Nortel Reports Financial Results for the Third Quarter 2007
Delivers Highest Operating Margin(a) since 2004
TORONTO, ONTARIO--(Marketwire - November 06, 2007) - Nortel(1)
Networks Corporation (TSX: NT)(NYSE: NT) today announced results for
the third quarter of 2007 prepared in accordance with United States
generally accepted accounting principles (GAAP) in U.S. dollars.
Results were again driven by solid operating and gross margin
expansion, evidence of the continued traction of the Company's
business transformation program.
"Nortel achieved solid results this quarter in a challenging business
environment. We delivered operating margin of 5 percent, the highest
since 2004, driven by the highest gross margin in nine quarters,"
said Mike Zafirovski, Nortel President and CEO. "I am also encouraged
by the top-line activity. Adjusted for the UMTS sale, orders in the
third quarter were up 9 percent and up 5 percent year to date, which
demonstrates Nortel's increasing relevance in the marketplace. With
an ongoing focus on customers and execution, we expect to continue to
deliver operational and financial improvements in the fourth quarter
and beyond."
Highlights
- Orders of $2.38B were up 2 percent year over year and were down 2
percent year to date; excluding the impact of the UMTS Access
divestiture, orders increased by 9 percent year over year and by 5
percent year to date.
- Revenue of $2.70 billion, down 8 percent year over year and 4
percent on a year-to-date basis; excluding the impact of the UMTS
Access divestiture, revenue decreased by 2 percent in the quarter and
grew by 2 percent year to date(b). Compared to the second quarter of
2007, revenue grew by 6 percent.
- Gross margin of 43.0 percent, up 460 basis points year over year.
- Operating margin(a) of 5.0 percent, 277 basis points better year
over year.
- Net Earnings of $27 million, or $0.05 per common share on a diluted
basis.
- Cash balance of $3.13 billion, with Cash Flow used in operations of
$139 million.
- Nortel and Microsoft's ICA alliance gained further traction by
unveiling new product plans. In the year since the alliance was
formed, the two have signed more than 300 joint customers and 900,000
licenses for their unified communications solution.
- Nortel further accelerated its enterprise go-to-market strategy
through an agreement with Dell, who will become a key sales channel
for Nortel's entire Enterprise portfolio, and some Services
offerings.
- Nortel will enable Baylor Health to securely send medical orders
directly to radiology technicians wirelessly, enabling better patient
care.
- Nortel and Polycom are adding high definition (HD) video
conferencing and telepresence to unified communications for
enterprises.
- Pine Cellular and Choctaw Electric Cooperative will use Nortel 4G
WiMAX to deliver broadband access to rural communities in
southeastern Oklahoma.
- AT&T will be among the first to deploy selected elements of a new
All-IP product line from Nortel for their GSM and UMTS network which
is designed to help service providers easily evolve to an all-IP
network.
- Australia's Silk Telecom will deploy a Metro Ethernet using
Nortel's innovative PBT (Provider Backbone Transport).
- Mumbai's International Airport Private Limited will build one of
the most extensive IP networks ever deployed by an international
airport in India.
- Nortel reached a settlement on all issues with the United States
Securities and Exchange Commission (SEC).
- Nortel announced the appointment of Pavi S. Binning as Executive
Vice President and Chief Financial Officer, Joel Hackney as
President, Enterprise Solutions, and Joe Flanagan as Senior Vice
President, Global Operations.
Revenue
Revenue was $2.70 billion for the third quarter of 2007 compared to
$2.93 billion for the third quarter of 2006 and $2.56 billion for the
second quarter of 2007. In the third quarter, as a result of a
transition of a CDMA manufacturing centre, Nortel encountered some
difficulty in fulfilling certain customer orders resulting in the
deferral of approximately $45 million in revenue.
Revenue
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YoY excl
UMTS
Q3 2007 YoY Access (b) QoQ
--------------------------------------------------------------------
Carrier Networks $ 1,080M (19%) (11%)(b) 2%
Enterprise Solutions $ 671M 18% 18% 14%
Global Services $ 540M (0%) 6% (b) 9%
Metro Ethernet Networks $ 360M (13%) (13%) (1%)
Other $ 54M (11%) (11%) (5%)
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Total $ 2,705M (8%) (2%)(b) 6%
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Carrier Networks (CN) revenue in the third quarter of 2007 was $1,080
million, a decrease of 19 percent compared with the year-ago quarter
and an increase of 2 percent sequentially. In the third quarter, CN
revenue was impacted by the UMTS Access divestiture, the transition
of a CDMA manufacturing centre, as mentioned above, and decreases in
legacy products, partially offset by a significant contribution from
the LG Nortel joint venture.
