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October 17, 2002

Nortel Networks Reports Results for Third Quarter of 2002

  • Revenues of US$2.36 billion, down sequentially approximately 15%
  • Strong cash performance
  • Cost structure significantly improved over Q2 2002
  • Continuing to target profitability by the second quarter of 2003

TORONTO – Nortel Networks* Corporation [NYSE/TSX: NT] reported results for the third quarter and the first nine months of 2002 prepared in accordance with United States generally accepted accounting principles, except as noted with respect to pro forma results(a).

Revenues from continuing operations were US$2.36 billion for the third quarter of 2002 compared to US$3.69 billion in the same period in 2001. Nortel Networks reported a net loss in the third quarter of 2002 of US$1.80 billion, or US$0.42 per common share, compared to a net loss of US$3.47 billion, or US$1.08 per common share, in the third quarter of 2001(b). Pro forma net loss from continuing operations(a) for the third quarter of 2002 was US$420 million, or US$0.10 per common share, compared to pro forma net loss from continuing operations(a) of US$2.18 billion, or US$0.68 per common share, in the third quarter of 2001. Included in the pro forma net loss from continuing operations(a) for the third quarter of 2002 was an incremental charge of approximately US$120 million for increased provisioning related to trade and customer financed receivables. Pro forma net loss from continuing operations(a) for the third quarter of 2002 excluded US$1.38 billion, comprised of: special charges (US$1.19 billion) primarily related to restructuring (US$599 million) and a write down of goodwill related to Optical Networks (US$595 million); certain costs related to acquisitions (US$60 million); and a net income tax charge (US$125 million).

Consistent with its quarterly review procedures, the company performed an evaluation of the recoverability of its deferred income tax assets as at September 30, 2002 and determined that it was appropriate to recognize certain additional tax valuation allowances of US$450 million (which more than offset the US$325 million income tax benefit recorded in the third quarter of 2002), resulting in a reported net income tax charge of US$125 million for the third quarter. The increase in the valuation allowance was primarily the result of the uncertainty regarding the timing of a meaningful recovery in the telecom market.

The company had a strong cash balance at the end of the third quarter of 2002 of approximately US$4.59 billion, which included approximately US$420 million of restricted cash used as cash collateral for certain customer performance bonds and contracts. In light of the cash position and anticipated financial performance, the company expects the US$1.5 billion in credit facilities, that mature mid-December 2002 and which are currently undrawn, will not be amended or extended and will expire on that date. The company will continue to monitor its financial position in light of the terms of the remaining syndicated credit facilities.

“We are pleased with the strong cash performance again this quarter,” said Doug Beatty, chief financial officer, Nortel Networks. “We will continue to focus on cash management and expect we have more than sufficient cash to fund our current business model, manage our investments and meet our customer commitments. We expect to have a cash balance in excess of US$3 billion at end of 2002. In 2003, we will drive the business to profitability and in conjunction, we expect to fund restructuring costs of approximately US$900 million and make scheduled debt repayment of approximately US$200 million.”

“We made significant progress again this quarter in our drive to profitability. We reduced our overall cost structure and had a strong gross margin performance of 38 percent despite declining revenues,” said Frank Dunn, president and chief executive officer, Nortel Networks. “We continue to monitor the marketplace and align our business and investment priorities to the market and in line with our customers drive for profitable revenues, improved productivity, and reduced cost of operations. We continue to focus our business on key transformation solutions that deliver high performance, cost effective networking for our wireline and wireless service provider networks and enterprise networks customers.”

Dunn continued, “Our core strength continues to be in our technology and industry leading portfolio. Despite the continued industry dynamics, our progress on all fronts has been significant.”

Some of Nortel Networks recent highlights include:
  • Wireless Networks - Continued momentum in wireless data
    • Sprint PCS launched commercial CDMA 1XRTT service nationwide;
    • Mobilkom Austria launched commercial network using our UMTS equipment;
    • “Business Trial” readiness milestone passed on Vodafone Spain UMTS network; and
    • 2G to 3G call handoff completed using our 3GPP network equipment and user equipment from Qualcomm.

  • Wireline Networks – Continued leadership in Voice over Packet and Packet Networking
    • Packet core network contracts with China Telecom, China Netcom, and Syringa Networks;
    • Key deployment with Tiscali UK, activation of UK’s first commercial carrier Voice Over IP Network based on Succession softswitches; and
    • Successful completion of softswitch and services trial in Taiwan with Chunghwa Telecom.

  • Optical Networks – Continued technology advancements and product wins
    • World’s first commercial deployment of Nortel Networks OPTera Connect HDX optical switch with Touch America;
    • Amended multi-year agreement with SBC to support additional deployment of metro optical services; and
    • Contract announcements for both Metro and Long Haul Optical included China Telecom, Chunghwa Telecom, and KDDI.

