Nortel Reports Profits for the Fourth Quarter and Full Year 2010

 -- Cash balance as of December 31, 2010 was $807 million, compared to $1.7 billion as of September 30, 2010, plus restricted cash balance of $3.2 billion of primarily divestiture proceeds. Cash balance as of September 30, 2010 related to the U.S. Subsidiaries of $966 million was deconsolidated as of October 1, 2010.-- Fourth quarter earnings of $28 million related to MSS business and customer contracts not transferred with the sales of businesses

The fourth quarter

Nortel(1) Networks Corporation announced its results for the fourth quarter and full year 2010. Results were prepared pursuant to this agreement United States usually accepted accounting principles in U.S. dollars.

As of May 31, 2010, Nortel determined that it no longer had significant influence over the operating and financial policies of the EMEA Subsidiaries primarily due to the significance of the completed business divestitures. As a result, Nortel accounted for the EMEA Subsidiaries in accordance with the cost method of accounting as of June 1, 2010. Commencing June 1, 2010, the financial results of the EMEA Subsidiaries are no longer included in Nortel's financial results. As of October 1, 2010, Nortel determined that the U.S. Subsidiaries would be deconsolidated and accounted for pursuant to this agreement the cost method of accounting. This change was largely based on Nortel's work toward standalone debtor estates due to the diminishing interdependency between the estates primarily resulting from the sale of substantially all of Nortel's global businesses. Commencing October 1, 2010, the financial results of the U.S. Subsidiaries are no longer included in Nortel's financial results. In the context of the Creditor Protection Proceedings, Nortel continues to evaluate the method of accounting for all of its subsidiaries.

Result of the divestitures of

As a result of the divestitures of: the Code Division Multiple Access/LTE Access and Enterprise Solutions businesses in the fourth quarter of 2009; the Optical Networking and Carrier Ethernet, and Global System for Mobile communications/GSM for Railways businesses in the first quarter of 2010; and the Carrier VoIP (Voice over Internet Protocol) and Application Solutions business and Nortel's interest in the LGN joint venture in the second quarter of 2010, only the residual contracts related to those businesses were included in the respective reportable segments. The MEN reportable segment as well continued to include the multiservice switching products and related services business. As announced on September 25, 2010, Nortel entered into asset sale agreements with Ericsson, the successful acquirer at auction, for the sale of the MSS business. Nortel and Ericsson are working toward a successful transition and closing of the transaction in the first quarter of 2011. As announced on December 1, 2010, Nortel China and other third parties entered into an asset sale agreement with Ericsson China for the sale of substantially all of the assets of Guangdong-Nortel Telecommunications Equipment Co. Ltd.. Nortel, Nortel China and Ericsson China and the other shareholders of GDNT are working toward a successful transition and closing of the transaction in the second quarter of 2011.

The ES and LGN businesses are presented as discontinued operations during the other residual businesses are presented as continuing operations. The discussion below relates to Results from Continuing Operations pursuant to this agreement U.S. GAAP and excludes the financial results of the EMEA Subsidiaries and includes the financial results of the U.S. Subsidiaries for the first nine months of 2010 only. As a result, the comparative segment information has been recast to reflect this change.

The fourth quarter of 2010

Nortel's overall financial performance in the fourth quarter of 2010 was impacted by the sale of substantially all of its businesses in prior quarters.

 -- Earnings in the fourth quarter of $28 million, with declines year over year in all segments and in all regions. Full year earnings were $620 million, with declines year over year in all segments and in all regions.-- Gross margin of negative 42.9 percent in the fourth quarter, a decrease of 84.4 percentage points from the year ago quarter. Full year gross margin of 14.2 percent, a decrease of 29.9 percentage point from full year 2009.-- SG&A expense in the fourth quarter of $106 million, a decrease of 23.7 percent from the year ago quarter. SG&A expense for the full year of $515 million, a decrease of 18.6 percent from 2009.-- R&D expense in the fourth quarter of $1 million, a decrease of 99.2 percent from the year ago quarter. R&D expense for the full year of $107 million, a decrease of 84.8 percent from 2009.-- Cash balance as of December 31, 2010 was $807 million, compared to $1.7 billion as of September 30, 2010. Excludes cash balance as of September 30, 2010 related to the U.S. Subsidiaries of $966 million. For clarity, the September 30, 2010 and December 31, 2010 cash balances exclude cash balances related to the EMEA Subsidiaries.

Segment earnings from continuing operations were $28 million in the fourth quarter of 2010 compared to $641 million for the fourth quarter of 2009, reflecting a reduction of 95.6 percent as a result of the business divestitures.

