Nortel Networks

Nortel Outlines Action Plan to Improve Operating Margins and Business Performance

    Toronto, Canada (ots/PRNewswire) -

    - Mix of Cost Reduction Strategies and New Business Initiatives to Increase Competitiveness

TORONTO, Canada, June 27 /PRNewswire/ --

    In connection with its previously announced Business Transformation  plan to increase competitiveness by improving operating margins and overall  business performance, Nortel(x) (NYSE: NT, TSX: NT) today announced  significant changes to its North American pension programs as well as a net  reduction of approximately 1,100 positions globally. Nortel also announced a series of new initiatives to create a world-class Operations organization.  Today's announcement is the latest in a series of actions Nortel is taking  to achieve a targeted operating-margin expansion in excess of US$1.5 billion  in 2008.

    "I am confident in the progress we are making in turning around Nortel  and recreating a great company," said Mike Zafirovski, Nortel president and  CEO. "In the past few months we've taken important steps, some with near- term impact, and others with longer-term benefits, toward transforming our  operations to be more efficient and customer-focused. Today's announcements  continue our efforts to increase competitiveness, better manage our costs,  and secure the resources to fuel Nortel's innovation."

    Key Company actions announced today include:

@@start.t1@@            -  Pension Plan: changes to control costs and align with
                 industry-benchmarked companies. These changes are expected to
                 result in an estimated annual reduction of US$100 million in
                 pension expense starting in 2008 and savings of more than
                 US$400 million in cash by the year 2012. This will reduce the
                 Company's unfunded pension liability deficit by approximately
                 US$400 million.
            -  Global Operations: initiatives designed to create a world-class
                 Operations organization to speed customer responsiveness and to
                 instill process excellence while reducing costs.
            -  Organizational Simplification: flatten the organization and shift
                 to a culture marked by agility and accountability.@@end@@

    The latter two actions result in a reduction of approximately 1,900  positions globally and the creation of approximately 800 new positions in  Operations Centers of Excellence. Total cost, both the charge to the income  statement and cash, for the Global Operations restructuring and the  organizational simplification, is estimated to be approximately US$100  million over the next two years, of which approximately US$35 million of  the charge to the income statement is expected to be taken in the second  quarter of 2006. The cash cost is expected to be incurred equally over a  two-year period. Annual savings from these actions is targeted to be  approximately US$100 million in 2007 and approximately US$175 million by 2008.

    Pension Plan Changes

    Beginning January 1, 2008, Nortel will introduce key changes to the  current Nortel Capital Accumulation and Retirement Program in the United  States and Canada. Employees currently in defined benefit pension plans  will be moved to defined contribution retirement programs. Employees  already in defined contribution programs will stay in defined contribution  programs. The defined contribution programs will have a new formula which  is comprised of an automatic employer contribution equal to two percent of  employees' eligible earnings. In addition, Nortel will provide a 50 percent  match on employee contributions of up to six percent of eligible earnings, for a total maximum five percent employer contribution.

    Current post-retirement healthcare benefits will be eliminated for employees who are not age 50 with five years of service on July 1, 2006.  All future retirees who do not meet this age and service criteria will  continue to have access to healthcare coverage at their own cost through  Nortel's preferred provider, given they meet eligibility requirements when  they retire.

    "With these changes, we are redesigning our pension plans to reduce the  overall cost of the program while still ensuring we offer a competitive  pension plan and overall benefits program in alignment with industry-  benchmarked companies," said Dennis Carey, Nortel executive vice president,  Corporate Operations.

    These changes will not go into effect for 18 months. Between now and  then employees will continue to earn benefits under the current plans. Also , employees will keep their rights to all benefits already earned in their  current plans. Those benefits will be available when they retire or leave  Nortel. The Company will provide financial education and modeling  assistance to help employees through the transition.

    Current retirees in both the U.S. and Canada will not see any change to  their pension income benefit. Some retirees in the U.S. will see a change  in the cost-sharing formula for medical benefits.

