also introduced its Virtualized Networks Services (VNS) solution which will help enterprises and service providers extend the benefits of SDN to branch locations.

Revenues in our IP Transport division, which includes our Terrestrial and Submarine Optics businesses, were 2,114 million in 2014, a decrease of 0.2% from 2,120 million in 2013. Within IP Transport, we witnessed mixed trends as revenues in our terrestrial business increased in 2014, driven by our strength in our WDM portfolio. This increase was offset by declines in our Submarine Optics business, which showed signs

of an upward cycle recovery and order backlog build-up as we exited 2014. Within our WDM portfolio, our 1830 Photonic Service Switch continues to grow as a percentage of total optical revenues, reaching 49% in 2014, compared to 38% in 2013. Our 100 Gigabit optical single carrier coherent technology continues to be one of the growth drivers in our WDM portfolio, as its relative share of port shipments continues to increase, to 34% in 2014 from 26% in 2013.

Revenues in our IP Platforms division, which includes software and related services, were 1,484 million in 2014, a decrease of 16.5% from 1,778 million in 2013. 2014 was a transitional phase for the IP Platforms business, reflecting our strategy to rationalize the portfolio and leverage on growth engines such as IP Communications (including IMS and Subscriber Data Management), Motive Customer Experience and Policy & Charging. Our portfolio rationalization drove the decline in revenues in 2014, as well as weaker revenues from legacy platforms. These trends were partially offset by growth in our Motive portfolio and resilience in our IMS portfolio which was impacted by delayed VoLTE rollouts in the latter part of the year.

Access segment

Revenues in our Access segment, which consists of our Wireless Access, Fixed Access, Managed Services and Licensing divisions, were 7,157 million in 2014, a decrease of 3.9% from 7,447 million in 2013, using current exchange rates. When we translate the non-euro portion of Access 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. If there had been constant exchange rates in 2014 as compared to 2013, our Access segment revenues would have decreased by 3.6% instead of the 3.9% increase actually reported.

Revenues in our Wireless Access division increased 3.9% in 2014, to 4,685 million from 4,510 million in 2013. Within the Wireless Access business, we witnessed strong year-over-year

 

 

 

 

61


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013

 

growth in our LTE revenues, driven by strong U.S. investments throughout the year and LTE deployments in China, notably in the first half of the year. This growth overcame declines in legacy technologies. Throughout 2014, we continued to diversify our LTE customer base, now with over 70 contracts. In 2014, we also expanded our focus on small cell adoption, with 76 total customers and the announcement of our Multi-Standard Enterprise Small Cell device, in collaboration with Qualcomm that will allow operators to extend 3G, 4G LTE and Wi-Fi connectivity and coverage into the office for in-building coverage.

Revenues in our Fixed Access division were 2,048 million in 2014, a decrease of 1.0% from 2,069 million in 2013, as growth in VDSL2 vectoring and fiber, notably in Europe and Asia Pacific, excluding China, was offset by declines in legacy products and the slowdown in specific customer rollouts in North America in the latter part of the year. During 2014, we launched the industry’s first Time and Wavelength Division Multiplexed Passive Optical Networks (TWDM-PON) solution,

also known as NG-PON2, which can converge residential, business and mobile traffic onto one network. We also introduced our G.fast solution that allows operators to place fiber closer to subscribers’ homes, with 10 trials concluded in 2014.

Revenues in our Managed Services division were 369 million in 2014 compared to 791 million in 2013, a decrease of 53.4%, as this business continued to be impacted by our strategy to terminate or restructure margin-dilutive contracts.

Revenues in our Licensing division were 55 million in 2014 compared to 77 million in 2013, a decrease of 28.6%.

Other segment

Revenues in our Other segment, which included our Government business which was sold in the first quarter of 2014, were 41 million in 2014 compared to 210 million in 2013, which included a full year of results.

 

 

Revenues by geographical market

Revenues in 2014 and in 2013 by geographical market (calculated based upon the location of the customer) are as shown in the table below:

 

(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  
         
2014     771        1,929        282        1,342        1,289        5,488        1,009        1,068        13,178   
   
2013     798        2,125        361        1,097        1,230        5,986        1,209        1,007        13,813   
   

% Change 2014 vs. 2013

    -3%        -9%        -22%        22%        5%        -8%        -17%        6%        -4.6%   
   

 

In 2014, the United States accounted for 41.6% of revenues, down from 43.3% in 2013. Revenues declined 8% in the U.S. as investments in LTE were not enough to offset declines in other technologies, mainly in legacy optical and Fixed Access. Europe accounted for 22.6% of revenues in 2014 (5.9% in France, 14.6% in Other Western Europe and 2.1% in Rest of Europe), down from 23.8% in 2013 (5.8% in France, 15.4% in Other Western Europe and 2.6% in Rest of Europe). Europe witnessed encouraging trends in 2014, particularly in IP Routing, IP Transport and Fixed Networks, while revenues were tempered by the impact of the implementation of our strategy in Managed Services. Within Europe, revenues declined in each area: 3% in France, 9% in Other Western Europe and 22% in Rest of Europe. Asia-Pacific accounted for 20.0% of revenues in 2014 (10.2% in China and 9.8% in Other Asia Pacific), up from 16.8% in 2013 (7.9% in China and 8.9% in Other Asia Pacific), with growth mainly attributable to increased spending in China as LTE was deployed in the country. Revenues in Other Americas were negatively impacted by a slowdown in Central and Latin America in 2014 driving revenues to decline 17% from 2013, as its share of total revenue declined from 8.8% to 7.7%. The Rest of World share of total revenue increased to 8.1% in 2014 compared to 7.3% in 2013, as revenues increased 6% in the region.

Gross Profit. In 2014, gross profit as a percentage of revenues increased to 33.4% of revenues compared to 31.2% in 2013, and increased in absolute terms, to 4,408 million in 2014 from 4,322 million in 2013. The increase in gross profit was mainly attributable to a favorable product mix, operational improvements and reduced fixed costs.

We sell a wide variety of products in many geographic markets. Profitability per product can vary based on a product’s maturity and our overall 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 2014, we witnessed trends, where, as noted above, a shift in product mix positively impacted gross profit.

Administrative and selling expenses. In 2014, administrative and selling expenses were 1,621 million or 12.3% of revenues compared to 1,862 million or 13.4% of revenues in 2013. The 12.9% decline in administrative and selling expenses year-over-year reflects the progress we have made in reducing fixed costs as part of The Shift Plan launched in 2013. Included in administrative and selling expenses are non-cash purchase accounting entries resulting from the Lucent business combination of 27 million in 2014 and 32 million in 2013.

 

 

 

 

62


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013

 

 

Research and development costs. Research and development costs were 2,215 million or 16.8% of revenues in 2014, after the net impact of capitalization of (2) million of development expense, a decrease of 2.3% from 2,268 million or 16.4% of revenues after the net impact of capitalization of (34) million of development expense in 2013. The 2.3% decrease in research and development costs reflects a reduction in the overall level of R&D, notably for legacy technologies. Capitalization of R&D expense was negative in both 2014 and 2013, reflecting the fact that the amortization of our capitalized R&D costs was greater than new R&D costs capitalized during this period. Included in research and development costs are non-cash purchase accounting (PPA) entries resulting from the Lucent business combination of 24 million in 2014 and 54 million in 2013 with the decline due mainly to the phasing out of the amortization of certain in-process R&D.