  Segment Earnings B/(W)-------------------------------------------------------------------------------------------------------------------------------------------------------- Q4 2010 YoY----------------------------------------------------------------------------Wireless Networks $ 20Carrier VoIP and Application Solutions 0Metro Ethernet Networks 8Other 0---------------------------------------------------------------------------- Total Segment Earnings from Continuing Operations $ 28--------------------------------------------------------------------------------------------------------------------------------------------------------Discontinued Operations $ 0--------------------------------------------------------------------------------------------------------------------------------------------------------

Discontinued operations earnings from ES and LGN in the fourth quarter of 2010 were nil, a decrease of 100 percent compared with the year ago quarter as a result of the divestiture of the ES, NGS and DiamondWare businesses in the fourth quarter of 2009 and the sale of NNL's interest in LGN in the second quarter of 2010.

Gross margin declined to negative 42.9 percent of earnings in the fourth quarter of 2010 compared to 41.5 percent for the fourth quarter of 2009, primarily as a result of the business divestitures. Gross margin was as well impacted by the ongoing costs related to delivery of the transition services agreements, the recovery of which is recorded in other operating income.

Focus on reducing costs

A focus on reducing costs and the business divestitures resulted in lower operating expenses compared to the year ago quarter. Operating expenses were $107 million in the fourth quarter of 2010 compared to $268 million for the fourth quarter of 2009. Operating expenses were as well impacted by a change in the methodology of allocating certain SG&A expenses related to corporate overhead costs to R&D expense and cost of earnings.

The net revenues in the fourth quarter of 2009 of $1.8 billion included a gain from discontinued operations of $696 million primarily related to the divestiture of the ES business to Avaya of $756 million, reorganization items of $1,261 million primarily related to the gain on the divestiture of the CDMA/LTE (Long Term Evolution, latest standard in the mobile network technology) Access assets to Ericsson of $1,202, interest expense of $74 million, other charges of $44 million comprised in some cases by pension curtailment expense, and $80 million in income tax expense, partially offset by other income - net of $19 million, comprised partly of a currency exchange gain of $14 million.

The cash balance as of December 31

The cash balance as of December 31, 2010 was $807 million and restricted cash was $3.2 billion primarily related to the business divestiture proceeds, compared to a cash balance of $1.7 billion as of September 30, 2010. The year-end cash balance excludes the cash balance of $966 million related to the U.S. Subsidiaries deconsolidated effective October 1, 2010. The cash balance was as well impacted by cash used in financing activities of $75 million primarily related to the repayment of a note to the U.S. Subsidiaries, cash used in operating activities of $53 and a net unfavorable foreign exchange impact of $10 million, partially offset by cash from investing activities of $225 million primarily related to proceeds from the sale of the Carling Facility.

For 2010, earnings were $620 million compared to $3.5 billion for 2009. Nortel reported a net loss for 2010 of $4.1 billion, compared to net revenues of $0.5 billion for the year 2009.

Result of the following

Actual results or events could differ materially from those contemplated in forward-looking statements as a result of the following: risks and uncertainties relating to the Creditor Protection Proceedings including: risks associated with Nortel's ability to: stabilize the business and maximize the value of Nortel's businesses; obtain required approvals and successfully consummate pending and future divestitures; ability to satisfy transition services agreement obligations in connection with divestiture of operations; successfully conclude ongoing discussions for the sale of Nortel's other assets or businesses; develop, obtain required approvals for, and implement a court approved plan; allocation of the sale proceeds of our businesses among the various Nortel entities participating in these sales may take considerable time to resolve ongoing issues with creditors and other third parties whose interests may differ from Nortel's; generate cash from operations and maintain adequate cash on hand in each of its jurisdictions to fund operations within the jurisdiction while the Creditor Protection Proceedings; continue to have cash management arrangements and obtain any furthermore required approvals from the Canadian Monitor, the U.K. Administrators, the U.S. Principal Officer, the U.S. Creditors' Committee, or other third parties; raise capital to satisfy claims, including Nortel's ability to sell assets to satisfy claims against Nortel; realize full or fair value for any assets or business that are divested; utilize net operating loss carryforwards and certain other tax attributes henceforth; avoid the substantive consolidation of NNI's assets and liabilities with those of one or more other U.S. Debtors; operate Nortel's business effectively in accordance with the new organizational structure, and in consultation with the Canadian Monitor, and the U.S. Creditors' Committee and work effectively with the U.K. Administrators, French Administrator and Israeli Administrators in their respective administration of the EMEA businesses subject to the Creditor Protection Proceedings;

