$5.8m bad debt provision hurts Nortel’s local result

$5.8m bad debt provision hurts Nortel’s local result

Despite marked increases in revenue and gross profit for the year ended 31 December 2008, Nortel’s local business posted an overall loss of $2.3 million for the period — greater than the previous year’s loss of $1.59 million.

Revenue rose 46 percent to $2.6 million for the 2008 full-year over the previous year, while gross profit more than doubled to just over $9 million.

However, the New Zealand subsidiary made a $5.8 million provision in 2008 for receivables from the parent company, which filed for chapter 11 bankruptcy protection in the US in January and under the Companies’ Creditors Arrangement Act in Canada.

Nortel’s ANZ enterprise business head Rick Seeto says the bad debt expense provision was made to protect the New Zealand business and was reflected in the overall loss.

“The thought process at that time is the New Zealand business offers certain services to the parent company. Given the parent company’s [chapter 11] filing we wanted to protect ourselves to make sure that didn’t become a bad debt, so we took an impairment charge.

“It was purely an accounting entry prompted by the chapter 11 filing. From a prudence point of view, it was to protect the New Zealand entity as a business on its own. We wanted to make sure an intercompany debt that may have been owed by the parent company was fully catered for.”

In notes accompanying its financial results, the company says “normal day to day operations in New Zealand are expected to continue without interruption in New Zealand as the company finalises a consensual restructure of intercompany debt.”

In the notes, Nortel New Zealand says it does not depend on any related parties for working capital or financing and plans to be self-sufficient as a going concern. The company only depends on related entities for “strategic product leadership, technical phone support access to IP and corporate marketing and branding”.

It says directors are confident there is enough working capital for the 12 months from the date of signing the directors’ declaration.

Seeto says, “When the parent company is in a chapter 11 situation there’s enormous focus on working capital for every entity, but to the best of my knowledge New Zealand’s working capital is intact.”

He says his focus for the second half of the year is to build confidence among Nortel New Zealand partners and customers and allay their fears over the chapter 11 filing overseas.

In late July, Nortel Networks in the US announced a stalking horse agreement for Avaya to buy Nortel’s enterprise units for $US475 million.

“With a contractually binding stalking horse agreement with Avaya, we know there’s a very clear path for our enterprise business out of chapter 11,” he says. “We are out of the financial sin bin. It shouldn’t be an issue [partners and customers] need to be concerned about financially.”

He attributes the New Zealand business’ 2008 profit and revenue growth to good opportunities in the carrier space across its entire business, as well as in the enterprise, in particular government departments such as the Department of Defence. Seeto has been in the role since replacing Mark Fioretto about a month ago. Hamish McNee continues to lead the local enterprise business, as he has since 2007.

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