Nortel Rattles Nerves

Just as things were looking up, Nortel Networks Corp. (NYSE/Toronto: NT) has announced another restatement.

Last night, Nortel reported it has delayed its 10-K filing with the SEC, saying it would probably have to restate the unaudited earnings it reported for 2003. This comes on the heels of the company's November restatements, which tweaked results for the years 2000 through 2002 and for the first two quarters of 2003 (see Nortel Delays Earnings Report, Nortel Keeps to Profit Path, and Nortel Refiles Results).

Nortel shares were down $0.61 (9%) to $6.27 in morning trading.

Details are scarce, but it appears Nortel will restate its 2003 earnings and might have to redo some of the numbers already restated last November. A Nortel statement said the company was "re-examining the establishment, timing of, support for and release to income of certain accruals and provisions in prior periods."

"We're disappointed, but we're quite committed to ensuring we get this correct," a company spokeswoman says.

The news douses excitement over Nortel's newly found profitability. The company had reported a blowout fourth quarter, with revenues up 12 percent, to $2.83 billion, and net income of $499 million, capping the company's first profitable year since 1997 (see Nortel Scores in Q4).

The newest restatement is embarrassing, but analysts say it shouldn't trigger the worst-case scenario: the calling in of $3.6 billion in debt.

"I don't think it's going to result in any bond acceleration or anything -- that would be the main issue," says Stephen Koffler, analyst with Wachovia Securities Inc. "Since it doesn't relate to revenues -- it only relates to earnings from accruals -- I don't think the bondholders will do anything."

"This should not affect Nortel's liquidity nor lead to default of $3.6B in long term debt, but could lead to termination of credit lines," writes Steve Levy, analyst with Lehman Brothers, in a note today. "To be clear, today's press release does not make any comments about this expected restatement not impacting future cash balances -- this language was in prior press releases when the company restated results in late 2003."

The debt in question consists of $1.8 billion of convertible debt securities and $1.8 billion in notes held by subsidiary Nortel Networks Ltd. The danger appears to be that the debt maturity could be accelerated if the 10-K filing is delayed more than 90 days beyond March 30, in which case Nortel would have to "seek alternative financing sources" to cover payments, according to the press release.

— Craig Matsumoto, Senior Editor, Light Reading