Enterprise Solutions (ES) revenue in the third quarter of 2007 was
$671 million, an increase of 18 percent compared with the year-ago
quarter and an increase of 14 percent sequentially. ES recorded the
fifth consecutive quarter of year over year growth, driven by
contract completions in the quarter across all portfolios and strong
double digit growth in the data and applications businesses.
Global Services (GS) revenue in the third quarter of 2007 was $540
million, essentially flat compared with the year-ago quarter and an
increase of 9 percent sequentially. A decrease in network
implementation services, primarily due to the UMTS Access divestiture
and lower GSM services revenue, was offset by growth in support
services. Excluding the impact of the UMTS Access divestiture, GS
revenue increased by 6 percent in the third quarter of 2007 compared
with the year-ago quarter.(b)
Metro Ethernet Networks (MEN) revenue in the third quarter of 2007
was $360 million, a decrease of 13 percent compared with the year-ago
quarter and a decrease of 1 percent sequentially. The year over year
decrease in revenue was primarily due to decreases in long-haul
optical revenue resulting from revenue recognized in the third
quarter of 2006 and not repeated to the same extent in the third
quarter of 2007, as well as decreases in legacy data, partially
offset by increases in metro optical and carrier ethernet revenue.
Deferred Revenue
Deferred revenue balances decreased by $88 million during the third
quarter of 2007 compared to a decrease of $166 million in the third
quarter of 2006. Year to date deferred revenue has decreased by $85
million compared to a decrease of $35 million in the first three
quarters of 2006.
Gross margin
Gross margin was 43.0 percent of revenue in the third quarter of
2007. This compared to gross margin of 38.4 percent for the third
quarter of 2006 and 41.1 percent for the second quarter of 2007.
Compared to the third quarter of 2006, gross margins benefited
primarily from strong double digit productivity improvements.
Operating Expenses
Operating Expenses
---------------------------------------------------------
---------------------------------------------------------
Q3 2007 YoY QoQ
---------------------------------------------------------
SG&A $ 613M 5% 3%
R&D $ 416M (12%) (2%)
---------------------------------------------------------
Total $1,029M (3%) 1%
---------------------------------------------------------
---------------------------------------------------------
Operating Expenses were $1,029 million in the third quarter of 2007,
compared to $1,059 million for the third quarter of 2006 and $1,018
million for the second quarter of 2007.
Selling, general and administrative (SG&A) expenses were $613 million
in the third quarter of 2007, compared to $585 million for the third
quarter of 2006, and $595 million for the second quarter of 2007.
Compared to the third quarter of 2006, SG&A was favourably impacted
by lower costs related to internal control remediation and finance
transformation activities and the UMTS Access divestiture, offset by
increased sales commissions and by foreign exchange impacts.
Research and development (R&D) expenses were $416 million in the
third quarter of 2007, compared to $474 million for the third quarter
of 2006 and $423 million for the second quarter of 2007. Compared to
the third quarter of 2006, R&D was primarily impacted by the UMTS
Access divestiture and lower employee-related expenses, partially
offset by unfavourable foreign exchange impacts.
Operating Margin (a)
Operating margin was 5.0 percent in the third quarter of 2007,
compared to 2.2 percent for the third quarter of 2006 and 1.3 percent
for the second quarter of 2007. Third quarter of 2007 Operating
Margin was the highest since 2004, reflecting the building momentum
of Nortel's Business Transformation initiatives while generally
maintaining top line revenue and gaining momentum in focus areas.
Other
Special charges in the third quarter of 2007 of $56 million included
restructuring charges of $20 million related to our prior
restructuring plans and $36 million related to the 2007 restructuring
program announced in February 7, 2007.
Other income (expense) - net was $163 million of income for the third
quarter of 2007, compared to income of $58 million in the third
quarter of 2006 and income of $122 million in the second quarter of
2007. Other income included interest and dividend income of $62
million, foreign exchange gains of $67 million, a gain of $14 million
due to a market value adjustment related to an undesignated interest
rate swap (which compared to a charge of $14 million in the second
quarter of 2007), and royalty income of $5 million.
Minority interest was an expense of $43 million in the third quarter
of 2007, compared to an expense of $11 million for the third quarter
of 2006 and an expense of $11 million for the second quarter of 2007.
Minority interest expense included an expense of $10 million related
to the ongoing payment of preferred shares dividends, but was
primarily driven by the profitability of the LG Nortel joint venture.
Interest expense was $107 million in the third quarter of 2007,
compared to $105 million for the third quarter of 2006 and $98
million for the second quarter of 2007.