  • Enterprise Networks – Continued Momentum
    • Agreements for next generation, metro optical solutions for Boeing and the University of Miami; and
    • Strength in voice over packet solutions for enterprises as well as security solutions and recent Ethernet switching product offerings.

Outlook

Commenting on the company’s business focus and outlook, Dunn said, “As I have previously communicated, we expect there will be ongoing pressure on customer capital spending well into 2003. Focusing on our top priority of returning to profitability by the second quarter of 2003, we will continue to reduce our cost structure and drive to a break even model to be in place for the second quarter of 2003 (not including costs related to acquisitions and any special charges and gains) at quarterly revenues of below US$2.4 billion. Based on the plans we have worked in recent weeks, the company continues to expect a workforce of approximately 35,000 to support this break even model. We expect sequential improvement in our pro forma bottom line results in the fourth quarter of 2002.”

Breakdown of Third Quarter 2002 Revenues from Continuing Operations

Third quarter 2002 revenues from continuing operations reflected the realignment of the previously reported Metro and Enterprise Networks segment into the Wireline Networks segment and the Enterprise Networks segment. The Optical Networks and the Wireless Networks segments remained unchanged.

Compared to the second quarter of 2002, Wireless Networks segment revenues decreased 16 percent, reflecting a considerable decrease in the United States and Canada and Latin America, which was partially offset by a substantial increase in Asia and a slight increase in Europe. Enterprise Networks segment revenues decreased 4 percent, primarily reflecting a modest decrease in the United States and substantial decreases in Canada and Asia. Wireline Networks segment revenue decreased 17 percent, primarily reflecting substantial decreases in the United States, Europe and Asia. Optical Networks segment revenues were down 24 percent, primarily reflecting considerable decreases in the United States and Canada, and a significant increase in Asia.

Compared to the third quarter of 2001, Wireless Networks segment revenues decreased 30 percent, Enterprise Networks segment revenues decreased 10 percent, Wireline Networks segment revenues decreased 49 percent and Optical Networks segment revenues decreased 47 percent, representing substantial decreases across all major regions. Other revenues declined 95 percent, primarily reflecting the impact of divested businesses.

Geographic revenues for the third quarter of 2002 compared to second quarter of 2002 decreased 19 percent in the United States, 49 percent in Canada and 4 percent outside the United States and Canada. Asia was up 11 percent compared to the second quarter of 2002. Compared to the third quarter of 2001, revenues decreased 31 percent in the United States, 41 percent outside the United States and Canada, and 51 percent in Canada.

Nine-Month Results

For the first nine months of 2002, revenues from continuing operations were US$8.04 billion compared to US$14.06 billion for the same period in 2001. Nortel Networks reported a net loss for the first nine months of 2002 of US$3.34 billion, or US$0.91 per common share, compared to US$25.50 billion, or US$7.07 per common share, in the first nine months of 2001(b). Pro forma net loss from continuing operations(a) for the first nine months of 2002 was US$1.21 billion, or US$0.33 per common share, compared to pro forma net loss from continuing operations(a) of US$4.01 billion, or US$1.26 per common share, for the same period in 2001. Pro forma net loss from continuing operations(a) for the first nine months of 2002 excluded US$2.26 billion (US$2.13 billion (after tax)), mainly comprised of special charges (US$1.85 billion (after tax)), certain costs related to acquisitions and divestitures (US$156 million (after tax)) and a net income tax charge taken in the third quarter of US$125 million.

Expenses

Selling, general and administrative (“SG&A”) expenses in the third quarter of 2002 were US$682 million, which included an incremental charge of approximately US$120 million for increased provisioning related to trade and customer financed receivables. Excluding incremental charges, SG&A expenses were reduced by approximately US$105 million compared to second quarter 2002, primarily reflecting the impact of restructuring and streamlining activities. Nortel Networks expects an ongoing reduction in SG&A expenses as it moves towards profitability.

Research and development (“R&D”) expenses were US$565 million in the third quarter of 2002. The R&D expenses in the quarter reflected focused investments to drive continued market leadership in our core businesses. Going forward, Nortel Networks expects further reductions in R&D expenditures as the company leverages synergies across core development platforms which will drive greater efficiencies in its development process.

Pension Accounting

The decline in the world capital markets and global interest rates over the past year have had a significant negative impact on the investment assets of the company’s registered pension plans which are managed by third parties. As a result, the company expects to record at December 31, 2002 a non-cash charge to shareholders’ equity, currently expected to be between US$600 million to US$700 million, related to the increase in the minimum required recognizable deficit associated with these registered pension plans. In 2002, Nortel Networks has made all required cash contributions to its registered pension plans as well as additional voluntary contributions. To date in 2002, total cash contributions already made by the company to its registered pension plans was approximately US$150 million.

