Nortel
Reports Results for the Third Quarter 2005
Nov. 2, 2005
Nortel Networks Corporation
reported results for the third quarter of 2005 in U.S. dollars
and in accordance with accounting principles generally
accepted in the United States.
"Our results demonstrate
solid progress in our next-generation businesses including 3G
Wireless, VoIP and Metro-optical and recent announcements show
early momentum from execution of our Asia strategy with our
joint venture with LG," said Bill Owens, vice chairman
and chief executive officer, Nortel. "As I come to the
close of my tenure as CEO, I am pleased that Nortel can now
move from this phase of stabilization with the foundation
we've built over the last 19 months. I am confident that
Nortel, with the leadership of Mike Zafirovski, is strong and
ready to move forward and will continue to play to win."
Third Quarter 2005 Results
Revenues were $2.66 billion for
the third quarter of 2005 compared to $2.18 billion for the
third quarter of 2004 and $2.86 billion for the second quarter
of 2005. The Company reported a net loss in the third quarter
of 2005 of $105 million, or $0.02 per common share on a
diluted basis, compared to a net loss of $259 million, or
$0.06 per common share on a diluted basis, in the third
quarter of 2004 and net earnings of $45 million, or $0.01 per
common share on a diluted basis, in the second quarter of
2005.
The net loss in the third
quarter of 2005 included special charges of $37 million
related to restructuring activities and a net charge of $20
million related to the re-filing of the Company's tax returns
as a result of the financial restatements. The third quarter
2005 results included adjustments related to prior periods
which increased our net loss by approximately $15 million, or
approximately $0.00 in basic and diluted loss per common
share.
Breakdown of Third Quarter 2005
Revenues
Carrier Packet Networks
revenues were $754 million, an increase of 41 percent compared
with the year-ago quarter and an increase of 2 percent
sequentially. Enterprise Networks revenues were $685 million,
an increase of 16 percent compared with the year-ago quarter
and a decrease of 6 percent sequentially. GSM and UMTS
Networks revenues were $674 million, an increase of 24 percent
compared with the year-ago quarter and a decrease of 6 percent
sequentially. CDMA Networks revenues were $539 million, an
increase of 5 percent compared with the year-ago quarter and a
decrease of 19 percent sequentially.
Gross Margin
Gross margin was 38 percent of
revenue in the third quarter of 2005, and included an
additional projected loss of approximately $71 million related
to a 2004 wireless contract in India.
Selling, General and
Administrative (SG&A)
SG&A expenses were $572
million in the third quarter of 2005, compared to SG&A
expenses of $512 million for the third quarter of 2004 and
$579 million for the second quarter of 2005. Each of these
amounts included approximately $50 million related to internal
control remedial measures, investment in the Company's finance
processes and restatement related activities.
Research and Development
(R&D)
R&D expenses were $449
million in the third quarter of 2005, compared to $501 million
for the third quarter of 2004 and $479 million for the second
quarter of 2005. The third quarter of 2005 R&D expenses
decreased primarily as a result of savings associated with the
Company's restructuring plan and cost containment initiatives.
Other income (expense) - net
Other income - net was $66
million income for the third quarter of 2005, which primarily
related to investment income of $27 million, currency exchange
gains of $21 million and an adjustment of $16 million related
to sub-lease income.
Tax
Income tax expense was $40
million in the third quarter of 2005, which primarily related
to a net charge of $20 million related to the re-filing of the
Company's tax returns as a result of the financial
restatements and $19 million for income taxes in profitable
jurisdictions.
Cash
The cash balance at the end of
the third quarter of 2005 was $3.00 billion, down from $3.06
billion at the end of the second quarter of 2005. This
decrease in cash was primarily driven by a cash outflow from
operations of $145 million which included cash payments for
restructuring of $55 million and $38 million of pension
funding, and expenditures on capital assets of approximately
$48 million, partially offset by proceeds of $131 million from
Flextronics International Ltd.
Nine Month 2005 Results
For the first nine months of
2005, revenues were $8.05 billion compared to $7.21 billion
for the same period in 2004. The Company reported a net loss
for the first nine months of 2005 of $109 million, or $0.03
per common share on a diluted basis, compared to a net loss of
$184 million, or $0.04 per common share on a diluted basis,
for the same period in 2004.
Net earnings in the first nine
months of 2005 included special charges of $148 million
related to restructuring activities and $41 million of costs
related to the sale of businesses and assets. The first nine
months of 2005 results included adjustments related to prior
periods which increased net loss by approximately $40 million
($16 million of which was included in the costs related to the
sale of businesses and assets described above) or
approximately $0.01 in basic and diluted loss per common
share.