continue as a going concern; actively and adequately communicate on and respond to events, media and rumors associated with the Creditor Protection Proceedings that could adversely affect Nortel's relationships with clients, suppliers, partners and employees; retain and incentivize key employees and attract new employees as may be needed; retain, or when required, replace major suppliers on acceptable terms and avoid disruptions in Nortel's supply chain regarding our remaining businesses and stranded contracts; obtain court orders or approvals with respect to motions filed from place to place; resolve claims made against Nortel in connection with the Creditor Protection Proceedings for amounts not exceeding Nortel's recorded liabilities subject to compromise; prevent third parties from obtaining court orders or approvals that are contrary to Nortel's interests; and risks and uncertainties associated with: limitations on actions against any Debtor while the Creditor Protection Proceedings; the values, if any, that will be prescribed pursuant to any court approved plan to outstanding Nortel securities and, in particular, that Nortel does not expect that any value will be prescribed to the NNC common shares or the NNL preferred shares in any such plan; the delisting of NNC common shares from the NYSE; and the delisting of NNC common shares and NNL preferred shares from the TSX; and risks and uncertainties relating to Nortel's business including fluctuations in foreign currency exchange rates; any requirement to make larger contributions to defined benefit plans hereafter; a high level of debt, arduous or restrictive terms and conditions related to accessing certain sources of funding; the sufficiency of workforce and cost reduction initiatives; a failure to protect Nortel's intellectual property rights; any adverse legal judgments, fines, penalties or settlements related to any significant pending or future litigation actions; failure to maintain integrity of Nortel's information systems; and Nortel's potential inability to maintain an effective risk management strategy.

