From the National Post - Looks like NT has about $3 Billion in cash.
More woes loom at Nortel
Balance sheet concerns: Analysts worried cash-flow crunch could force writeoffs
Scott Adams, with files from Michael Lewis and Jacqueline Thorpe
Financial Post
The meltdown in technology stocks has left many firms with a growing problem on their balance sheets and analysts are growing increasingly concerned it could blow up in the faces of industry leaders, including Nortel Networks Corp.
The danger of holding mountains of goodwill, associated with a binge of acquisitions over the past few years, is growing more acute as the market value of those assets has fallen precipitously.
A large amount of goodwill might otherwise sit harmlessly on a company's books and be written off over time, but the concern for firms such as Nortel is that the current economic slump could impair cash flow and force it to take massive charges in the coming quarters.
Ross Healy, president and chief executive of Strategic Analysis Corp., believes the chance of Nortel writing off some of its goodwill in the next couple years is "extremely high" given the depressed state of the telecommunications market.
"[A writeoff] would be really ugly because you're writing off a whole strategy," Mr. Healy said. "But the sooner they get this mess cleaned up, the better.
"If the company does replace John Roth, then the potential for a writeoff is, I would say, 100%," Mr. Healy said. "That's typical of a new CEO to get rid of all the mistakes of the last one."
A crunch in cash flow could force several firms to write down the value of their takeovers, many of which were completed in an "acquisition frenzy" at "peak valuations," according to quantitative analysts at Scotia Capital Markets.
"We believe that the carrying value of goodwill on many companies' balance sheets is greatly in excess of current cash-flow expectations and that the coming writedowns of these assets is inevitable," said Scotia authors Peter Gibson, Andrew Marmash and Robert Nikifork in a report to clients last week.
In 2000, Nortel completed 11 major deals for a total purchase price of US$19.7-billion, the authors noted. Of that, US$17.6-billion was allocated to goodwill. In total, 45% of Nortel's assets and 65% of its book value consisted of goodwill and intangible assets, they found.
"The ratios are worse for JDS Uniphase [Corp.] where 80% and 86% of its total assets and shareholder's equity, respectively, are also goodwill."
Nortel is still Canada's most powerful global company and one might think that such a company has wisely socked billions of dollars away somewhere, ready for use in the case when a bad storm arises. But that is not necessarily the case.
A look at the company's results last year also shows the company actually made a lot less money than is first apparent.
Most investors look at a company's income statement to judge its financial performance.
Last year, Nortel said it earned US$2.3-billion, or US74¢ a share from its operations. That figure does not include what is called intangibles, such as goodwill and acquired technology from acquisitions. But if these items are included, Nortel actually lost US$3.5-billion, or US$1.17 a share last year.
"Nortel had convinced the Street to look at it's earnings in a way that was not derived using generally accepted accounting principles," said Michael Palmer, analyst at research boutique Veritas Investment Research Corp. "They had this thing called operating earnings."
He said reporting the cost of goodwill separately became de rigueur for high-technology companies as they snapped up rivals with high priced shares during the the technology boom.
"Mostly, it's been high-tech companies convincing people to look at their earnings differently because they were a different breed and the markets and economy were different for them," Mr. Palmer said. "Well, it turns out they weren't so different."
Another useful indication of Nortel's health is its statement of cash flow, which shows actually cash that came into the door from Nortel's operations.
On sales of US$30.3-billion last year, the company took in just US$40-million of net cash from its operating activities.
That compares to the year before when the company took in US$1-billion of net cash from its operating activities on sales of US$21.3-billion. A big reason why Nortel took in so much less cash is that it spent US$2-billion on building its inventories in the year, up from US$1.3-billion in 1999.
The company's cash flow statement was weak even though it was also helped last year by events that will be hard to see happen again this year.
Nortel took in US$479-million from issuance of common shares, which comes from people exercising their stock options. With Nortel's stock so low, it will be hard for Nortel to take in anywhere near that amount this year.
Nortel also took in US$1.7-billion from the sale of assets, including its manufacturing plants and its stake in Entrust Technologies.
Nortel faces a loss in its current quarter and hundreds of millions of dollars in potential severance costs for paying off thousands of employees.
Nortel is cushioned from this by its cash position, which stood at US$1.6-billion at the end of last year, down from US$2.2-billion in 1999, and it recently raised US$1.5-billion for a bond sale.
Nortel competitor Lucent Technologies Inc. faces a liquidity crunch after the initial public stock sale of its Agere Systems Inc. unit raised less than planned, an offer adversely affected by Nortel's profit warning the previous day.
sadams@nationalpost.com |