Outlook
Commenting on the Company's
outlook, Peter Currie, executive vice president and chief
financial officer, Nortel said, "For the full year 2005
compared to 2004, we expect revenue to grow in the range of 13
percent. We continue to expect gross margins to be in the
range of 40 to 44 percent of revenue and operating expenses as
a percentage of revenue to be approximately 35 percent by the
end of the year."
Other
Export Development Canada -
Amended Support Facility
As previously announced, on
October 24, 2005, Nortel and Export Development Canada (EDC)
amended the EDC Support Facility to maintain the total
facility at $750 million, including the existing $300 million
of existing support for performance bonds and similar
instruments, and the extension of the maturity date by one
year to December 31, 2007. In connection with this amendment,
all guarantee and security agreements previously guaranteeing
or securing the obligations of Nortel and its subsidiaries
under the EDC Support Facility and Nortel's public debt
securities were terminated and the assets of Nortel and its
subsidiaries pledged under the security agreements were
released in full.
Revenue Independent Review
As described in Nortel's 2003
Annual Report on Form 10-K (2003 Annual Report), management
identified certain accounting practices and errors related to
revenue recognition that it determined to adjust as part of
the Second Restatement. In light of the resulting corrections
to previously reported revenues, the Audit Committee
determined to review the facts and circumstances leading to
the restatement of these revenues for specific transactions
identified in the Second Restatement, with a particular
emphasis on the underlying conduct. The Audit Committee sought
a full understanding of the historic events that required the
revenues for these specific transactions to be restated and
intended to consider any appropriate additional remedial
measures, including those involving internal controls and
processes. The Audit Committee engaged Wilmer Cutler Pickering
Hale and Dorr to advise it in connection with this review.
Because of the significant accounting issues involved in the
inquiry, WilmerHale retained Huron Consulting Services LLC to
provide expert accounting assistance.
The review focused principally
on transactions that account for approximately $3.0 billion of
the $3.4 billion in restated revenue, with a particular
emphasis on transactions that account for approximately $2.6
billion in 2000. That emphasis was appropriate because (1) the
size of the revenue restatement for 2000 ($2.8 billion of the
total restated revenue of $3.4 billion) and (2) some of the
same types of errors made in 2000 typically reoccurred in
subsequent years. As more fully described in Item 9A of the
2003 Annual Report, the revenue adjustments that were part of
the Second Restatement primarily related to certain categories
of transactions, and the independent review has examined
transactions in each of these categories.
The independent review of the
facts leading to the initial erroneous recognition of revenues
that have been restated is substantially complete. While the
primary focus of the review was on the underlying conduct
related to the transactions discussed above that were
restated, this review found no additional accounting errors
that should be investigated by management for possible
restatement. The independent review is ongoing as the Audit
Committee continues to evaluate the causes for the underlying
conduct that gave rise to the initial erroneous recognition of
revenue and possible remedial measures to strengthen internal
controls and processes.
The Audit Committee expects to
complete its review prior to the filing of the 2005 Annual
Report on Form 10-K by the Company. The Audit Committee
anticipates that there will be additional work done by the
Company on remedial measures, internal controls, and
improvements to processes up to and following the filing of
the Company's and NNL's 2005 audited financial statements.
The Board of Directors is
committed to fully cooperate with the ongoing investigations
of these matters by the regulatory and law enforcement
authorities in both Canada and the United States.
Recent Business Highlights
Revenue Momentum
-- Nortel's mobility momentum continued globally with new
contracts, contract extensions and deployments highlighted by:
wireless broadband data solutions for Hutchison Telecom
Vietnam and Hanoi Telecom, Universal Mobile Telecommunications
System (UMTS) for Poland's PTK Centertel, Orange Slovensko,
and CDMA2000 1x and EV-DO 3G wireless solutions for Trinidad
and Tobago's LaqTel and Telecommunications Services of
Trinidad and Tobago (TSTT), Movicel in Angola, Coral Wireless
in Hawaii, Telefonica Moviles in Guatemala, PT Bakrie Telecom
in Indonesia, and Leap Wireless International and Alaska
Native Broadband 1 License.