Nortel Networks is an industry leader and innovator focused on transforming how the world communicates and exchanges information. The company is supplying its service provider and enterprise customers with communications technology and infrastructure to enable value-added IP data, voice and multimedia services spanning Wireless Networks, Wireline Networks, Enterprise Networks, and Optical Networks. As a global company, Nortel Networks does business in more than 150 countries. More information about Nortel Networks can be found on the Web at www.nortelnetworks.com.

The following notes are important to a reader’s understanding of the information contained herein, including the pro forma information:
  1. Pro forma loss from continuing operations is defined as reported net loss from continuing operations before any “Acquisition Related Costs” (in–process research and development expense, as applicable, and the amortization of acquired technology and goodwill from all acquisitions subsequent to July 1998, as applicable), stock option compensation from acquisitions and divestitures, all special charges (which includes restructuring), any gain or loss on sale of businesses, one time gains associated with certain investment sales, any associated items as included in the income or loss of our equity accounted for investments, and certain additional income tax valuation allowances resulting from the realizability of the net deferred tax asset or some portion thereof. This pro forma measure is not a recognized measure for financial statement presentation under United States generally accepted accounting principles (U.S. GAAP). Non-U.S. GAAP earnings measures (such as this pro forma measure) do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other issuers. This pro forma measure is provided to assist readers in evaluating the operating performance of Nortel Networks ongoing business and each of the items listed above were excluded because they were considered to be of a non-operational nature in the applicable period. Investors are encouraged to consider this pro forma measure in the context of Nortel Networks U.S. GAAP results (a reconciliation to which is set out in the attached tables).
  2. Effective January 1, 2002, Nortel Networks adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Footnote (2) to the attached consolidated results (unaudited) tables discloses the effect on both the reported net loss and reported basic and diluted loss per common share for the three months and nine months ended September 30, 2001 of the Statement’s requirement to cease amortization of goodwill had the Statement been in effect beginning January 1, 2001.

Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Factors which could cause results or events to differ from current expectations include, among other things: the severity and duration of the industry adjustment; the sufficiency of our restructuring activities, including the potential for higher actual costs to be incurred in connection with restructuring actions compared to the estimated costs of such actions; fluctuations in operating results and general industry, economic and market conditions and growth rates; the ability to recruit and retain qualified employees; fluctuations in cash flow; the level of outstanding debt and debt ratings; the ability to meet financial covenants contained in our credit agreements; the ability to make acquisitions and/or integrate the operations and technologies of acquired businesses in an effective manner; the impact of rapid technological and market change; the impact of price and product competition; international growth and global economic conditions, particularly in emerging markets and including interest rate and currency exchange rate fluctuations; the impact of rationalization in the telecommunications industry; the dependence on new product development; the uncertainties of the Internet; the impact of the credit risks of our customers and the impact of increased provision of customer financing and commitments; stock market volatility; the entrance into an increased number of supply, turnkey, and outsourcing contracts which contain delivery, installation, and performance provisions, which, if not met, could result in the payment of substantial penalties or liquidated damages; the ability to obtain timely, adequate and reasonably priced component parts from suppliers and internal manufacturing capacity; the future success of our strategic alliances; and the adverse resolution of litigation. For additional information with respect to certain of these and other factors, see the reports filed by Nortel Networks Corporation and Nortel Networks Limited with the United States Securities and Exchange Commission. Unless otherwise required by applicable securities laws, Nortel Networks Corporation and Nortel Networks Limited disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

*Nortel Networks, the Nortel Networks logo, the Globemark, Succession and OPTera are trademarks of Nortel Networks.

Nortel Networks will host a teleconference/audio webcast to discuss Q3 Results.

TIME: 5:00 PM – 6:00 PM EDT on Thursday, October 17, 2002

To participate, please call the following at least 15 minutes prior to the start of the event.

Teleconference:
North America: 888-211-4395
International: 212-231-6049

Webcast: www.nortelnetworks.com/3q2002

Replay:
(Available one hour after the conference until 11:59 pm EDT, October 30, 2002)

North America: 800-383-0935
Passcode: 20249885#
International: 402-530-5545
Passcode: 20249885#

Webcast: www.nortelnetworks.com/3q2002

Contact for Press and Analysts:

Investors:
Nortel Networks
888-901-7286
905-863-6049
investor@nortel.com

Media:
David Chamberlin
Nortel Networks
972-685-4648
ddchamb@nortel.com

Tina Warren
Nortel Networks
905-863-4702
tinawarr@nortel.com

Additional Media & Analyst Contacts

PDF  Consolidated Statements of Cash Flows (65.7 KB)

PDF  Consolidated Balance Sheets (68.9 KB)

PDF  Consolidated Results (78.1 KB)

PDF  Supplementary Information (67.4 KB)