 

Income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments. We recorded income from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments of 572 million in 2014 compared to income of 192 million in 2013. The improvement in 2014 reflects higher gross profits in addition to lower administrative and selling expenses and research and development costs. Non-cash purchase accounting (PPA) entries resulting from the Lucent business combination had a negative impact of 51 million in 2014, which was lower than the impact of 86 million in 2013 mainly due to the phasing out of the amortization of certain in-process R&D.

 

 

The tables below set forth our revenues and segment operating income (loss) for the years ended December 31, 2014 and December 31, 2013:

 

(In millions of euros)                                    
Twelve months ended December 31, 2014  

Core

Networking

    Access     Other     Total
Reportable
Segments
   

Other and

unallocated

amounts

    Total  
         
Revenues     5,966        7,157        41        13,164        14        13,178   
   
Segment Operating Income (Loss)     630        42        -        672        (49)        623   
   
PPA Adjustments (excluding restructuring costs and impairment of assets)               (51)   
   
Income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments               572   
   
                                     
(In millions of euros)                                    
Twelve months ended December 31, 2013  

Core

Networking

    Access     Other     Total
Reportable
Segments
   

Other and

unallocated

amounts

    Total  
         
Revenues     6,151        7,447        210        13,808        5        13,813   
   
Segment Operating Income (Loss)     479        (85)        5        399        (121)        278   
   
PPA Adjustments (excluding restructuring costs and impairment of assets)               (86)   
   
Income (loss) from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments               192   
   

 

In 2014, a segment operating income of 623 million for the Group, adjusted for 51 million in PPA yielded income from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments of 572 million. In 2013, a segment operating income of 278 million for the Group, adjusted for 86 million in PPA yielded an income from operating activities before restructuring costs, litigations, gain/(loss) on disposal of consolidated entities, impairment of assets and post-retirement benefit plan amendments of 192 million.

Operating income in our Core Networking segment was 630 million or 10.6% of revenues in 2014, compared with an operating income of 479 million or 7.8% of revenues in 2013. The year-over-year improvement in Core Networking segment operating income reflects the efforts we have made to improve our cost structure, notably with operating expenses, leading to higher operating income contributions from certain divisions.

Operating income in our Access segment was 42 million in 2014, compared with an operating loss of 85 million in 2013. The year-over-year improvement in our Access segment

 

 

 

 

63


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013

 

operating income reflects the work we are doing to improve our cost structure to achieve profitability in our Wireless Access division as part of The Shift Plan in addition to continued strong contribution from our Fixed Networks division.

Segment operating income in the Other segment was 0 million in 2014, as this business was sold in the first quarter of 2014, compared with an income of 5 million or 2.4% of revenues in 2013, which included a full year of results.

Restructuring Costs. Restructuring costs were 574 million in 2014, compared to 518 million in 2013. The cost of new restructuring plans increased in 2014 compared to 2013 due to the implementation of The Shift Plan and primarily related to severance payments, early retirement payments, costs for notice periods not worked, training costs of terminated employees, costs linked with the closure of facilities or the discontinuance of product lines and costs arising from plans that materially change the scope of business undertaken by the Group.

Litigations. In 2014, we booked a litigation credit of 7 million compared to 2013, when we booked a litigation charge of 2 million.

Gain/(loss) on disposal of consolidated entities. In 2014, we recognized a gain on the disposal of consolidated entities of 20 million mainly related to a 39 million gain from the sale of our cyber-security services and solutions and communications services activities partially offset by an 11 million loss recognized related to the sale of LGS Innovations LLC, compared to 2013, when we booked a gain on the disposal of consolidated entities of 2 million.

Impairment of assets. In 2014, we did not book any charges related to the impairment of assets. In 2013, we booked an impairment of assets charge of 548 million, mainly related to our Wireless product division goodwill.

Post-retirement benefit plan amendments. In 2014, we booked a 112 million credit that included (i) an 80 million gain related to a reduction in our obligation to pay for formerly represented retirees who are subject to annual dollar caps in exchange for a three year extension of post-retirement healthcare benefits, (ii) a 25 million gain related to the discontinuation of the subsidy for retiree healthcare benefits for former Management retirees who retired on or after March 1, 1990 and who are under 65 years old and (iii) a 7 million gain related to the conversion of defined benefit pension plans for current active Dutch employees into a defined contribution pension plan under which the Group no longer guarantees any pension increase. In 2013, we booked a 135 million credit that included (i) a 55 million gain related to the change in retiree healthcare benefits for formerly represented retirees resulting from the extension of benefits until December 31, 2016 and a reduction in our obligation to pay for retirees who are subject to annual dollar caps, (ii) a 41 million gain related to the amendment of AUXAD, a French supplemental pension plan, to align it with the conditions of the French AGIRC (General Association of Pension Institutions for Managerial Staff) scheme, (iii) a 35 million gain related to an amendment of German pension plans where the traditional pension plans of most active

German employees have been transferred into a new cash balance plan whose benefits are lower than in previous plans and (iv) a gain of 4 million related to the amendment of our U.S. long term disability plan, where long-term medical benefits for disabled U.S. former employees will be provided by the retiree medical plan.

Income (loss) from operating activities. Income (loss) from operating activities was an income of 137 million in 2014, compared to a loss of 739 million in 2013. The improvement in income (loss) from operating activities in 2014 is due to no impairment charge, higher gross profits, lower administrative and selling expenses and research and development costs and a gain on disposal of consolidated entities, partially offset by higher restructuring costs and lower contributions from post-retirement benefit plan amendments.

Finance costs. Finance costs were 291 million in 2014, a decrease from 392 million in 2013. The decrease in finance costs was mainly due to a decrease in interest paid, from 462 million in 2013 to 359 million in 2014, slightly offset by a decrease in interest earned from 70 million in 2013 to 68 million in 2014. The 2014 decrease in interest paid is mainly due to the refinancing and balance sheet restructuring activities leading to a decrease in our gross financial debt, notably attributable to the early repayment in January 2014 of the outstanding U.S.$931 million on the 7.75% convertible trust preferred securities issued by Lucent Technologies Capital Trust I.

