Embattled Nortel Networks this week dealt with problems for its future, even as its former CFO faces unrelated problems from its past. The Toronto-based company has taken a whopping $1.1 billion noncash charge from changes in its Canadian tax profile.
Meanwhile, the Royal Canadian Mounted Police are still readying the filing of criminal fraud charges against a former Nortel CFO and controller.
At the same time Nortel announced the noncash charge — taken in the fourth quarter — the company also said it planned to eliminate 2,100 employees under a restructuring plan, and will move about 1,000 positions to higher growth and lower cost geographies. About 70 percent of the net reduction will take place in 2008, according to Nortel, North America’s biggest maker of telephone equipment.
More specifically, Nortel said that that the fourth quarter had been chosen for recording the charge so that it could increase the valuation allowance against the Canadian deferred tax asset due to the sustained strength of the Canadian dollar relative to the U.S. dollar, and the recent reduction of the Canadian federal tax rate and other expectations related to the timing of Canadian taxable income.
The noncash charge was reflected in the quarterly net loss of $844 million, or $1.70 a share. For the full year the loss was $957 million, or $1.98 a share.
Nortel CFO Pavi Binning stressed that the change, made to adjust its Canadian deferred tax asset, is an accounting transaction and has no bearing on the company’s financial fundamentals or cash position. “It is also important to note that despite the net reduction on our balance sheet for accounting purposes, the Canadian deferred tax asset remains available to offset the company’s future Canadian tax liability as conditions warrant,” he added. The plan also includes the sale of certain real estate assets.
These actions are expected to result in annual gross savings of about $300 million, with total charges to earnings of $275 million and cash outlays of $250 million. “However, the actual costs could be lower with the redeployment of resources,” the company added.
The adoption of the noncash writedown approach comes several days after we reported the Mounties’ pursuit of former Nortel CFO Douglas Beatty and ex-controller Michael Gollogly for their alleged involvement in a fraudulent accounting scheme, according to Canada’s Financial Post.
The fraud charges stemmed from an RCMP probe launched in 2004. The Mounties’ investigation concerned the telecom giant’s financial results in the fourth quarter of 2002 and the first two quarters of 2003, according to the paper.