Income tax expense was $50 million in the third quarter of 2007,
compared to $15 million for the third quarter of 2006 and $11 million
for the second quarter of 2007. The tax expense was primarily related
to the reduction of our deferred tax assets, due to rate changes in
certain European jurisdictions, partially offset by the recognition
of R&D related incentives.
Earnings
The Company reported net earnings in the third quarter of 2007 of $27
million, or $0.05 per common share on a diluted basis, compared to
net loss of $63 million, or $0.14 per common share on a diluted
basis, in the third quarter of 2006 and a net loss of $37 million, or
$0.07 per common share on a diluted basis, in the second quarter of
2007.
Significant Impact Items
-------------------------------------------------------------------------
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Q3 2007 Q3 2006 Q2 2007
-------------------------------------------------------------------------
Net Earnings $27M ($63M) ($37M)
Restructuring Charges $56M $22M $36M
SEC Accrual $35M
Loss (Gain) on Sale $3M ($15M) ($10M)
Currency Exchange Loss (Gain) ($67M) ($1M) ($69M)
Income Tax - Adjustment to Deferred Tax Asset $33M
Other Income - Loss (Gain) from Swap ($14M) $14M
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The net earnings in the third quarter of 2007 of $27 million included
special charges of $56 million for restructuring, a tax expense,
primarily related to the reduction of our deferred tax assets of $33
million, a loss of $3 million on the sale of assets, a gain of $67
million due to favourable effects of changes in foreign exchange
rates and a gain due to a market value adjustment of $14 million on
an interest rate swap. The net loss in the third quarter of 2006 of
$63 million included special charges of $22 million for restructuring
and a gain of $15 million on the sale of assets. The net loss in the
second quarter of 2007 of $37 million included special charges of $36
million for restructuring, a $35 million provision related to the
then outstanding discussions with the SEC, a loss due to a market
value adjustment of $14 million on an interest rate swap, a gain of
$69 million due to favourable effects of changes in foreign exchange
rates and a gain of $10 million on the sale of assets.
Cash
Cash balance at the end of the third quarter of 2007 was $3.13
billion, down from $4.47 billion at the end of the second quarter of
2007. The decrease in cash was primarily driven by redemption at par
$1.13 billion principal amount of Nortel's $1.80 billion convertible
notes, cash used in operating activities of $139 million, and cash
used in investing activities of $109 million, partially offset by a
positive impact from foreign exchange of $46 million.
Other Items
As previously announced, in October 2007 Nortel and the SEC reached a
settlement in connection with the SEC's investigation of the
Company's prior restatements and accounting practices. The settlement
fully resolved all issues between Nortel and the SEC. The settlement
includes, among other things, a fine of $35 million that corresponds
to an accrual recorded in the second quarter of 2007. The settlement
recognized the extensive and proactive efforts made by Nortel's
senior management and Board of Directors to identify and address the
accounting and internal control issues and conduct that led to the
investigation.
On October 1, 2007 Nortel announced the appointment of Pavi S.
Binning, a senior executive with more than 25 years of financial
experience, as Executive Vice President and Chief Financial Officer.
Binning will assume his new role effective November 12, 2007.
Outlook (c)
In the fourth quarter 2007, Nortel expects:
- Revenue to be approximately flat compared to fourth quarter 2006,
with an expected range of plus or minus $100 million, dependent on
customer spending decisions.
-- Note that fourth quarter 2006 UMTS Access revenue associated with
the assets sold was approximately $157 million.
- Gross margin as a percentage of revenue to improve slightly
compared to the third quarter of 2007.
- Operating margin(d) as a percentage of revenue to be approximately
10%, with an expected range of plus or minus 125 basis points,
dependent on revenue.
For the full year 2007, Nortel expects:
- Revenue to be down slightly compared to 2006.
- Gross margin in the low 40s as a percentage of revenue.
- Operating margin(d) as a percentage of revenue to be in the range
of 4% to 5%.
(a) Operating Margin is a non-GAAP measure defined as Gross Profit
less SG&A and R&D expenses. Operating Margin percentage is a non-GAAP
measure defined as Operating Margin divided by Revenue. Nortel's
management believes that these measures are meaningful measurements
of operating performance and provides greater transparency to
investors with respect to Nortel's performance and supplemental
information used by management in its financial and operational
decision making. These non-GAAP measures may also facilitate
comparisons to Nortel's historical performance and competitors'
operating results. These non-GAAP measures should be considered in
addition to, but not as a substitute for, the information contained
in Nortel's financial statements prepared in accordance with GAAP.
These measures may not be synonymous to similar measurement terms
used by other companies.