-- Continuing on Nortel's leadership in enabling the convergence
of multiple voice and data networks with:
-- the integration of VIVO Brazil's call centers with its
CDMA2000 1X wireless network using a Nortel VoIP solution,
-- Telefonica Moviles Mexico deployment of a Nortel packet
voice backbone for all of its national and international
voice and data traffic and Centennial Communications
deploying Nortel's Communication Server (CS) 2000-compact
and Media Gateway 15000 to deliver advanced communications
services for enterprises,
-- leading rural market cable operator Cable One selection of
Nortel as its primary VoIP technology and professional
services provider in their deployment of a complete,
end-to-end VoIP solution, and
-- the launch of SIP-based VoIP services enabled on the
DMS-10 platform opening new markets to rural voice
providers.
-- University customers globally continued to deploy Nortel
solutions to improve the way education institutions conduct
research, teach students and collaborate including new
deployments at: Northwestern University (U.S.); North Carolina
Central University (U.S.); University of Nebraska (U.S.);
Kings College (U.S.); the Institute of Education, University
of London (U.K.); University of Regina (Canada) and Wodong
TAFE (Australia). Enabling more secure, mobile communication
North Carolina Central University deployed Nortel's WLAN 2300
for complete campus mobility. Northwestern University is
deploying Nortel's Multimedia Communications Server (MCS) 5100
to provide multimedia collaboration between students, faculty
and staff.
-- Deployments by the Australian Department of Defense and the
China Shandong Traffic Police Bureau of Nortel's Ethernet
Switching solutions, the municipality of Rishon Le Zion in
Israel for IP telephony solutions including Nortel's Contact
Centre Manager and Communications Server 1000 Telephony
Manager, and the Florida Department of Transportation choice
of Nortel's Multiservice Switching build on Nortel's proven
track record as a major provider of solutions for large
government and military organizations around the world.
-- Demonstrating Nortel's growing momentum in helping carriers
evolve today's SONET/SDH networks into packet-optimized
infrastructures, the 5000th Optical Metro 3000 shipped to
Japan was deployed by NTT to provide optical metro Ethernet
solutions, and the Optical Multiservice Edge 6500 installed
base continues to grow globally with approximately 50 new
customer deployments in the past year, including VimpelCom of
Russia for next generation mobile backhaul and TelstraClear
for VoIP and broadband service delivery.
-- India's leading private sector provider of telecommunications,
Bharti Tele-Ventures, announced a landmark technology
outsourcing arrangement with Nortel for the delivery of
technology and expert resources to Bharti's customers to
enhance the quality of customer services.
Leading Next-Generation Solutions
-- Building on Nortel's proven High Speed Downlink Packet Access
(HSDPA) capabilities, which were demonstrated with the
industry's first HSDPA mobile call in January 2005, the
completion with LG Electronics (LGE) of the first live test
calls using a commercial handset solution for HSDPA in March
2005 and the completion of the TL9000 registration standard
for Quality Management System Requirements and Measurements
across its HSDPA, UMTS and GSM wireless infrastructure
solutions with:
-- SK Telecom, Korea's largest mobile communications
provider, selection of HSDPA technology from Nortel and
UMTS core network solutions from LGE. SK Telecom's
commercial launch of UMTS services is planned for November
2005, with commercial launch of HSDPA following in early
2006,
-- KTF, one of Korea's leading cellular providers, selection
of Nortel HSDPA-based access equipment and LGE UMTS core
network solution for roll out of its planned HSDPA-ready
broadband wireless network,
-- Nortel achieved a Chinese wireless industry milestone with
what was believed to be the country's first seamless
handoff of broadband voice and multimedia services and
Nortel's first SIP-based video call handover between a
live HSDPA network and a Wireless Mesh network.
-- Demonstrating the world's first integrated data encryption for
10 Gbps optical networks using Advanced Encryption Standards
(AES-256) approved by the U.S. National Security Agency,
Nortel has encrypted multiple light-paths at the Optical
Ethernet layer to travel across today's SONET networks to be
decrypted at multiple unique destinations, increasing security
for confidential transmissions, reducing network complexity,
and lowering operational expenses through reduced power and
space requirements.
New Strategic Relationships
-- Nortel announced strategic relationships with WiMAX leaders
Intel and Airspan Networks and plans to offer fixed and mobile
WiMAX products based on industry standards. Expected to
complement the work already underway with the LG-Nortel joint
venture, Nortel is collaborating with Intel to promote
deployment of wireless broadband based on WiMAX, and will
integrate Airspan's WiMAX base transceiver stations and
subscriber terminals with Nortel's optical backhaul
technology, data networking solutions and wireless services.
-- Nortel's strategic relationship with Microsoft was expanded to
provide collaborative real-time capabilities through the
combining of the capabilities of Microsoft's Live
Communications Server and Office Communicator with Nortel's IP
Telephony SIP applications. This Nortel/Microsoft converged
office solution builds on a longstanding relationship between
the two companies and is expected to be available in late
2005.