Other financial income (loss). Other financial losses were 211 million in 2014, compared to 318 million in 2013. In 2014, other financial loss consisted primarily of (i) a 101 million loss related to the impact of the re-evaluation of the Alcatel-Lucent USA, Inc. Senior Secured Credit Facility that we repaid on August 19, 2014, (ii) a loss of 44 million related to the financial component of pension and post-retirement benefit costs and (iii) a loss of 30 million related to partial repurchase of our Senior Notes due 2016. These losses were partially offset by a reversal of impairment loss of 15 million. In 2013, other financial losses consisted primarily of (i) 134 million related to a net loss on convertible bonds and notes repurchased in 2013, (ii) a loss of 84 million related to the financial component of pension and post-retirement benefit costs, (iii) a loss of 39 million related to the change of estimated future cash flows in respect of the irrevocable commitment we made to repay in January 2014 the 7.75% convertible trust preferred securities issued by Lucent Technologies Capital Trust I, (iv) a loss of 24 million related to the amortization of outstanding costs arising from the repayment of the Alcatel-Lucent USA, Inc. U.S.$500 million asset sale facility established in 2013, (v) a net loss of 24 million on foreign exchange and (vi) a loss of 21 million related to the accelerated amortization of outstanding costs related to the repayment of the Alcatel-Lucent USA, Inc euro tranche Senior Secured Credit Facility established in 2013.

Share in net income (losses) of equity affiliates. Share in net income of equity affiliates was 15 million in 2014, compared with 7 million in 2013.

 

 

 

 

64


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Consolidated and segment results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013

 

 

Income (loss) before income tax and discontinued operations. Income (loss) before income tax and discontinued operations was a loss of 350 million in 2014 compared to a loss of 1,442 million in 2013.

Income tax (expense) benefit. We had an income tax benefit of 327 million in 2014, compared to an income tax benefit of 106 million in 2013. The income tax benefit for 2014 resulted from a current income tax charge of 61 million which was offset by a net deferred income tax benefit of 388 million. The 388 million net deferred income tax benefit mainly includes 363 million of deferred tax assets recognized due to the reassessment of the recoverability of deferred tax assets in the United States. The income tax benefit for 2013 resulted from a current income tax charge of 56 million in addition to a net deferred income tax benefit of 162 million. The 162 million net deferred income tax benefit included: (i) 85 million in deferred tax benefits related to Alcatel-Lucent USA, Inc.’s post-retirement benefit plans, (ii) 64 million related to the reversal of deferred tax liabilities mainly related to the repayment of the Alcatel-Lucent USA, Inc. 2.875% Series A and B convertible debentures, the irrevocable commitment to repay the Lucent Technologies Capital Trust I’s 7.75% convertible trust preferred securities and the repayment of the 2015 OCEANE (iii) 58 million of other deferred income tax benefits, net, primarily related to the re-assessment of the recoverability of certain deferred tax assets in the U.S. and (iv) 45 million of deferred income tax benefits related to the reversal of deferred

tax liabilities accounted for in the purchase price allocation of Lucent. These benefits were slightly offset by a deferred tax charge of 23 million related to the post-retirement benefit plan amendments we implemented in 2013.

Income (loss) from continuing operations. We had a loss from continuing operations of 23 million in 2014 compared to a loss of 1,336 million in 2013.

Income (loss) from discontinued operations. We had a loss from discontinued operations of 49 million in 2014 mainly related to the disposal of our Enterprise business. We had a loss from discontinued operations of 25 million in 2013 mainly related to settlements of litigations related to businesses disposed of in prior periods and a post-closing purchase price adjustment in connection with the Genesys business disposal.

Non-controlling Interests. Non-controlling interests accounted for an income of 35 million in 2014, compared to an income of 10 million in 2013. The improvement in 2014 compared to 2013 is due largely to income from our operations in China through Alcatel-Lucent Shanghai Bell, Co. Ltd. and its subsidiaries.

Net income (loss) attributable to equity holders of the parent. A net loss of 107 million was attributable to equity holders of the parent in 2014, compared to a net loss of 1,371 million in 2013.

 

 

6.4 Liquidity and capital resources

Liquidity

 

Cash flow for the years ended December 31, 2015 and 2014

Overview. Cash and cash equivalents increased 1,027 million in 2015 from 3,878 million as of December 31, 2014 to 4,905 million as of December 31, 2015, mainly due to a significant increase of 1,050 million of our net cash generated by operating activities. This increase was the result of the actions taken as part of The Shift Plan since 2013.

Net cash provided (used) by operating activities. Net cash provided by operating activities was 1,177 million in 2015 compared to net cash provided of 127 million in 2014. Net cash provided by operating activities before changes in working capital, interest and taxes increased from 609 million in 2014 to 1,015 million for 2015. This increase was primarily due to a significant increase in profitability driven by an improved gross margin at 36.0% in 2015 compared to 33.4% in 2014.

Changes in working capital favorably impacted our net cash from operating activities before interest and taxes by 435 million in 2015 compared to a negative impact of 164 million in 2014 due to several factors. Changes in inventories and work in progress had a strong positive effect on the operating cash flow of 342 million in 2015 compared to a negative impact 72 million in 2014, mainly due to strong

revenues, particularly during the fourth quarter of 2015. Also, the change in trade receivables amounted to 93 million in 2015 compared to 18 million in 2014, mainly driven by good collections and the increased sale of receivables without recourse, principally in the U.S. Changes in accounts payable were negative at 227 million, due to a higher level of activity in 2015, compared to a negative effect of 167 million in 2014. Changes in other current assets and liabilities were significant at 275 million compared to a negative amount of 35 million in 2014 mainly driven by VAT collection and the increase in wage accruals.

Net interest and taxes paid amounted to 273 million in 2015 compared to 318 million in 2014. Interest paid decreased to 264 million in 2015 from 290 million in 2014. This decrease was primarily due to the full effect over 2015 of the refinancing and the repayment prior to maturity of certain debt in the first half of 2014.

Net cash provided (used) by investing activities. Net cash used by investing activities was 485 million in 2015 compared to net cash provided of 235 million in 2014. This change was mainly due to much less significant sales of marketable securities in 2015 than in 2014 (68 million in 2015 compared to 617 million in 2014). Capital expenditures slightly increased from 556 million in 2014 to 580 million in 2015. In 2015, we

 

 

 

 

65


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Liquidity and capital resources

 

acquired the 49% interest in Alda Marine previously held by our joint-venture partner Louis Dreyfus Armateurs for 76 million and a cable vessel for 26 million. This was the main reason for an increase in cash expenditures for obtaining control of consolidated companies or equity affiliates, from 14 million in 2014 to 109 million in 2015, which also contributed to the increased cash used by investing activities.

Net cash provided (used) by financing activities. Net cash used by financing activities amounted to 211 million in 2015 compared to 1,383 million in 2014.

On March 18, 2015, in connection with the acquisition of the 49% equity interest in Alda Marine and a cable vessel, Alcatel-Lucent Submarine Networks entered into a 85 million credit facility agreement with a seven-year maturity, which was fully drawn at that date.

On September 4, 2015, we repurchased an aggregate U.S.$300 million nominal amount of 6.75% Senior Notes due 2020.

In 2014 we issued convertible notes (OCEANE) in two tranches for an aggregate amount of 1,148 million. With the proceeds of these issuances, we repaid our remaining outstanding Senior Secured Credit Facility for a total nominal value of U.S.$1,724 million. We also repaid in 2014 (i) at the maturity date the remaining 274 million outstanding 6.375% Senior Notes, (ii) in full the outstanding principal amount of U.S.$931 million on the 7.75% Convertible Trust Preferred Securities due 2017 and (iii) an aggregate 232 million nominal amount of Senior Notes 2016.