(b) Third quarter of 2006 included revenue of $123 million in CN and
$33 million in Global Services that related to the UMTS Access
business that was sold on December 31, 2006. CN and GS revenue for
the third quarter of 2006 excluding UMTS revenue are non-GAAP
measures. Nortel's management believes that this supplemental
information is meaningful, given the sale of the UMTS Access
business, by providing greater transparency to investors with respect
to Nortel's performance and by facilitating comparisons to Nortel's
historical performance. These non-GAAP measures should be considered
in addition to, but not as a substitute for, the information
contained in Nortel's financial statements prepared in accordance
with GAAP.
(c) The Company's financial outlook contains forward-looking
information and as such, is based on certain assumptions, and is
subject to important risk factors and uncertainties (which are
summarized in italics at the end of this press release) that could
cause actual results or events to differ materially from this
outlook.
(d) Operating Margin is a non-GAAP measure defined as Gross Profit
less SG&A and R&D expenses. Operating Margin percentage is a non-GAAP
measure defined as Operating Margin divided by Revenue. Nortel's
management believes that Operating Margin is a meaningful measurement
of operating performance and provides greater transparency to
investors with respect to Nortel's expected performance and
supplemental information used by management in its financial and
operational decision making. This non-GAAP measure also facilitates
comparisons to Nortel's historical performance and competitors'
operating results. No reconciliation of the projected non-GAAP
measure is provided to the comparable projected GAAP measure because
Nortel does not predict special items that might occur in the future,
and Nortel's forecasts are developed at a level of detail different
than that used to prepare GAAP-based financial measures. Thus, such a
reconciliation is not available without unreasonable efforts.
About Nortel
Nortel is a recognized leader in delivering communications
capabilities that make the promise of Business Made Simple a reality
for our customers. Our next-generation technologies, for both service
provider and enterprise networks, support multimedia and
business-critical applications. Nortel's technologies are designed to
help eliminate today's barriers to efficiency, speed and performance
by simplifying networks and connecting people to the information they
need, when they need it. Nortel does business in more than 150
countries around the world. For more information, visit Nortel on the
Web at www.nortel.com. For the latest Nortel news, visit
www.nortel.com/news.
Certain statements in this press release may contain words such as
"could", "expects", "may", "anticipates", "believes", "intends",
"estimates", "targets", "envisions", "seeks" and other similar
language and are considered forward-looking statements or information
under applicable securities legislation. These statements are based
on Nortel's current expectations, estimates, forecasts and
projections about the operating environment, economies and markets in
which Nortel operates. These statements are subject to important
assumptions, risks and uncertainties, which are difficult to predict
and the actual outcome may be materially different. Nortel has made
various assumptions in the preparation of its financial outlook in
this press release, including the following company specific
assumptions: no further negative impact to Nortel's results of
operations, financial condition and liquidity arising from Nortel's
restatements of its financial results; increase in sales to Nortel's
enterprise customers and wireless service provider customers in the
Asia Pacific region as a result of Nortel's joint venture with LG
Electronics Inc.; improvement in Nortel's product costs due to
favorable supplier pricing, offset by higher costs associated with
initial customer deployments in emerging markets; cost reductions
resulting from the 2007 and 2006 restructuring plans; increased
employee costs relative to expected cost of living adjustments and
employee bonuses; and the effective execution of Nortel's strategy,
including the execution of Nortel's supply chain strategy and the
implementation of its Business Transformation initiatives in 2007.
Nortel has also made certain macroeconomic and general industry
assumptions in the preparation of its financial guidance including: a
modest decrease in the growth rate of the gross domestic product of
global economies which is lower than the growth rate in 2006; global
service provider capital expenditures in 2007 reflecting mid to high
single digit growth as compared to high single digit growth in 2006;
global growth rate to remain stable with investments in next
generation products and services to offset declines in purchases of
legacy equipment; and a moderate impact as a result of expected
industry consolidation among service providers in various geographic
regions, particularly in North America and EMEA. The above
assumptions, although considered reasonable by Nortel at the date of
this press release, may prove to be inaccurate and consequently
Nortel's actual results could differ materially from its expectations
set out in this press release.
