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Nortel may restate 2003 results
Thursday, March 11, 2004
Nortel Networks Corp. surprised investors Thursday with news it may have to restate its 2003 financial results, a move that — if borne out — would mark the second time in less than a year that the battered tech giant has had to revisit the past.
Initially, investors sold off the stock in the early hours of trading following the late Wednesday announcement. At one point, the stock was down as much as 16 per cent in New York.
The stock — which has traded as low a $2.01 (U.S.) over the last 52 weeks — recovered somewhat, closing at $6.37, down 51 cents or 7.4 per cent. More than 191.3 million shares were traded.
In Toronto, the stock closed down 67 cents (Canadian) or 7.4 per cent to $8.40 on a volume of 114 million shares.
"Given this is the second time the company has gone back to review certain transactions, and the uncertainty of the impact, this does increase our level of concern," Merrill Lynch analyst Pat Chiefalo said in a note to the brokerage's clients.
Nortel made the announcement late Wednesday, saying it was delaying filing its 2003 annual report with the U.S. Securities and Exchange Commission because a previously announced accounting review could lead to the restatement of some results.
"Nortel Networks believes it is likely that it will need to revise its previously announced unaudited results for the year ended December 31, 2003 and the results reported in certain of its quarterly reports for 2003, and to restate its previously filed financial results for one or more earlier periods," the company said in a statement.
"Nortel Networks cannot predict at this time when such review will be completed given the volume and complexity of the work involved."
The most recent restatement — even if it doesn't have a long-term negative impact on the company — is likely to put at least some downward pressure on its stock and raise questions about Nortel's management.
"Nortel's latest restatement will hurt the premium investors are willing to pay for Nortel in the near-term and shake investor confidence in senior management," Schwab Soundview Capital Markets analyst Matt Hoffman said in a research note.
"However, we believe the restatement will largely be immaterial to the company's future traction and market share in key markets."
In December, Nortel Networks filed its complete restated results for the past three-and-a-half years, ending a process that began in July and finished with nominal changes to prior financial figures.
"As a result of the work done to date, Nortel Networks is re-examining the establishment, timing of, support for and release to income of certain accruals and provisions in prior periods," Nortel said.
In terms of the impact of the latest situation, Nortel also said — if the filing extends beyond March 30 — it would not be in compliance with obligations to its public debt indentures and certain credit pacts but that the delay would not cause an automatic default and acceleration in repayments of long-term debt.
However, Nortel also said if repayment of its debt securities were to be sped up, its Nortel Networks Ltd. subsidiary might not be able to meet its payment obligations and would see alternative financing.
The operating subsidiary has about $1.8-billion (U.S.) of notes outstanding and the parent company has about $1.8-billion of convertible debt securities outstanding under the indentures, Nortel said.
As well, Nortel said Export Development Canada would have the right — if the filing goes beyond March, 2004 — to terminate commitments totalling $750-million.
According to wire service reports, the company has not drawn on that credit facility.
"The company is now cash flow positive and we would be surprised to see creditors abandoning them now," Goldman Sachs analyst Brantley Thompson said in a report to clients.
"The issue will overhang the stock over the next few months and we would wait it out."
The latest announcement comes just after Nortel — which had seen its fortunes fad dramatically after the tech bubble burst - surprised the markets with a stronger-than-expected fourth quarter, during which sales and profit easily exceeded expectations.
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