The net positive effect of exchange rate changes was 505 million in 2015 compared to 633 million in 2014.

Disposed of or discontinued operations. Cash provided by discontinued operations was 41 million in 2015 compared to 170 million of cash used in 2014, both related to the disposal of our Enterprise business in 2014.

Capital resources

Resources. Over time, we may derive our capital resources from a variety of sources, including the generation of positive cash flow from on-going operations, proceeds from asset sales, the issuance of debt in various forms and credit facilities, including the Nokia Revolving Liquidity Support Facility and the Nokia Revolving Credit Facility. Our ability to continue to draw upon these resources is dependent upon a variety of factors, including our customers’ ability to make payments on outstanding accounts receivable, who may ask for extended payment terms during the year; the perception of our credit quality by lenders and investors; and the debt market conditions generally.

Given current conditions, access to the debt markets may not be relied upon at any given time. Also, although our on-going operations generated positive cash flow in 2015, this had not been the case in the previous years. Our cash, cash equivalents and marketable securities, including short-term investments, amounted to 6,531 million as of December 31, 2015. Although approximately 1,700 million of this cash, cash equivalents and

marketable securities are subject to exchange control restrictions in certain countries (primarily China) that may limit the use of such funds by our subsidiaries outside of the local jurisdiction, we do not expect that such restrictions will have an impact on our ability to meet our cash obligations.

Nokia Revolving Liquidity Support Facility.

On February 3, 2016, Nokia Corporation and Alcatel Lucent USA Inc. entered into a U.S.$2 billion Facility, which comprises:

 

·   Facility A, for U.S.$686 million, with a maturity date of June 30, 2017;

 

·   Facility B, for U.S.$546 million, with a maturity date of December 31, 2019; and

 

·   Facility C, for U.S.$768 million, with a maturity date of November 15, 2020.

Applicable interest rate is 2.40% per annum on drawn amounts. The commitment fee is 30% of 2.40% on available undrawn amounts.

The Facility was made available to Alcatel Lucent USA Inc. to finance the redemption of U.S.$700 million of its 6.750% Senior Notes due 2020, U.S.$500 million of its 8.875% Senior Notes due 2020, and U.S.$650 million of its 4.625% Senior Notes due 2017 (together, the “Notes”), including any related fees, costs and expenses, as well as for general purposes of the Alcatel Lucent Group. The Notes were redeemed in February, 2016.

Borrowings under the Facility rank pari passu with all other unsecured and unsubordinated indebtedness of Alcatel Lucent USA Inc.. The Facility does not contain any financial covenants. It does contain certain undertakings of Alcatel Lucent USA Inc. (including, for example, certain negative covenants, such as with respect to guarantees, indemnities and financial indebtedness), but none of these undertakings prevent the Borrower from engaging in any activities which would have been permitted under the indentures relating to the Notes.

Nokia Revolving Credit Facility

On April 13, 2016, Nokia Corporation and Alcatel-Lucent Participations entered into a 1 billion Revolving Credit Facility for a two-year term.

Applicable interest rate is EURIBOR plus a 0.95% margin per annum on drawn amounts. A utilization fee of 0.10%, 0.20% or 0.40% per annum depending on the level of use of the facility, is also applicable. The commitment fee is 35% of 2.40% on available undrawn amounts.

This Revolving Credit Facility is available for the general purposes of Alcatel-Lucent Participations.

Borrowings under the Revolving Credit Facility rank pari passu with all other unsecured and unsubordinated indebtedness of Alcatel-Lucent Participations. The Facility does not contain any financial covenants.

 

 

 

 

66


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Liquidity and capital resources

 

2013 Syndicated Bank Credit Facility.

On December 17, 2013, we had obtained a 504 million three-year revolving credit facility with a syndicate of 12 international banks. The availability of funds under the credit facility was not dependent upon Alcatel Lucent’s credit ratings. Alcatel Lucent’s ability to draw on the credit facility was conditioned upon compliance with a financial covenant linked to the Group’s capacity to cover its interest charges. Alcatel-Lucent USA Inc. and some subsidiaries of the Group had provided senior unsecured guarantees in respect of this revolving credit facility.

This revolving credit facility was cancelled on February 9, 2016. It had never been drawn prior to its termination.

March 2015 Credit Facility Agreement.

On March 18, 2015, in conjunction with the acquisition of the equity in ALDA Marine owned by our joint venture partner, Alcatel-Lucent Submarine Networks (ASN) entered into a 86 million credit facility agreement with a seven year maturity that was fully drawn at that date. Three vessels are subject to a mortgage under the credit facility.

6.75% Senior Notes due November 2020.

On September 2, 2015, Alcatel Lucent USA Inc. accepted for purchase an aggregate principal amount of U.S.$300 million of its 6.75% Senior Notes due November 2020, pursuant to its offer to purchase for cash up to U.S.$300 million. The purchase price of the Notes was U.S.$1,080 per U.S.$1,000 principal amount of Notes, plus accrued and unpaid interest. The Notes repurchased by Alcatel Lucent USA Inc. were cancelled. Consequently, the outstanding principal amount for these 6.750% Notes was U.S.$700 million as of December 31, 2015.

On February 10, 2016, Alcatel Lucent USA Inc. completed the redemption in full of the outstanding U.S.$700 million principal amount of the 6.75% Senior Notes due 2020. The redemption payment was U.S.$765 million, including the applicable premium of U.S.$54 million and accrued and unpaid interest of U.S.$11 million.

8.875% Senior Notes due January 2020.

On February 10, 2016, Alcatel Lucent USA Inc. completed the redemption in full the outstanding U.S.$500 million principal amount of its 8.875% Senior Notes due 2020. The redemption payment was U.S.$542 million, including the applicable premium of U.S.$37 million and accrued and unpaid interest of U.S.$5 million.

OCEANE Convertible Bonds due 2018 / 2019 / 2020.

On July 3, 2013, we issued convertible/exchangeable bonds (OCEANE) due July 1, 2018 for a nominal value of 629 million. The bonds bore interest at an annual rate of 4.25%, payable semi-annually in arrears on January 1, and July 1, commencing January 1, 2014. At our option, the bonds were subject to early redemption under certain conditions. These bonds are no longer outstanding (see below).

On June 10, 2014, we issued convertible/exchangeable bonds (OCEANE) in two tranches:

 

·   Tranche 1 due January 30, 2019 for a nominal value of 688 million. The conversion price per bond was set at 4.11, giving a conversion premium of approximately 40% over Alcatel Lucent’s reference share price on the regulated market Euronext in Paris.

 

·   Tranche 2 due January 30, 2020 for a nominal value of 460 million. The conversion price per bond was set at 4.02, giving a conversion premium of approximately 37% over Alcatel Lucent’s reference share price on the regulated market Euronext in Paris.

The bonds due 2019 and 2020 bear interest at an annual rate of 0.00% and 0.125% respectively, payable semi-annually in arrears on January 30th, and July 30th, commencing January 30, 2015. At our option, the bonds may be subject to early redemption under certain conditions.

