Nortel Networks Corp faces a new financial crisis after it said that it would delay filing its annual report for 2006 and would have to restate its accounts after discovering errors in the amount it has set aside for pensions and yet more revenue-recognition problems.
The latest in a string of restatements will further damage investor confidence in a company that has suddenly become a small player in a consolidating market for networking equipment, and shares in the Toronto, Canada-based company fell 2.3% to $29.29.
Nortel placed most blame on third-party actuarial calculation errors, which it said were embedded in its North American pension and post-retirement plans. But it also admitted revenue incorrectly recognized in prior periods that should have been deferred to later periods, an issued that has dogged it frequently in the past.
Nortel only got up to date with its financial filings in June 2006 after it had to pay $2.4bn in cash and shares to settle class action lawsuits that were launched against the company after a revenue-recognition scandal that led to the firing of three top officers in April 2004.
Securities regulators, the Royal Canadian Mounted Police, and the US Attorney’s office have all been probing events at the company in an affair that is likely to rumble on for years. The allegation then was that revenue was depressed during a market slump and then inflated during the recovery to boost executive bonuses.
Nortel said the new problems came to light after it implemented remedial measures to improve internal control over financial reporting. It said it expects to eliminate the majority of five material weaknesses in its financial controls although it continues to have a material weakness in the area of revenue recognition.
CEO Mike Zafirovski said Nortel had made great progress advancing its business transformation plan in 2006 and the announcement would not slow its progress or divert its focus.
The company said revenue in the fourth quarter to December 31 is expected to show a 10.2% rise to $3.32bn, with a gross margin slightly above 40%. It said there would be a strong contribution from its LG joint-venture and CDMA. It had $3.5bn of cash at the end of the year.
But with the newly identified revenue-recognition problems, it said it expects revisions to its previously reported 2006 nine-month results resulting in increases in revenues of $24m and improvements in income of $15m. This will also reduce 2005 revenue by $28m and increase the loss by $87m while the 2004 results will be altered to reduce revenue by $33m and increasing the loss by $42m. On results prior to 2004, Nortel said it expects revisions to reduce revenue by $27m and earnings by $5m.
Nortel will now need a waiver from government support agency Export Development Canada to avoid being in violation of the terms of a $750m support package.
Nortel last month said that CFO Peter Currie would step down at the end of April. When questioned by Computer Business Review, company spokesperson Jay Barta said Currie’s decision to go had nothing to do with the financials. He wants to pursue new challenges, said Barta.