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November 2, 2005
TORONTO -- Nortel Networks Corporation (NYSE:NT)(TSX:NT):
Q3 2005 revenues of $2.66 billion, up year over year 22 percent
Q3 2005 net loss of $105 million, $0.02 per common share on a diluted basis
Q3 2005 cash balance of $3.0 billion
Nortel Networks Corporation (NYSE:NT)(TSX:NT) today 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 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.
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.
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.
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."
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.
Nortel Networks Ltd.
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