  NORTEL NETWORKS CORPORATION Condensed Consolidated Statements of Operations Three months ended Twelve months ended --------------------------------------------- December December December December 31, 2010 31, 2009 31, 2010 31, 2009 ---------------------------------------------Earnings: Products $ 23 $ 549 $ 501 $ 3,131 Services 5 92 119 315 --------------------------------------------- 28 641 620 3,446 ---------------------------------------------Cost of earnings Products 34 356 486 1,832 Services 6 19 46 94 --------------------------------------------- 40 375 532 1,926 ---------------------------------------------Gross profit 266 88 1,520 -42.9% 41.5% 14.2% 44.1%Selling, general and administrative expense 106 139 515 633Technology and development expense 1 129 107 703 ---------------------------------------------Management operating margin 184 -425.0% -0.3% -86.1% 5.3%Loss on sale of businesses and assets - 1 3 -Other operating expense - net 44 83 ---------------------------------------------Total operating expenses 76 313 344 1,419 ---------------------------------------------Operating earnings 101Other income - net 69 19 83 36Interest expense Long-term debt Other - ---------------------------------------------Earnings from operations previously reorganization items, income taxes, equity in net earnings of associated companies and EMEA SubsidiariesReorganization items - net 1,261 971 ---------------------------------------------Earnings from operations earlier incomes taxes and equity in net earnings of associated companies and EMEA Subsidiaries 1,159 809Income tax benefit 3 40 ---------------------------------------------Earnings from continuing operations earlier equity in net earnings of associated companies and EMEA Subsidiaries 1,079 708Equity in net earnings of associated companies - net of tax - -Equity in net earnings of EMEA Subsidiaries - 3 ---------------------------------------------Net earnings from continuing operations 1,082 260Net earnings from discontinued operations - net of tax 696 24 245 ---------------------------------------------Net earnings 1,778 505Income attributable to noncontrolling interests ---------------------------------------------Net loss attributable to Nortel Networks Corporation $ $ 1,777 $ $ 488 ---------------------------------------------Average shares outstanding - Basic 499 499 499 499Average shares outstanding - Diluted 499 536 499 536Basic earnings per common share - continuing operations $2.17 $0.49Basic earnings per common share - discontinued operations $1.40 $0.05 $0.49 ---------------------------------------------Total basic earnings per common share $3.57 $0.98 ---------------------------------------------Diluted earnings per common share - continuing operations $2.03 $0.49Diluted earnings per common share - discontinued operations $1.30 $0.05 $0.46 ---------------------------------------------Total diluted earnings per common share $3.33 $0.95 ---------------------------------------------(a) Nortel determined that, as of the Petition Date, the presentation of the EMEA Subsidiaries in accordance with the equity method of accounting was more appropriate based on the conclusion that Nortel exercised significant influence over those entities. The equity method of accounting resulted in the financial position and results of operations of the EMEA Subsidiaries being presented net on a single line on the balance sheet and statement of operations, respectively, versus being combined gross into each individual line item. As of May 31, 2010, the EMEA Subsidiaries are accounted for in accordance with the cost method of accounting.(b) Nortel determined that, as of October 1, 2010, the U.S. Debtors, and their subsidiaries, should be accounted for under the cost method of accounting.(c) The ES business as so then as the shares of NGS and DiamondWare are presented as discontinued operations beginning with the quarter ended September 30, 2009. The LGN business is presented as discountinued operations beginning with the quarter ended June 30, 2010. Consequently, comparative periods have been recast to give effect for the changes in presentation. NORTEL NETWORKS CORPORATION Condensed Consolidated Balance Sheets December December 2010 31, 2009 ------------------------- ASSETSCurrent assets Cash and cash equivalents $ 807 $ 1,998 Short-term investments - 18 Restricted cash and cash equivalents 158 92 Accounts receivable - net 194 625 Inventories - net 4 183 Deferred income taxes - net - 24 Other current assets 154 348 Assets held for sale 39 272 Assets of discontinued operations 4 148 ------------ ------------Total current assets 1,360 3,708Restricted cash 3,061 1,928Investments - 117Plant and equipment - net 30 688Goodwill - 9Intangible assets - net - 51Deferred income taxes - net - 10Other assets 65 177 ------------ ------------Total assets $ 4,516 $ 6,688 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' DEFICITCurrent liabilities Trade and other accounts payable $ 319 $ 294 Payroll and benefit-related liabilities 42 128 Contractual liabilities 69 93 Restructuring liabilities 1 4 Other accrued liabilities 55 660 Liabilities held for sale 10 205 Liabilities of discontinued operations 5 53 ------------ ------------Total current liabilities 501 1,437Long-term liabilitiesLong-term debt - 41Investment in net liabilities of EMEA Sbsidiaries - 534Deferred income taxes - net - 7Other liabilities 31 226 ------------ ------------Total long-term liabilities 31 808Liabilities subject to compromise 10,440 7,358Liabilities subject to compromise of discontinued operations 35 129 ------------ ------------Total liabilities 11,007 9,732 ------------ ------------ SHAREHOLDERS' DEFICITCommon shares, without par value - Authorized shares: unlimited; Issued and outstanding shares: 498,206,366 as of December 31, 2010 and 2009 35,604 35,604Additional paid-in capital 3,597 3,623Accumulated deficitAccumulated other comprehensive income ------------ ------------Total Nortel Networks Corporation shareholders' deficit ------------ ------------Noncontrolling interest 621 729 ------------ ------------Total shareholders' deficit ------------ ------------Total liabilities and shareholders' deficit $ 4,516 $ 6,688 ------------ ------------ ------------ ------------ NORTEL NETWORKS CORPORATION Condensed Consolidated Statements of Cash Flows Three months ended Twelve months ended ---------------------------------------------- December December December December 31, 2010 31, 2009 31, 2010 31, 2009 ----------------------------------------------Cash flows from operating activities Net earnings attributable to Nortel Networks Corporation $ $ 1,777 $ $ 488 Net loss from discontinued operations - net of tax 4 Adjustments to reconcile net earnings to net cash from operating activities, net of effects from acquisitions and divestitures of businesses: Amortization and depreciation 24 28 75 167 Non-cash portion