Further, actual results or events could differ materially from those
contemplated in forward-looking statements as a result of the
following
(i) risks and uncertainties relating to Nortel's business including:
significant competition, competitive pricing practice, cautious
capital spending by customers, industry consolidation, rapidly
changing technologies, evolving industry standards, frequent new
product introductions and short product life cycles, and other trends
and industry characteristics affecting the telecommunications
industry; any material, adverse affects on Nortel's performance if
its expectations regarding market demand for particular products
prove to be wrong; the sufficiency of recently announced
restructuring actions; any negative developments associated with
Nortel's suppliers and contract manufacturing agreements including
our reliance on certain suppliers for key optical networking
solutions components; potential penalties, damages or cancelled
customer contracts from failure to meet delivery and installation
deadlines and any defects or errors in Nortel's current or planned
products; fluctuations in foreign currency exchange rates; potential
higher operational and financial risks associated with Nortel's
efforts to expand internationally; potential additional valuation
allowances for all or a portion of Nortel's deferred tax assets if
market conditions deteriorate or future results of operations are
less than expected; a failure to protect Nortel's intellectual
property rights, or any adverse judgments or settlements arising out
of disputes regarding intellectual property; any negative effect of a
failure to maintain integrity of Nortel's information systems;
changes in regulation of the telecommunications industry or other
aspects of the industry; any failure to successfully operate or
integrate strategic acquisitions, or failure to consummate or succeed
with strategic alliances; Nortel's potential inability to attract or
retain the personnel necessary to achieve its business objectives or
to maintain an effective risk management strategy;
(ii) risks and uncertainties relating to Nortel's liquidity,
financing arrangements and capital including: any inability of Nortel
to manage cash flow fluctuations to fund working capital requirements
or achieve its business objectives in a timely manner or obtain
additional sources of funding; high levels of debt, limitations on
Nortel capitalizing on business opportunities because of senior notes
covenants, or on obtaining additional secured debt pursuant to the
provisions of indentures governing certain of Nortel's public debt
issues; Nortel's below investment grade credit rating; any increase
of restricted cash requirements for Nortel if it is unable to secure
alternative support for obligations arising from certain normal
course business activities, or any inability of Nortel's subsidiaries
to provide it with sufficient funding; any negative effect to Nortel
of the need to make larger defined benefit plans contributions in the
future or exposure to customer credit risks or inability of customers
to fulfill payment obligations under customer financing arrangements;
or any negative impact on Nortel's ability to make future
acquisitions, raise capital, issue debt and retain employees arising
from stock price volatility and any declines in the market price of
Nortel's publicly traded securities; and
(iii) risks and uncertainties relating to Nortel's prior restatements
and related matters including: any negative impact on Nortel and NNL
of such restatements; legal judgments, fines, penalties or
settlements related to the ongoing criminal investigations of Nortel
in the U.S. and Canada; the significant dilution of Nortel's existing
equity positions resulting from the approval of its class action
settlement; any significant pending or future civil litigation
actions not encompassed by Nortel's class action settlement; any
unsuccessful remediation of Nortel's material weakness in internal
control over financial reporting resulting in an inability to report
Nortel's results of operations and financial condition accurately and
in a timely manner; or any breach by Nortel of the continued listing
requirements of the NYSE or TSX causing the NYSE and/or the TSX to
commence suspension or delisting procedures. For additional
information with respect to certain of these and other factors, see
Nortel's Annual Report on Form10-K and other securities filings with
the United States Securities and Exchange Commission. Unless
otherwise required by applicable securities laws, Nortel disclaims
any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
(1)Nortel, the Nortel logo and the Globemark are trademarks of Nortel
Networks.
Nortel will host a teleconference/audio webcast to discuss Third
Quarter 2007 Results.
TIME: 8:30 AM - 9:30 AM ET on Tuesday, November 6, 2007
To participate, please call the following at least 15 minutes prior
to the start of the event.