On January 22, 2016, we informed the holders of OCEANE 2018, OCEANE 2019 and OCEANE 2020 of their right to request an early redemption of their OCEANE in the context of the Nokia Offer, the result of which constitutes a change of control within the meaning of the OCEANE prospectuses. Holders of 7,393,369 OCEANE 2019 and 1,751,000 OCEANE 2020 requested early repayment.

In addition, in late 2015 and early 2016, 206,784,349 OCEANE 2018, 37,880,652 OCEANE 2019 and 16,138,206 OCEANE 2020 were tendered into the Nokia Offer, and in early 2016 4,795,096 OCEANE 2018, 19,971,720 OCEANE 2019 and 56,644,832 OCEANE 2020 were tendered into the reopened Nokia Offer. On February 12, 2016, Nokia converted all of the OCEANE tendered in the offer into Nokia Corporation shares.

On March 21, 2016, the 421,910 OCEANE 2018 remaining outstanding were redeemed. As of the date of this report, there are no OCEANE 2018 outstanding.

As of March 31, 2016, as a result of the transactions described above, the remaining outstanding OCEANE 2019 amount to 367 million, and the remaining outstanding OCEANE 2020 amount to 109 million.

4.625% Senior Notes due July 2017.

On February 10, 2016, Alcatel Lucent USA Inc. completed the redemption in full of the outstanding U.S.$650 million principal amount of its 4.625% Senior Notes due 2017. The redemption payment for the 4.625% Notes was U.S.$685 million, including the applicable premium of U.S.$31 million and accrued and unpaid interest of U.S.$3 million.

8.50% Senior Notes due January 15, 2016.

In March 2015, a nominal amount of 2 million of our Senior Notes due 2016 was bought back and cancelled for a cash amount of 2 million. As a result, the outstanding principal amount for these 8.50% Notes was 190 million as of December 31, 2015. On January 15, 2016, we repaid on the maturity date the 190 million outstanding under our 8.50% Senior Notes.

 

 

 

 

67


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Liquidity and capital resources

 

Credit rating

As of the date of filing of this report, the credit ratings of Alcatel-Lucent and Alcatel-Lucent USA Inc. were as follows:

 

Rating Agency   Corporate
Family rating
    Long-term
debt
    Short-term
debt
    Outlook     Last update of
CFR/Debt rating
    Last update of
the outlook
 
   
Moody’s:                      
Alcatel-Lucent S.A.     B2        B2/B3 (1)        Not Prime       
 
Review for
upgrade
  
  
    August 28, 2015        April 20, 2015   
Alcatel-Lucent USA Inc.     n.a.        B2 (2)        n.a       
 
Review for
upgrade
  
  
    August 28, 2015        April 20, 2015   
Standard & Poor’s:                      
Alcatel-Lucent S.A.     BB+        BB+        B        Positive        March 21, 2016        March 21, 2016   
         
Alcatel-Lucent USA Inc.     BB+        BB+        n.a        Positive        March 21, 2016        March 21, 2016   
   

 

(1)   The OCEANE due 2018, the OCEANE due 2019 and the OCEANE due 2020 are rated B3; all other long-term debt issued by Alcatel-Lucent is rated B2.

 

(2)   The 8.875% Senior Notes, the 6.75% Senior Notes and the 4.625% Senior Notes were each rated B2 at the time of their redemption. Ratings were withdrawn on January 20, 2012 for the Alcatel-Lucent USA Inc. 6.50% Notes due 2028 and 6.45% Notes due 2029.

 

Moody’s: On August 28, 2015, Moody’s upgraded Alcatel-Lucent’s Corporate Family rating to B2 from B3, the convertible notes (OCEANE) ratings to B3 from Caa1, and the senior unsecured ratings to B2 from B3. All ratings remain on review for upgrade.

On April 20, 2015, Moody’s placed on review for upgrade all of Alcatel-Lucent’s ratings.

On November 17, 2014, Moody’s changed the outlook on Alcatel-Lucent and Alcatel-Lucent USA Inc to positive from stable, and affirmed the B3 ratings.

The rating grid of Moody’s ranges from Aaa, which is the highest rated class, to C, which is the lowest rated class. Alcatel-Lucent’s Corporate Family rating, the Alcatel-Lucent long-term debt, the OCEANE 2019 and 2020, and the Alcatel-Lucent USA Inc. rated long-term debt, are rated in the B category, which includes B1, B2 and B3 ratings.

Moody’s gives the following definition of its B category: “obligations rated B are considered speculative and are subject to high credit risk”.

Standard & Poor’s: On March 21, 2016, Standard & Poor’s raised its long-term corporate ratings on Alcatel-Lucent and Alcatel-Lucent USA Inc. to BB+ from B+, with positive outlook. The ratings on the debt issued by Alcatel-Lucent and Alcatel-Lucent USA Inc. were also raised to BB+ from B+, and the B short-term corporate credit rating on Alcatel-Lucent was affirmed.

On August 5, 2015, Standard and Poor’s raised its long-term corporate credit ratings on Alcatel-Lucent and Alcatel-Lucent USA Inc. to B+ from B, as well as on the debt issued by Alcatel-Lucent and Alcatel-Lucent USA. All ratings remain on CreditWatch with positive implications.

On April 17, 2015, Standard & Poor’s placed Alcatel-Lucent ratings on CreditWatch with positive implications.

On August 18, 2014, Standard & Poor’s raised its corporate credit ratings on Alcatel-Lucent and Alcatel-Lucent USA Inc. from B- to B. The unsecured bonds issued by the Group were

also upgraded from CCC+ /B- to B. At the same date, and as a consequence of the rating upgrade, the outlook was changed from Positive to Stable.

The rating grid of Standard & Poor’s ranges from AAA (the strongest rating) to D (the weakest rating).

Alcatel-Lucent’s and Alcatel-Lucent USA Inc.’s Corporate Family rating, as well as their long term debt are rated B+, which is in the B category.

Standard & Poor’s gives the following definition to the BB category: “An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.”

Standard & Poor’s gives the following definition to the B category: “An obligation rated “B” is more vulnerable to non-payment than obligations rated “BB” but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.”

Short-term cash requirements

Our short-term cash requirements are primarily related to funding our operations, including our restructuring plans, capital expenditures and short-term debt repayments.

Restructuring plans.

Through The Shift Plan, we reduced our fixed-cost base by 1,031 million in 2015 compared to our 2012 cost base through the adoption of direct-channel operations, additional consolidation of SG&A (selling, general and administrative) functions, and by refocusing our R&D capacity. For the year ended December 31, 2015, we expensed 306 million of restructuring costs for these actions.

 

 

 

 

68


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Liquidity and capital resources

 

 

Short-term debt.

As of December 31, 2015, we had 579 million of short-term financial debt outstanding.

Long-term debt and total financial debt.

As of December 31, 2015, we had 4,632 million of long-term financial debt outstanding and therefore a total gross financial debt at that date of 5,211 million, compared to 5,277 million as of December 31, 2014.

Cash flow outlook.

We believe that our cash, cash equivalents and marketable securities, including short-term investments, aggregating 6,531 million as of December 31, 2015, are sufficient to fund

our cash requirements for the next 12 months and to pursue our capital expenditures program as planned.