NORTEL NETWORKS CORPORATION
Consolidated Statements of Operations
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ---------------------
2005 2004 2005 2004
----------- ---------- ---------- ----------
(Unaudited)
(U.S. GAAP, Millions of U.S. dollars, except
per share amounts)
Revenues $2,655 $2,179 $8,046 $7,213
Cost of revenues 1,648 1,393 4,747 4,319
----------- ---------- ---------- ----------
Gross profit 1,007 786 3,299 2,894
Selling, general and
administrative expense 572 512 1,725 1,596
Research and development
expense 449 501 1,402 1,465
Amortization of
intangibles 6 2 10 7
Special charges 37 93 148 99
(Gain) loss on sale of
businesses and assets 4 (39) 41 (114)
----------- ---------- ---------- ----------
Operating earnings (loss) (61) (283) (27) (159)
Other income (expense) -
net 66 44 170 112
Interest expense
Long-term debt (55) (45) (156) (132)
Other (2) (3) (6) (18)
----------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income taxes,
minority interests and
equity in net earnings
(loss) of associated
companies (52) (287) (19) (197)
Income tax benefit
(expense) (40) 30 (49) 32
----------- ---------- ---------- ----------
(92) (257) (68) (165)
Minority interests - net
of tax (15) (7) (46) (29)
Equity in net earnings
(loss) of associated
companies - net of tax 1 -- 3 (2)
----------- ---------- ---------- ----------
Net earnings (loss) from
continuing operations (106) (264) (111) (196)
Net earnings (loss) from
discontinued operations -
net of tax 1 5 2 12
----------- ---------- ---------- ----------
Net earnings (loss) $(105) $(259) $(109) $(184)
=========== ========== ========== ==========
----------- ---------- ---------- ----------
Average shares
outstanding ('000s) -
Basic 4,338,613 4,337,513 4,337,900 4,336,537
Average shares
outstanding ('000s) -
Diluted 4,338,613 4,337,513 4,337,900 4,336,537
----------- ---------- ---------- ----------
Basic earnings (loss) per
common share
- from continuing
operations $(0.02) $(0.06) $(0.03) $(0.04)
- from discontinued
operations 0.00 0.00 0.00 0.00
----------- ---------- ---------- ----------
Basic earnings (loss) per
common share $(0.02) $(0.06) $(0.03) $(0.04)
=========== ========== ========== ==========
Diluted earnings (loss)
per common share
- from continuing
operations $(0.02) $(0.06) $(0.03) $(0.04)
- from discontinued
operations 0.00 0.00 0.00 0.00
----------- ---------- ---------- ----------
Diluted earnings (loss)
per common share $(0.02) $(0.06) $(0.03) $(0.04)
=========== ========== ========== ==========
Please refer to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 including the Notes to the Consolidated
Financial Statements.
NORTEL NETWORKS CORPORATION
Consolidated Balance Sheets
September December
30, 31,
2005 2004
---------- -----------
(Unaudited)
(U.S. GAAP, Millions
of U.S. dollars,
except for share
amounts)
ASSETS
Current assets
Cash and cash equivalents $2,997 $3,686
Restricted cash and cash equivalents 73 80
Accounts receivable - net 2,616 2,551
Inventories - net 1,232 1,414
Deferred income taxes - net 371 255
Other current assets 580 356
---------- -----------
Total current assets 7,869 8,342
Investments 166 159
Plant and equipment - net 1,575 1,651
Goodwill 2,519 2,303
Intangible assets - net 150 78
Deferred income taxes - net 3,606 3,736
Other assets 579 715
---------- -----------
Total assets $16,464 $16,984
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade and other accounts payable $984 $996
Payroll and benefit-related liabilities 536 515
Contractual liabilities 396 569
Restructuring liabilities 131 254
Other accrued liabilities 2,500 2,823
Long-term debt due within one year 1,455 15
---------- -----------
Total current liabilities 6,002 5,172
Long-term debt 2,428 3,862
Deferred income taxes - net 227 144
Other liabilities 3,373 3,189
---------- -----------
Total liabilities 12,030 12,367
---------- -----------
Minority interests in subsidiary companies 641 630
Guarantees, commitments and contingencies
(notes 10, 11 and 17)
SHAREHOLDERS' EQUITY
Common shares, without par value - Authorized
shares: unlimited;
Issued and outstanding shares: 4,339,186,267
as of September 30, 2005 and 4,272,671,213
as of December 31, 2004 33,932 33,840
Additional paid-in capital 3,252 3,282
Accumulated deficit (32,692) (32,583)
Accumulated other comprehensive income (loss) (699) (552)
---------- -----------
Total shareholders' equity 3,793 3,987
---------- -----------
Total liabilities and shareholders' equity $16,464 $16,984
========== ===========
Please refer to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 including the Notes to the Consolidated
Financial Statements.