Teleconference: Webcast:
North America: 1-888-339-9435 www.nortel.com/q3earnings2007
International: 1-613-763-6814
Replay:
(Available one hour after the conference call)
North America: 1-800-406-7325 Passcode: 3978685#
International: 1-972-685-0465 Passcode: 3978685#
Webcast: www.nortel.com/q3earnings2007
NORTEL NETWORKS CORPORATION
Condensed Consolidated Statements of Operations (unaudited)
(U.S. GAAP; Millions of U.S. dollars, except per share amounts)
Three months ended Nine months ended
-------------------------------------------------
September June 30, September September September
30, 2007 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------
Revenues:
Products $ 2,378 $ 2,246 $ 2,595 $ 6,793 $ 7,142
Services 327 316 331 957 954
-------------------------------------------------
2,705 2,562 2,926 7,750 8,096
-------------------------------------------------
Cost of revenues
Products 1,384 1,337 1,614 4,024 4,445
Services 158 173 189 509 535
-------------------------------------------------
1,542 1,510 1,803 4,533 4,980
-------------------------------------------------
Gross profit 1,163 1,052 1,123 3,217 3,116
Selling, general and
administrative expense 613 595 585 1,812 1,809
Research and development
expense 416 423 474 1,248 1,451
-------------------------------------------------
Operating Margin (a) 134 34 64 157 (144)
Amortization of
intangibles 12 13 8 37 19
In-process research and
development expense - - - - 16
Special charges 56 36 22 172 76
Gain on sale of
businesses and assets 3 (10) (15) (8) (42)
Shareholder litigation
settlement recovery - - 38 (54) (453)
Regulatory investigation
expense - 35 - 35 -
-------------------------------------------------
Operating earnings (loss) 63 (40) 11 (25) 240
Other income - net 163 122 58 361 178
Interest expense
Long-term debt (102) (91) (85) (278) (188)
Other (5) (7) (20) (23) (55)
-------------------------------------------------
Loss from operations
before income taxes,
minority interests and
equity in net earnings
(loss) of associated
companies 119 (16) (36) 35 175
Income tax expense (50) (11) (15) (74) (69)
-------------------------------------------------
69 (27) (51) (39) 106
Minority interests - net
of tax (43) (11) (11) (76) (1)
Equity in net earnings
(loss) of associated
companies - net of tax 1 1 (1) 2 (6)
-------------------------------------------------
Net loss before
cumulative effect of
accounting change 27 (37) (63) (113) 99
Cumulative effect of
accounting change - net
of tax - - - - 9
-------------------------------------------------
Net earnings (loss) $ 27 $ (37) $ (63) $ (113) $ 108
-------------------------------------------------
-------------------------------------------------
Average shares
outstanding (millions) -
Basic(b) 497 497 434 479 434
Average shares
outstanding (millions) -
Diluted(b) 500 497 434 479 435
-------------------------------------------------
Basic and diluted
earnings (loss) per
common share $ 0.05 $ (0.07) $ (0.14) $ (0.24) $ 0.25
-------------------------------------------------
-------------------------------------------------
(a) Operating Margin is a non-GAAP measure defined as Gross Profit
less SG&A and R&D expenses. Nortel's management believes that this
measure is a meaningful measurement of operating performance and
provides greater transparency to investors with respect to Nortel's
performance and supplemental information used by management in its
financial and operational decision making. This non-GAAP measure may
also facilitate comparisons to Nortel's historical performance and
our competitors' operating results. This non-GAAP measure should be
considered in addition to, but not as a substitute for, the
information contained in our financial statements prepared in
accordance with GAAP. This measure may not be synonymous to similar
measurement terms used by other companies.
(b) Reflects the consolidation of the outstanding Nortel common
shares at a ratio of 1 consolidated share for 10 pre-consolidated
shares effective December 1, 2006.
NORTEL NETWORKS CORPORATION
Condensed Consolidated Balance Sheets (unaudited)
(U.S. GAAP; Millions of U.S. dollars, except for share amounts)
-----------------------------------
September June 30, December
30, 2007 2007 31, 2006
-----------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 3,128 $ 4,473 $ 3,492
Restricted cash and cash equivalents 64 47 639
Accounts receivable - net 2,538 2,393 2,785
Inventories - net 2,094 2,119 1,989
Deferred income taxes - net 472 432 276
Other current assets 598 534 742
-----------------------------------
Total current assets 8,894 9,998 9,923
Investments 200 196 204
Plant and equipment - net 1,533 1,511 1,530
Goodwill 2,537 2,535 2,529
Intangible assets - net 224 234 241
Deferred income taxes - net 3,982 3,916 3,863
Other assets 545 559 689
-----------------------------------
Total assets $ 17,915 $ 18,949 $ 18,979
-----------------------------------
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade and other accounts payable $ 1,077 $ 1,025 $ 1,125