To the extent that the business environment materially deteriorates or our customers reduce their spending plans, or if the credit markets were to limit our access to bid and performance bonds, with a resulting deterioration of our liquidity, we will need to re-evaluate our capital expenditure priorities appropriately. We may also be required to engage in additional restructuring efforts and seek additional sources of capital, which may be difficult under such circumstance.

Rating clauses affecting our debt

Alcatel Lucent and Alcatel-Lucent USA Inc.’s outstanding notes and convertible debentures do not contain clauses that could trigger an accelerated repayment in the event of a lowering of their respective credit ratings.

 

 

6.5 Contractual obligations and off-balance sheet contingent commitments

Contractual obligations

We have certain contractual obligations that extend beyond 2015. Among these obligations, we have long-term debt and interest thereon, finance leases, operating leases, commitments to purchase fixed assets and other unconditional purchase obligations. Our total contractual cash obligations as of December 31, 2015 for these items are presented below based upon the minimum payments we will have to make in the future under such contracts and firm commitments. Amounts related to financial debt, finance lease obligations and the equity component of our convertible bonds are fully reflected in our consolidated statement of financial position included in this annual report.

 

(In millions of euros)   Payment deadline        
Contractual payment obligations   Before
December 31,
2016
    2017-2018     2019-2020     2021 and after     Total  
         
Financial debt (excluding finance leases)     559        1,103        2,037        1,484        5,183   
       
Finance lease obligations     20        8        -        -        28   
       
Equity component of convertible bonds     -        46        139        -        185   
       
Unconditional purchase obligations (1)     27        94        173        53        347   
   
Sub-total - included in statement of financial position     606        1,251        2,349        1,537        5,743   
   
       
Finance costs on financial debt     241        396        276        2        915   
       
Operating leases     151        200        138        135        624   
       
Commitments to purchase fixed assets     33        -        -        -        33   
       
Other unconditional purchase obligations (2)     737        566        290        110        1,703   
   
Sub-total - commitments not included in statement of financial position     1,162        1,162        704        247        3,275   
   
Total contractual obligations (3)     1,768        2,413        3,053        1,784        9,018   
   

 

(1)   On April 1, 2015, we terminated certain existing license agreements and entered into two new license agreements with Qualcomm with terms ranging from 6 to 10 years, which were accounted for as intangible assets at their discounted value. Total commitments amounted to €347 million as of December 31, 2015. On February 4, 2016, Qualcomm notified us that they were exercising their right to terminate one of these two license agreements with immediate effect upon the closing of the Nokia Offer. The termination resulted in the acceleration of all remaining unpaid quarterly royalty payments of €278 million (U.S.302.5 million) payable to Qualcomm within 30 days of termination.

 

(2)   Of which €425 million relate to commitments made to HP pursuant to the sales cooperation agreement and the IT outsourcing transaction entered into with HP and €438 million relate to commitments made to Accenture as part of several outsourcing transactions mentioned below. Other unconditional purchase obligations result mainly from obligations under multi-year supply contracts linked to the sale of businesses to third parties.

 

(3)   Obligations related to pensions, post-retirement health and welfare benefits and post-employment benefit obligations are excluded from the table (refer to Note 23 to our consolidated financial statements).

 

 

 

69


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Contractual obligations and off-balance sheet contingent commitments

 

Off-balance sheet commitments

On December 31, 2015, our off-balance sheet commitments and contingencies amounted to 2,056 million, consisting primarily of 1,368 million in guarantees on long-term contracts for the supply of telecommunications equipment and services by our consolidated and non-consolidated subsidiaries. Generally, we provide these guarantees to back performance bonds issued to customers through financial institutions. These performance bonds and counter-guarantees are standard industry practice and are routinely provided in long-term supply contracts. If certain events occur subsequent to our including these commitments within our off-balance sheet contingencies, such

as delays in promised delivery or claims related to an alleged failure by us to perform on our long-term contracts, or the failure by one of our customers to meet its payment obligations, we reserve the estimated risk on our consolidated statement of financial position under the line items “Provisions” or “Amounts due to/from our customers on construction contracts,” or in inventory reserves. Not included in the 2,056 million is approximately 184 million in customer financing commitments provided by us.

With respect to guarantees given for contract performance, only those issued by us to back guarantees granted by financial institutions are presented in the table below.

 

 

Off-balance sheet contingent commitments given in the normal course of business are as follows:

 

(In millions of euros)   2015     2014     2013  
                 
Guarantees given on contracts made by the Group     1,368        1,637        1,180   
Discounted notes receivable with recourse (1)     -        -        -   
Other contingent commitments (2)     688        737        671   
   
Sub-total -contingent commitments     2,056        2,374        1,851   
   
Secured borrowings (3)     -        2        8   
   
Total (4)     2,056        2,376        1,859   
   

 

(1)   Amounts reported in this line item are related to discounting of receivables with recourse only. Total amounts of receivables discounted without recourse are disclosed in Note 20 to our consolidated financial statements.

 

(2)   Excluding the guarantee given to Louis Dreyfus Armateurs described below.

 

(3)   Excluding the subordinated guarantees described below on certain bonds.

 

(4)   Obligations related to pensions, post-retirement health and welfare benefits and post-employment benefit obligations are excluded from the table. Refer to Note 23 to our consolidated financial statements for a summary of our expected contributions to these plans.

 

The amounts of guarantees given on contracts reflected in the preceding tables represent the maximum potential amounts of future payments (undiscounted) that the Group could be required to make under current guarantees granted by the Group. The maximum potential amount reflects the undiscounted reliable best estimate of the highest payment that could effectively be made, even if the likelihood of occurrence of such payment is remote, and without taking into account any reduction related to potential recovery through recourse or collateralization provisions. If such a reliable best estimate is not available, the amount disclosed is the maximum amount the Group could be required to pay, with all the other characteristics remaining the same. In addition, most of the parent company guarantees and performance bonds given to our customers are insured; therefore, the estimated exposure related to the guarantees set forth in the preceding table may be reduced by insurance proceeds that we may receive in case of a claim.

Commitments related to product warranties and pension and post-retirement benefits are not included in the preceding table. These commitments are fully reflected in our 2015 consolidated financial statements. Contingent liabilities arising out of litigation, arbitration or regulatory actions are not included in the preceding

table either, with the exception of those linked to the guarantees given on our long-term contracts.

Commitments related to contracts that have been cancelled or interrupted due to the default or bankruptcy of the customer are included in the above-mentioned “Guarantees given on contracts made by the Group” as long as the legal release of the guarantee has not been obtained. For more information concerning contingencies, see Note 31 to our consolidated financial statements.

Guarantees given on third-party long-term contracts could require us to make payments to the guaranteed party based on a non-consolidated company’s failure to perform under an agreement. The fair value of these contingent liabilities, corresponding to the premium to be received by the guarantor for issuing the guarantee, was nil as of December 31, 2015 (nil as of December 31, 2014 and as of December 31, 2013).

Outsourcing transactions

No significant outsourcing agreement was signed in 2015.

