Nortel Backtracks, Will Restate Earnings Again

Nortel Networks, which had appeared to be on a strong turnaround course after purging its executive ranks, settling lawsuits and restating past earnings, said it will delay filing its annual report and again restate results after discovering more accounting irregularities.

Nortel was quick to make a distinction between the planned restatement, which was disclosed along with preliminary results for the company’s fourth quarter, and past accounting problems, saying that in this case, revenue was “real” but “recognized in the wrong periods.”

‘Accurate Information’

“Our priority is to have accurate financial information,” said CEO Mike Zafirovski. “Although the need to restate certain financial statements is unfortunate, it’s the right thing to do.”

He said the restatements, which cover the first nine months of 2005 as well as all of 2003 and 2004, will not affect the company’s cash position and said the company remains on a “solid foundation.” For the first nine months of 2005, the restatement will reduce revenue by US$162 million and earnings by $95 million. Revenue for 2003 will be lowered by $157 million and earnings by $91 million, while revenue for 2004 will drop $77 million and earnings by $93 million.

“Though it will take time, our unwavering commitment to be among the top companies in the world in corporate governance and business and financial controls remains,” Zafirovski added.

Since 2004, Nortel has worked to expunge past accounting issues, which resulted in investigations by regulators and private lawsuits, and reposition itself to take advantage of the new interest in phone and Internet gear as the telecom industry evolves through consolidation and expansion of the services being offered through phone and Internet connections.

Turnaround on Hold

Along the way, it slashed its workforce, publicly fired a number of executives connected with the misstatement of revenue from the earlier period, between 2000 and 2001, and sold much of its manufacturing capabilities to a third party that now builds its gear on an outsourcing basis.

Last month, Nortel said it had proposed a $2.4 billion settlement to end various lawsuits from investors who claimed they were harmed by the company’s misstatement of results.

Nortel has also tried to look at where it will play a role in the telecom gear industry as it changes in the future, spending just under $100 million to buy enterprise router maker Tasman Networks as it seeks to be in position to deliver converged networks that handle IP-based traffic as well as traditional telecommunications traffic. Nortel was once a dominant leader in the sector and still retains a strong brand and positive reputation for its ability to design and deliver heavy-duty telecom and network switches and routers.

The company said it would post a fourth quarter loss of $2.21 billion, including more than $2 billion in charges related to its shareholder settlement and other litigation costs. It said revenue for the fourth quarter looked to be up 14 percent year-over-year to around $2.95 billion.

Nortel shares were unchanged in midday trading Friday at $3.09. The stock has traded in a narrow range during the past year as investors digest the numerous changes.

Own Worst Enemy

Though of a different variety, the new accounting issues may derail those efforts by serving as a painful reminder of those past problems, which resulted in the CEO and CFO departing and other executives facing potential lawsuits from the company.

“Nortel has been saddled with accounting issues for years. Last year we thought it was done and the company was going to start recovery,” telecom analyst Jeff Kagan told the E-Commerce Times. “This news bothers everyone — investors, customers and workers. Getting back on track is enough of a challenge as the industry continues to change.”

Kagan, who thinks Nortel made a wise move by bringing Zafirovski aboard from Motorola — a hiring that resulted in a short-lived spat of back-and-forth lawsuits between the two companies — said Nortel is still a sound company.

“I don’t think there is anything really wrong with the company, but when they have these accounting issues it makes it very difficult to develop the kind of trust they need from investors and customers and workers,” he added. “They shot themselves in the foot again.”

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