UPDATE 4-Nortel holds audit forecast, shares surge
July 13, 2004 10:53:00 AM ET
By Susan Taylor
OTTAWA, July 13 (Reuters) - Investors breathed a huge sigh of relief and sent shares in Nortel Networks Corp. soaring after the telecom equipment supplier on Tuesday said its audit of 2003 results did not turn up any nasty surprises and it forecast stronger 2004 sales growth than the market.
Nortel, mired in an accounting scandal and required by securities regulators to issue bi-weekly updates, stuck to its forecast that an earnings restatement will see it halve 2003 net earnings.
The news sent Nortel shares roaring to gains of 10.2 percent on the Toronto Stock Exchange to C$6.14 and 9.5 percent to $4.63 on New York, where it was the exchange's second biggest percentage gainer and second most active stock.
"The thing that might have been a ticking time bomb turned out to be an alarm clock," said Duncan Stewart, partner and portfolio manger with Tera Capital, which owns Nortel stock. "They have not dramatically altered the 2003 picture and that is quite important."
Nortel said that two-thirds of the 2003 earnings reduction impacts the first half of the year, with the remaining third affecting in the latter half.
The first half reduction will result in a net loss compared to a previously reported net profit, Nortel said, while the second half adjustment will reduce net earnings.
"It means there's still earnings," said an analyst who asked not to be named. "The language is very clear in saying we still made money in the second half -- which (analysts) were hoping was the case and now they'll have more confidence."
Nortel said the restatement will eliminate "substantially all" of its net earnings from continuing operations for 2003.
The Brampton, Ontario-based company also said it expects 2004 sales to grow faster than the telecom equipment market, which it now sees rising in the low to mid single digit percentages. In June, Nortel forecast market growth in the low single digits.
The company expects to announce preliminary results for the first and second quarters of 2004 in mid August.
Nortel also repeated on Tuesday that it needs to cut costs to drive financial performance, and will take "necessary steps" to focus its operations and investments.
"The current year has been an extremely challenging one for Nortel Networks," said chief executive Bill Owens in a statement. "That being said, we are committed to placing Nortel Networks in a position to succeed."
The company's accounting debacle is being investigated by Canadian and U.S. regulators, while police in Canada are also conducting a review to see if there is need for a criminal investigation, such as one now under way in Texas.
Nortel, which paid out millions of dollars in bonuses tied to a 2003 profit, has said it will seek recovery of any incentive payments made to staff who acted improperly.
A Wall Street Journal report said Nortel manipulated its books to show a profit by misusing accrued liabilities, which stem from charges for such things as merger costs or contractual liabilities, to boost earnings.
The report added that Nortel inappropriately took reserves from its balance sheet in the first and second quarters of 2003 and added them to earnings. It also overstated the size of its reserves, the report charged.
Nortel fired its chief executive and several other senior officers as part of the accounting scandal.
($1=$1.33 Canadian) REUTERS
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