 

 

 

 

70


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Contractual obligations and off-balance sheet contingent commitments

 

Outsourcing transaction with Accenture

On February 28, 2014, in conjunction with the targeted cost savings of The Shift Plan, we entered into a 7-year Service Implementation Agreement with Accenture regarding the business transformation of our finance function, including the outsourcing of our accounting functions. This agreement supplements two similar service agreements regarding human resources and information technology. Each of the three corporate functions covered by our agreements with Accenture is called a “tower”. The Accenture agreements are expected to generate cost savings over the contract period, and cover: data processing services (back office) in finance, accounting and human resources, as well as IT services, support and maintenance of IT applications in the countries in which we operate.

Overall, we are committed to purchase approximately 757 million of Accenture goods and services until the end of 2020. As of December 31, 2015, the remaining total purchase commitment was 438 million, which amount is included in the contractual payment obligations table above in the line “Unconditional purchase obligations”.

Outsourcing transaction with HCL Technologies

On July 1, 2014, in conjunction with the targeted cost savings of The Shift Plan, we entered into a 7-year Master Service Agreement with HCL Technologies Limited regarding the transfer of a part of our R&D department for certain legacy technologies. This contract is expected to generate cost savings over the contract period in R&D development and in the maintenance domain. As part of an initial three year transition and transformation phase, we are committed to restructuring those activities, which is estimated to cost 40 million.

Overall, we are committed to purchase approximately 276 million of HCL services until 2021, of which 186 million remained to be purchased as of December 31, 2015, and such remaining amount is included in the contractual payment obligations table above in the line “Unconditional purchase obligations”.

Outsourcing transaction with Hewlett Packard

On October 29, 2009, we entered into a major IT outsourcing transaction with Hewlett Packard Company (HP), with an effective date of December 1, 2009, and at the same time we entered into a ten-year sales cooperation agreement with HP.

The IT outsourcing transaction provides for HP to transform and manage a large part of our IT infrastructure. As part of an initial transition and transformation phase (referred to as the “T&T phase”), HP invested its own resources to transform our global IT/IS platforms. As a result, we committed to restructure our IT/IS operations and in this connection we recognised restructuring costs of 263 million between 2010 and 2015. All related restructuring projects were completed by the end of 2015.

As part of the transfer of resources, in 2010 we sold to HP IT infrastructure assets under a sale and finance leaseback

arrangement, the payment obligations for which are included in “Finance lease obligations” in the contractual payments obligations table above, representing a 10 million finance lease obligation as of December 31, 2015 (3 million as of December 31, 2014 and 10 million as of December 31, 2013).

The overall arrangement with HP included our commitment to purchase approximately 514 million of HP goods and services. We satisfied this commitment by the end of 2014.

Also as part of the overall arrangement, the following commitments with remaining balances were included in the HP agreement:

 

·   a minimum value commitment regarding the amount of IT managed services to be purchased or procured by us from HP and/or any HP affiliates over ten years, for a total amount revised to 1,422 million (previously 1,408 million) and with a remaining commitment of 411 million as of December 31, 2015; and

 

·   a commitment to make certain commercial efforts related to the development of sales pursuant to the sales cooperation agreement, including through the establishment of dedicated teams, with a remaining commitment of 14 million as of December 31, 2015

These two commitments are included in the contractual payment obligations table above in the line “Unconditional purchase obligations” for the remaining balance as of December 31, 2015.

Other Commitments - Contract Manufacturers / Electronic Manufacturing Services (EMS) providers

We outsource a significant amount of manufacturing activity to a limited number of electronic manufacturing service (EMS) providers. The EMSs manufacture products using Alcatel-Lucent’s design specifications and they test platforms in line with quality assurance programs and standards established by Alcatel-Lucent. EMSs are required to procure components and sub-assemblies that are used to manufacture products based on our demand forecasts from suppliers in our approved supplier lists.

Generally, we do not own the components and sub-assemblies purchased by the EMS and title to the products is generally transferred from the EMS providers to us upon delivery. We record the inventory purchases upon transfer of title from the EMS to us. We establish provisions for excess and obsolete inventory based on historical trends and future expected demand. This analysis includes excess and obsolete inventory owned by EMSs that is manufactured on our behalf, and excess and obsolete inventory that will result from non-cancellable, non-returnable (NCNR) component and sub-assembly orders that the EMSs have with their suppliers for parts meant to be integrated into our products. In 2015, we recorded a charge of 3 million for excess inventory commitments with our EMS providers compared to a charge of 32 million in 2014 (and a charge of 26 million in 2013).

We generally do not have minimum purchase obligations in our contract-manufacturing relationships with EMS providers and

 

 

 

 

71


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Contractual obligations and off-balance sheet contingent commitments

 

therefore the contractual payment obligations table presented above under the heading “Contractual Obligations” does not include any commitments related to EMS providers.

Letter of Indemnity in favor of Louis Dreyfus Armateurs

During the first half of 2011, we provided a letter of Indemnity (LOI) in favor of Louis Dreyfus Armateurs (LDA), our former co-venturer in Alda Marine at the time, pursuant to which we agreed to indemnify LDA in respect of any losses arising out of exposure of crews to radiation from the nuclear power plant at Fukushima, in connection with the repairs conducted by Alcatel-Lucent during the second quarter of 2011 on a submarine cable system, which required the use of vessels managed by LDA.

Our aggregate potential liability under this LOI may not exceed 50 million, as increased annually by the lower of (i) 5% and (ii) the percentage rate of revaluation of crew salaries awarded by LDA. This LOI expires on April 15, 2081.

As the levels of radiation measured during the repairs were always below the critical level as defined by the IRSN (Institut de Radioprotection et de Sûreté Nucléaire), the risk of payment pursuant to the indemnity is considered remote as of December 31, 2015.

Specific commitments - Alcatel-Lucent USA Inc.

Alcatel-Lucent USA Inc.’s separation agreements

Alcatel-Lucent USA Inc. is party to various agreements that were entered into in connection with the separation of Alcatel-Lucent USA Inc. and former affiliates, including AT&T, Avaya, LSI Corporation (formerly Agere Systems, before its merger with LSI corporation in April 2007) and NCR Corporation. Pursuant to these agreements, Alcatel-Lucent USA Inc. and the former affiliates agreed to allocate certain liabilities related to each other’s business, and have agreed to share liabilities based on certain allocations and thresholds. Alcatel-Lucent USA Inc. has a provision of 2 million as of December 31, 2015 for a claim asserted by NCR Corporation relating to NCR Corporation’s liabilities for the environmental clean-up of the Fox River in Wisconsin, USA. Future developments in connection with the Fox River claim may warrant additional adjustments of existing provisions. We are not aware of any material liabilities to Alcatel-Lucent USA Inc.’s former affiliates as a result of the separation agreements that are not otherwise reflected in the 2015 consolidated financial statements. Nevertheless, it is possible that potential liabilities for which the former affiliates bear primary responsibility may lead to contributions by Alcatel-Lucent USA Inc. beyond amounts currently reserved.