of cost reduction activities - - - 18 Equity in net earnings of associated companies - net of tax - - 1 3 Equity in net loss of EMEA Subsidiaries - 50 445 Share-based compensation expense - - 56 Deferred income taxes - 7 Pension and other accruals 18 103 101 256 Loss on sales of business and impairment of assets - net - - 2 1 Income attributable to noncontrolling interests - net of tax 3 1 14 17 Reorganization items - non cash 2,155 3,434 Other - net 903 422 424 Change in operating assets and liabilities: Other 30 275 159 693 ---------------------------------------------- Net cash from operating activities of continuing operations 1,047 153 1,272 Net cash from operating activities of discontinued operations ---------------------------------------------- Net cash from operating activities 114 335 ----------------------------------------------Cash flows from investing activities Expenditures for plant and equipment Proceeds on disposals of plant and equipment 203 9 203 96 Change in restricted cash and cash equivalents 8 Decrease after all-term and long-term investments - 6 24 46 Acquisitions of investments and businesses - net of cash acquired - Proceeds from sales of investments and businesses and assets - net 7 1,085 994 1,091 ---------------------------------------------- Net cash from investing activities of continuing operations 217 Net cash from investing activities of discontinued operations 8 882 211 889 ---------------------------------------------- Net cash from investing activities 225 75 207 106 ----------------------------------------------Cash flows from financing activities Dividends paid, including paid by subsidiaries to noncontrolling interests - - Decrease in notes payable - Repayment of capital leases - ---------------------------------------------- Net cash from financing activities of continuing operations Net cash from financing activities of discontinued operations - ---------------------------------------------- Net cash from financing activities ----------------------------------------------Effect of foreign exchange rate changes on cash and cash equivalents 1 50Reduction of cash and cash equivalents of deconsolidated subsidiaries - - ----------------------------------------------Net cash from continuing operations 237 483Net cash from discontinued operations - ----------------------------------------------Net increase in cash and cash equivalents 142 362Cash and cash equivalents at beginning of period 1,686 1,856 1,998 2,397Less cash and cash equivalents of EMEA Subsidiaries - - - ----------------------------------------------Adjusted cash and cash equivalents at beginning of period 1,686 1,856 1,998 1,636 ----------------------------------------------Cash and cash equivalents at end of period 807 1,998 807 1,998Less cash and cash equivalents of discontinued operations at end of period - - ----------------------------------------------Cash and cash equivalents of continuing operations at end of period $ 807 $ 1,747 $ 807 $ 1,747 ---------------------------------------------- ---------------------------------------------- NORTEL NETWORKS CORPORATION Consolidated Financial InformationSegmented revenuesThe following table summarizes our revenue and management operating margin by segment. The financial information for our business segments does not include the results of the EMEA Subsidiaries, which is consistent with the way we manage our business segments. Three months ended Twelve months ended --------------------------------------------------- December December December December 31, 2010 31, 2009 31, 2010 31, 2009 ---------------------------------------------------Segment RevenuesWireless Networks $ 20 $ 291 $ 211 $ 2,072Carrier VoIP and Application Systems - 140 166 521Metro Ethernet Networks 8 210 241 853 ---------------------------------------------------Total reportable segments 28 641 618 3,446Other - - 2 - ---------------------------------------------------Total segment earnings 28 641 620 3,446Management Operating MarginWireless Networks $ 6 $ 62 $ 89 $ 515Carrier VoIP and Application Systems 7Metro Ethernet Networks ---------------------------------------------------Total reportable segments 1 59 3 454Other ---------------------------------------------------Total Management Operating Margin 184 -425.00% -0.31% -86.13% 5.34%Amortization of intangible assets - - - -Loss on sales of businesses and assets - 1 3 -Other operating expense - net 44 83 ---------------------------------------------------Total operating loss 101Other income - net 69 19 83 36Interest expenseReorganization items - net 1,261 971Income tax benefit 3 40Equity in net earnings of associated companies - net of tax - -Equity in net earnings of EMEA Subsidiaries - 3 ---------------------------------------------------Net earnings attributable to Nortel Networks Corporation from continuing operations $ $ 1,082 $ $ 260 --------------------------------------------------- ---------------------------------------------------Geographic revenuesThe following table summarizes our geographic revenues based on the location of the customer for: Three months ended Twelve months ended --------------------------------------------------- December December December December 31, 2010 31, 2009 31, 2010 31, 2009 ---------------------------------------------------RevenuesUnited States $ 2 $ 398 $ 342 $ 2,370EMEA - 6 3 10Canada - 97 45 335Asia 26 84 181 477CALA - 56 49 254 ---------------------------------------------------Total revenues $ 28 $ 641 $ 620 $ 3,446 --------------------------------------------------- ---------------------------------------------------(a) Europe, Middle East and Africa(b) Caribbean and Latin AmericaNetwork Solutions revenuesThe following table summarizes our revenue by segment. The financial information for our business segments does not include the results of the EMEA Subsidiaries, which is consistent with the way we manage our business segments. Three months ended Twelve months ended --------------------------------------------------- December December December December 31, 2010 31, 2009 31, 2010 31, 2009 ---------------------------------------------------RevenuesWireless Networks CDMA solutions $ 4 $ 167 $ 38 $ 1,515 GSM and UMTS solutions 16 124 173 557 --------------------------------------------------- 20 291 211 2,072Carrier VoIP and Application Systems Circuit and packet voice solutions - 140 166 521 --------------------------------------------------- - 140 166 521Metro Ethernet Networks Optical networking solutions - 175 147 765 Data networking and security solutions 8 35 94 88 --------------------------------------------------- 8 210 241 853Other - - 2 - ---------------------------------------------------Total revenues $ 28 $ 641 $ 620 $ 3,446 --------------------------------------------------- ---------------------------------------------------

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