Payroll and benefit-related
liabilities 563 547 640
Contractual liabilities 266 239 243
Restructuring liabilities 121 105 97
Other accrued liabilities 3,757 3,796 4,603
Long-term debt due within one year 697 22 18
-----------------------------------
Total current liabilities 6,481 5,734 6,726
Long-term debt 3,799 5,580 4,446
Deferred income taxes - net 16 53 97
Other liabilities 3,890 3,988 5,810
-----------------------------------
Total liabilities 14,186 15,355 17,079
-----------------------------------
Minority interests in subsidiary
companies 822 788 779
SHAREHOLDERS' EQUITY
Common shares, without par value -
Authorized shares: unlimited;
Issued and outstanding shares:
437,328,768 as of September 30, 2007,
437,197,970 as of June 30, 2007 and
433,934,747 as of December 31, 2006 34,027 34,023 33,938
Additional paid-in capital 5,008 4,980 3,378
Accumulated deficit (35,688) (35,715) (35,574)
Accumulated other comprehensive loss (440) (482) (621)
----------------------------------
Total shareholders' equity 2,907 2,806 1,121
-----------------------------------
Total liabilities and shareholders'
equity $ 17,915 $ 18,949 $ 18,979
-----------------------------------
-----------------------------------
NORTEL NETWORKS CORPORATION
Condensed Consolidated Statements of Cash Flows (unaudited)
(U.S. GAAP; Millions of U.S. dollars)
Three months ended Nine months ended
-----------------------------------------------------
September June 30, September September September
30, 2007 2007 30, 2006 30, 2007 30, 2006
-----------------------------------------------------
Cash flows from (used
in) operating
activities
Net earnings (loss) $ 27 $ (37) $ (63) $ (113) $ 108
Adjustments to
reconcile net
earnings
(loss) to net cash
from (used in)
operating activities,
net of effects from
acquisitions and
divestitures of
businesses:
Amortization and
depreciation 79 73 87 231 222
In-process research
and development
expense - - - - 16
Non-cash portion of
shareholder
litigation
settlement expense
(recovery) - - 38 (54) (453)
Non-cash portion of
special charges and
related asset write
downs - 3 11 3 2
Equity in net
(earnings) loss of
associated companies (1) (1) 1 (2) 6
Share based
compensation expense 31 30 30 86 83
Deferred income
taxes (11) (2) 21 (8) 73
Cumulative effect of
accounting change -
net of tax - - - - (9)
Pension and other
accruals 64 44 84 200 269
Gain on sale or
write down of
investments,
businesses and assets 3 (5) (8) (3) (36)
Minority interests 43 11 11 76 1
Other - net (119) (86) 26 (187) 248
Change in operating
assets and
liabilities,
excluding Global
Class Action
Settlement - net (255) (150) (239) (464) (813)
Global Class Action
Settlement - net - - - (585) -
-----------------------------------------------------
Net cash from (used
in) operating
activities (139) (120) (1) (820) (283)
-----------------------------------------------------
Cash flows from (used
in) investing
activities
Expenditures for
plant and equipment (31) (53) (83) (140) (260)
Proceeds on
disposals
of plant and
equipment 5 70 36 89 125
Restricted cash and
cash equivalents (17) (3) 21 575 (546)
Acquisitions of
investments and
businesses - net of
cash acquired (55) (12) (9) (81) (134)
Proceeds on sale of
investments and
businesses (11) 21 88 (29) 199
-----------------------------------------------------
Net cash from (used
in) investing
activities (109) 23 53 414 (616)
-----------------------------------------------------
Cash flows from (used
in) financing
activities
Dividends paid by
subsidiaries to
minority interests (10) (15) (15) (35) (46)
Increase in notes
payable 23 14 61 47 88
Decrease in notes
payable (25) (15) (63) (52) (75)
Increase in loan
payable - - - - 1,300
Proceeds from
issuance of long-term
debt - - 2,000 1,150 2,000
Repayments of
long-term debt (1,125) - (1,300) (1,125) (2,725)
Debt issuance costs - (1) (42) (23) (42)
Increase in capital
leases payable - - - - -
Decrease in capital
leases payable (7) (6) (3) (18) (12)
Issuance of common
shares 1 2 - 10 1
-----------------------------------------------------
Net cash from (used
in) financing
activities (1,143) (21) 638 (46) 489
-----------------------------------------------------
Effect of foreign
exchange rate changes
on cash and cash
equivalents 46 36 6 88 59
-----------------------------------------------------
Net increase
(decrease) in cash
and cash equivalents (1,345) (82) 696 (364) (351)
Cash and cash
equivalents at
beginning of period 4,473 4,555 1,904 3,492 2,951
-----------------------------------------------------
Cash and cash
equivalents at end
of period $ 3,128 $ 4,473 $ 2,600 $ 3,128 $ 2,600
-----------------------------------------------------
-----------------------------------------------------
NORTEL NETWORKS CORPORATION
Consolidated Financial Information (unaudited)
(U.S. GAAP; Millions of U.S. dollars)
The following tables reflect the completion of the Global Services
resegmentation effected in the first quarter of 2007.