NORTEL NETWORKS CORPORATION
Consolidated Statements of Cash Flows
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------- ---------------
2005 2005 2004
-------------- ------- -------
(Unaudited)
(U.S. GAAP, Millions of U.S.
dollars)
Cash flows from (used in) operating
activities
Net earnings (loss) from continuing
operations $(106) $(111) $(196)
Adjustments to reconcile net earnings
(loss) from continuing operations to
net cash from (used in) operating
activities, net of effects from
acquisitions and divestitures of
businesses:
Amortization and depreciation 71 231 260
Non-cash portion of special charges
and related asset write downs 1 3 --
Equity in net (earnings) loss of
associated companies - net of tax (1) (3) 2
Stock option compensation 21 58 55
Deferred income taxes 44 58 (12)
Other liabilities 72 251 190
(Gain) loss on sale or write down of
investments, businesses and assets 4 25 (147)
Other - net 54 (3) 98
Change in operating assets and
liabilities (305) (813) (697)
-------------- ------- -------
Net cash from (used in) operating
activities of continuing operations (145) (304) (447)
-------------- ------- -------
Cash flows from (used in) investing
activities
Expenditures for plant and equipment (48) (167) (194)
Proceeds on disposals of plant and
equipment -- 10 10
Restricted cash and cash equivalents -- 9 (14)
Acquisitions of investments and
businesses - net of cash acquired (1) (449) (7)
Proceeds on sale of investments and
businesses 141 308 143
-------------- ------- -------
Net cash from (used in) investing
activities of continuing operations 92 (289) (62)
-------------- ------- -------
Cash flows from (used in) financing
activities
Dividends paid by subsidiaries to
minority interests (9) (33) (24)
Increase in notes payable 20 58 54
Decrease in notes payable (18) (64) (56)
Repayments of long-term debt -- -- (107)
Repayments of capital leases payable (4) (8) (5)
Issuance of common shares 3 4 30
-------------- ------- -------
Net cash from (used in) financing
activities of continuing operations (8) (43) (108)
-------------- ------- -------
Effect of foreign exchange rate changes
on cash and cash equivalents (1) (86) (6)
-------------- ------- -------
Net cash from (used in) continuing
operations (62) (722) (623)
Net cash from (used in) in operating
activities of discontinued operations (1) 33 16
-------------- ------- -------
Net increase (decrease) in cash and cash
equivalents (63) (689) (607)
Cash and cash equivalents at beginning
of period 3,060 3,686 3,997
-------------- ------- -------
Cash and cash equivalents at end of
period $2,997 $2,997 $3,390
============== ======= =======
Please refer to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 including the Notes to the Consolidated
Financial Statements
Segment revenues
The following table summarizes our revenues for the three and nine
months ended September 30, 2005 and 2004, by segment:
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
2005 2004 2005 2004
------- ------- ------- -------
Revenues
Carrier Packet Networks $754 $533 (a) $2,156 $1,940
CDMA Networks 539 511 1,743 1,647
GSM and UMTS Networks 674 543 2,182 1,910
Enterprise Networks 685 591 1,962 1,703
------- ------- ------- -------
Total reportable segments 2,652 2,178 8,043 7,200
Other 3 1 3 13
------- ------- ------- -------
Total revenues $2,655 $2,179 $8,046 $7,213
======= ======= ======= =======
Geographic revenues
The following table summarizes our geographic revenues for the three
and nine months ended September 30, 2005 and 2004, based on the
location of the customer:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
---------- ------- --------- -------
Revenues
United States $1,282 $1,114 $3,825 $3,653
EMEA (b) 642 581 2,085 1,820
Canada 163 122 460 413
Asia Pacific 379 227 1,193 904
CALA (c) 189 135 483 423
---------- ------- --------- -------
Consolidated $2,655 $2,179 $8,046 $7,213
========== ======= ========= =======
(a) As previously reported Carrier Packet Networks revenue for the
third quarter of 2004 included a reduction of $80 million related
to a cumulative correction of revenue improperly recognized in
prior periods.
(b) The Europe, Middle East and Africa region, or EMEA.
(c) The Caribbean and Latin America region, or CALA.
Please refer to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 including the Notes to the Consolidated
Financial Statements
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