Alcatel-Lucent USA Inc.’s guarantees and indemnification agreements

Alcatel-Lucent USA Inc. divested certain businesses and assets through sales to third-party purchasers and spin-offs to the other common shareowners of the businesses spun off. In connection with these transactions, certain direct or indirect indemnifications

were provided to the buyers or other third parties doing business with the divested entities. These indemnifications include secondary liability for certain leases of real property and equipment assigned to the divested entity and specific indemnifications for certain legal and environmental contingencies, as well as vendor supply commitments. The durations of such indemnifications vary but are standard for transactions of this nature.

Alcatel-Lucent USA Inc. remains secondarily liable for approximately U.S.$7 million of lease obligations as of December 31, 2015 (U.S.$7 million of lease obligations as of December 31, 2014 and U.S.$23 million of lease obligations as of December 31, 2013), that were assigned to Avaya, LSI Corporation and purchasers of other businesses that were divested. The remaining terms of these assigned leases and the corresponding guarantees range from one month to eight years. The primary obligor of the assigned leases may terminate or restructure the lease before its original maturity and thereby relieve Alcatel-Lucent USA Inc. of its secondary liability. Alcatel-Lucent USA Inc. generally has the right to receive indemnity or reimbursement from the assignees and we have not reserved for losses on this form of guarantee.

Alcatel-Lucent USA Inc. is party to a tax-sharing agreement to indemnify AT&T and is liable for tax adjustments that are attributable to its lines of business, as well as a portion of certain other shared tax adjustments, during the years prior to its separation from AT&T. Alcatel-Lucent USA Inc. has similar agreements with Avaya and LSI Corporation. Certain proposed or assessed tax adjustments are subject to these tax-sharing agreements. We do not expect that the outcome of these other matters will have a material adverse effect on our consolidated results of operations, consolidated financial position or near-term liquidity.

Customer financing

Based on standard industry practice, from time to time we extend financing to our customers by granting extended payment terms, making direct loans, and providing guarantees to third-party financing sources. More generally, as part of our business, we routinely enter into long-term contracts involving significant amounts to be paid by our customers over time.

As of December 31, 2015, net of reserves, we had an exposure of 84 million under drawn customer-financing arrangements. In addition, as of December 31, 2015, we had further commitments to provide customer financing for 89 million. It is possible that these further commitments will expire without our having to actually provide the committed financing.

Outstanding customer financing and undrawn commitments are monitored by assessing, among other things, each customer’s short-term and long-term liquidity positions, the customer’s current operating performance versus plan, the execution challenges faced by the customer, changes in the competitive landscape, and the customer’s management experience and depth. When we detect potential problems, we take mitigating actions, which may include the cancellation of undrawn commitments. Although by taking such actions we may be able

 

 

 

 

72


Table of Contents

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Contractual obligations and off-balance sheet contingent commitments

 

to limit the total amount of our exposure, we still may suffer losses to the extent of the drawn and guaranteed amounts.

Capital expenditures

Each year we incur a certain level of capital expenditures in maintenance and innovation. In 2015, our capital expenditures amounted to 580 million, including 203 million of capitalization of development costs. We believe that our current

cash, cash equivalents and marketable securities and funding arrangements provide us with adequate flexibility to pursue our capital expenditure program as planned. To the extent that the business environment materially deteriorates or our customers reduce their spending plans, we will need to reevaluate our capital expenditure priorities appropriately.

As of December 31, 2015, our contractual obligations for capital expenditures amounted to 33 million.

 

 

6.6 Qualitative and quantitative disclosures about market risks

 

Financial instruments

We enter into derivative financial instruments primarily to manage our exposure to fluctuations in interest rates and foreign currency exchange rates. Our policy is not to take speculative positions. Our strategies to reduce exchange and interest rate risk have served to mitigate, but not eliminate, the positive or negative impact of exchange and interest rate fluctuations.

Derivative financial instruments held by us at December 31, 2015 were mostly hedges of existing or future financial or commercial transactions or were related to issued debt.

The largest portion of our issued debt is in euro and U.S. dollar. We use cross-currency interest rate derivatives to convert a part of our U.S. dollar fixed rate debt into euro fixed rate debt in order to cover the currency risk.

Counterparty risk

For our marketable securities, cash, cash equivalents and financial derivative instruments, we are exposed to credit risk if a counterparty defaults on its financial commitments to us. This risk is monitored daily, with strict limits based on the counterparties’ rating. More than 95% of our counterparties were classified in the investment grade category as of

December 31, 2015. The exposure of each market counterparty is calculated taking into account the fair value of the underlying market instruments.

Foreign currency risk

Since we conduct commercial and industrial operations throughout the world, we are exposed to foreign currency risk. We use derivative financial instruments to protect ourselves against fluctuations of foreign currencies which have an impact on our assets, liabilities, revenues and expenses.

Future transactions mainly relate to firm commercial contracts and forecasted transactions. Firm commercial contracts and forecasted transactions are hedged by forward foreign exchange transactions. The duration of future transactions that are not firmly committed does not usually exceed 18 months.

Interest rate risk on financial debt, net

In the event of an interest rate decrease, the fair value of our fixed-rate debt would increase and it would be more costly for us to repurchase it (not taking into account that an increased credit spread reduces the value of the debt).

 

 

 

 

73


Table of Contents

6

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

 

Qualitative and quantitative disclosures about market risks

 

In the table below, the potential change in fair value for interest rate sensitive instruments is based on a hypothetical and immediate 1% fall or rise for 2015 and 2014, in interest rates across all maturities and for all currencies. Interest rate sensitive instruments are fixed-rate, long-term debt or swaps and marketable securities.

 

    December 31, 2015     December 31, 2014  
               
(In millions of euros)  

Booked

value

    Fair
value
    Fair value
variation
if rates fall
by 1% (1)
    Fair value
variation
if rates rise
by 1%
   

Booked

value

    Fair
value
    Fair value
variation
if rates fall
by 1% (1)
    Fair value
variation
if rates rise
by 1%
 
                 
Assets                      
   
Marketable securities     1,626        1,626        (4)        4        1,672        1,672        (2)        2   
     
Cash and cash equivalents (2)     4,905        4,905        -        -        3,878        3,878        -        -   
   
Liabilities                      
   
Convertible bonds     (1,302)        (2,270)        (32)        31        (1,498)        (2,346)        (55)        53   
     
Non convertible bonds     (3,283)        (3,509)        (218)        196        (3,198)        (3,372)        (229)        205   
     
Other financial debt     (626)        (625)        -        -        (581)        (581)        -        -   
     
Derivative interest rate instruments - other current and non-current assets     4        4        93        115        1        1        37        13   
     
Derivative interest rate instruments - other current and non-current liabilities     -        -        -        -        -        -        -        -   
     
Loan to co-venturer - financial asset     -        -        -        -        -        -        -        -   
   
Debt/cash position before FX derivatives     1,325        131        (161)        346        274        (748)        (249)        273   
   
     
Derivative FX instruments on financial debt - other current and non-current assets     158        158        -        -        123        123        -        -   
     
Derivative FX instruments on financial debt - other current and non-current liabilities     (74)        (74)        -        -        (71)