Segmented revenues
The following table summarizes revenue and Management EBT(a) by segment
for:
Three months ended Nine months ended
-----------------------------------------------------
September June 30, September September September
30, 2007 2007 30, 2006 30, 2007 30, 2006
-----------------------------------------------------
Revenues
Carrier Networks $ 1,080 $ 1,058 $ 1,337 $ 3,147 $ 3,670
Enterprise Solutions 671 590 571 1,858 1,504
Global Services 540 494 541 1,482 1,592
Metro Ethernet
Networks 360 363 416 1,096 1,142
-----------------------------------------------------
Total reportable
segments 2,651 2,505 2,865 7,583 7,908
Other 54 57 61 167 188
-----------------------------------------------------
Total revenues $ 2,705 $ 2,562 $ 2,926 $ 7,750 $ 8,096
-----------------------------------------------------
-----------------------------------------------------
Management EBT
Carrier Networks 145 173 107 454 246
Enterprise Solutions 16 3 (4) 21 (81)
Global Services 101 75 89 253 280
Metro Ethernet
Networks 3 13 32 (1) 61
-----------------------------------------------------
Total reportable
segments 265 264 224 727 506
Other (117) (216) (219) (584) (722)
-----------------------------------------------------
Total Management EBT 148 48 5 143 (216)
Amortization of
intangible assets (12) (13) (8) (37) (19)
In-process research
and development expense - - - - (16)
Special charges (56) (36) (22) (172) (76)
Gain (loss) on sales
of businesses and
assets (3) 10 15 8 42
Shareholder
litigation
settlement (expense)
recovery - - (38) 54 453
Regulatory
investigation
expense - (35) - (35) -
Income tax expense (50) (11) (15) (74) (69)
-----------------------------------------------------
Net earnings (loss)
before cumulative
effect of
accounting change $ 27 $ (37) $ (63) $ (113) $ 99
-----------------------------------------------------
-----------------------------------------------------
Geographic revenues
The following table summarizes Nortel's geographic revenues based on the
location of the customer for:
Three months ended Nine months ended
-----------------------------------------------------
September June 30, September September September
30, 2007 2007 30, 2006 30, 2007 30, 2006
-----------------------------------------------------
Revenues
United States $ 1,159 $ 1,171 $ 1,304 $ 3,546 $ 3,577
EMEA (b) 665 678 825 1,921 2,345
Canada 204 178 228 555 535
Asia 537 336 432 1,255 1,192
CALA (c) 140 199 137 473 447
-----------------------------------------------------
Total revenues $ 2,705 $ 2,562 $ 2,926 $ 7,750 $ 8,096
-----------------------------------------------------
-----------------------------------------------------
(b) Europe, Middle East and Africa
(c) Caribbean and Latin America
Network Solutions revenues
The following table summarizes Nortel's revenues by category of network
solutions for each of the reportable segments for:
Three months ended Nine months ended
-------------------------------------------------------
September June 30, September September September
30, 2007 2007 30, 2006 30, 2007 30, 2006
-------------------------------------------------------
Revenues
Carrier Networks
CDMA solutions $ 592 $ 494 $ 645 $ 1,654 $ 1,580
GSM and UMTS
solutions 341 402 477 1,014 1,472
Circuit and
packet voice
solutions 147 162 215 479 618
-------------------------------------------------------
1,080 1,058 1,337 3,147 3,670
Enterprise
Solutions
Circuit and
packet voice
solutions 426 393 388 1,194 1,051
Data networking
and security
solutions 245 197 183 664 453
-------------------------------------------------------
671 590 571 1,858 1,504
Global Services 540 494 541 1,482 1,592
Metro Ethernet
Networks
Optical
networking
solutions 305 285 309 853 799
Data networking
and security
solutions 55 78 107 243 343
-------------------------------------------------------
360 363 416 1,096 1,142
Other 54 57 61 167 188
-------------------------------------------------------
Total revenues $ 2,705 $ 2,562 $ 2,926 $ 7,750 $ 8,096
-------------------------------------------------------
-------------------------------------------------------
(a) Management EBT is a non-GAAP measure defined as operating margin
less interest expense, other income (expense) - net, minority
interests - net of tax and equity in net earnings (loss) of
associated companies - net of tax. Management believes that this
measure is a meaningful measurement of operating performance and
provides greater transparency to investors with respect to
performance and supplemental information used by management in its
financial and operational decision making. This non-GAAP measure may
also facilitate comparisons to Nortel's historical performance and
Nortel's competitors' operating results. This non-GAAP measure should
be considered in addition to, but not as a substitute for the
information contained in Nortel's financial statements prepared in
accordance with GAAP. This measurement may not be synonymous to
similar measurement terms used by other companies.
Contacts:
Nortel
Jay Barta
Media
(972) 685-2381
Email: jbarta@nortel.com
Nortel
Mohammed Nakhooda
Media
(647) 292-7180
Email: mohammna@nortel.com
Nortel
Investors
1-888-901-7286 or (905) 863-6049
Email: investor@nortel.com
Website: www.nortel.com