Nortel ( NT) said new revenue-recognition adjustments will cause it to miss a deadline for filing its 2005 annual report, an event that will leave it out of compliance with lenders. The company, which has been working for three years to clean up its accounting, said the latest restatements relate to previously booked revenue that should have been deferred into future periods. Nortel expects the restatement to lop $162 million out of revenue and $95 million from net income in the first nine months of 2005. The restatements will reduce 2003 and 2004 revenue by about $234 million and earnings by $184 million, Nortel said. Previously filed financial statements aren't reliable, the company said, and a material weakness continues to exist with regard to its financial controls. "Although the need to restate certain financial statements is unfortunate, it's the right thing to do," said CEO Mike Zafirovski, the former Motorola ( MOT) executive who took the reins last summer after a parade of executives tried to right Nortel's ship. "This revenue is real -- it was recognized in the wrong periods. The restatements do not affect the company's cash position." Nortel also released preliminary results for the fourth quarter, saying it lost $2.21 billion, or 51 cents a share, in the period because of a litigation expense of $2.47 billion, or 57 cents a share. Revenue for the quarter was $2.95 billion, up from $2.59 billion a year ago. Analysts surveyed by Thomson First Call had been forecasting precharge earnings of 4 cents a share on sales of $3.02 billion. "Two thousand five was an important year," said Zafirovski. "The business was stabilized and we began to set the foundation for the future. Because of Nortel's strong technology solutions and customer relationships, we grew our business in 2005 for the first time in five years. We are, however, certainly not satisfied with our financial results, which in my opinion have not been good in terms of growth, operating margins and cash flows since 1998. We are working diligently to rectify this and we expect that you will start to see improved results during 2006."
For 2006, Nortel said it expects "revenue momentum in the second half," resulting in mid- to high-single digit growth for the full year 2006 compared to 2005. It expects gross margin to be in the "low 40s" as a percentage of revenue and operating expenses to be essentially flat compared to 2005. Regarding the restatement, Nortel said it won't be able to file its 2005 Form 10-K by March 16 and, absent a waiver, a default will occur under its $1.3 billion one-year credit facility. That could result in lenders accelerating repayment terms and trigger other default events. "Nortel will request a temporary waiver from the lenders while Nortel completes its filing obligations. There can be no assurance that Nortel will receive such a waiver." The stock fell 8 cents, or 2.6%, to $3.01.