    Creating a World-Class Operations Organization

    To realize the vision of a world-class Operations organization that  delivers high quality service at low cost to customers, Nortel is also  announcing a number of actions designed to increase customer responsiveness , as well as product and service reliability. The action plan to deliver  these savings and transform Nortel's Global Operations includes:

@@start.t2@@            -  Operations Centers of Excellence: The creation of two new
                 world-class Nortel Operations Centers of Excellence in Mexico and
                 Turkey powered by state-of-the-art tools, Six Sigma processes and
                 Nortel's own technology. These locations were selected for a
                 number of reasons including Nortel's established operations in
                 these countries, a strong labor pool, cost competitiveness, and
                 proximity to major customers based in these regions. The long-term
                 plan is to consolidate more than 100 sites globally into fewer
                 operations centers of excellence focused on delivering
                 engineering, product and technical support, order management,
                 purchasing and data analysis, among other functions. As Nortel
                 consolidates these sites, the company will eliminate approximately
                 1,200 Operations positions globally, in part through attrition.
                 Nortel expects to create approximately 800 new Operations
                 positions for these and other centers of excellence by 2008.
            -  High-Touch Customer Centers: An increased focus on
                 high-customer-interaction processes delivering strategic
                 capabilities such as network design, project engineering,
                 consulting and advisory work to support Nortel's new Services
                 strategy. These activities will be led out of major Nortel
                 locations including Ottawa, Ontario; Richardson, Texas; and
                 Research Triangle Park, North Carolina, as well as locations
                 supporting Europe, the Middle East and Africa (EMEA), Caribbean
                 and Latin America (CALA) and Asia Pacific.
            -  Procurement Effectiveness: Driving process excellence through the
                 implementation of three major initiatives: supplier life-cycle
                 management, which maps supplier capabilities including agility,
                 volume and capacity to the different stages in a product's life
                 cycle; smart, simple design or parts standardization; and Clean
                 Sheet Analysis, a data-intensive best practice that enables Nortel
                 to identify what a product, or component "should" cost and then
                 use that data in supplier negotiations.@@end@@

    Organizational Simplification

    In addition to the actions taken to create a world-class Operations  organization, Nortel will eliminate approximately 350 middle management  positions throughout the company and through business unit efficiencies  approximately 350 additional positions globally.

    About Nortel

    Nortel is a recognized leader in delivering communications capabilities  that enhance the human experience, ignite and power global commerce, and  secure and protect the world's most critical information. Our next- generation technologies, for both service providers and enterprises, span  access and core networks, support multimedia and business-critical  applications, and help eliminate today's barriers to efficiency, speed and  performance by simplifying networks and connecting people with information.  Nortel does business in more than 150 countries. For more information,  visit Nortel on the Web at For the latest Nortel news, visit

    Certain statements in this press release may contain words such as " could", "expects", "may", "anticipates", "believes", "intends", "estimates ", "targets", "envisions", "seeks" and other similar language and are  considered forward-looking statements or information under applicable  securities legislation. These statements are based on Nortel's current  expectations, estimates, forecasts and projections about the operating  environment, economies and markets in which Nortel operates. These  statements are subject to important assumptions, risks and uncertainties,  which are difficult to predict and the actual outcome may be materially different. Nortel has made various assumptions in the preparation of the  forward looking information in this press release related to the following  matters: (1) Global Operations, and (2) Organizational Simplification: the  total expected costs to be incurred related to this restructuring is based  on current estimated employee headcount reductions included within  restructuring activities set forth in this press release; annualized cost  savings are based on an average per headcount cost savings (actual cost  savings realized will be dependent on an individual employee's salary,  fringe and other related costs); all charges and timing impact of charges  are based on the relevant FASB guidance for exit activities; and annual  cost savings are based on completion of the restructuring referenced in this press release by the end of 2007; and (3) post-retirement benefits:  that the methodology for calculating pension and post-retirement expenses  and liabilities is consistent with that used in Nortel's recently filed  2005 Annual Report on Form 10-K/A ("2005 10-K/A"); that the management  assumptions set forth in the 2005 10-K/A remain valid, including, without  limitation, that the expected long-term rate of return on plan assets used  to estimate pension expenses is 7.4% on a weighted average basis; that the discount rates used to estimate the net pension obligations and expenses is  5.1%; that the assumption used to estimate the post-retirement benefit  obligations and cost was an expected discount rate of 5.4%, respectively,  both on a weighted average basis; that there is no demographic shift in  Nortel's work force; that the pension and post-retirement benefits  projections are consistent with those set out in the 2005 10-K/A; and that  there are no changes in accounting standards with respect to the accounting for pension and post-retirement benefits under US or Canadian GAAP. The  above assumptions, although considered reasonable by Nortel at the date of  this press release, may prove to be inaccurate and consequently Nortel's  actual results could differ materially from its expectations set out in  this press release.

    Further, actual results or events could differ materially from those  contemplated in forward-looking statements as a result of the following (i)  risks and uncertainties relating to Nortel's restatements and related  matters including: Nortel's most recent restatement and two previous  restatements of its financial statements and related events; the negative  impact on Nortel and NNL of their most recent restatement and delay in  filing their financial statements and related periodic reports; legal  judgments, fines, penalties or settlements, or any substantial regulatory  fines or other penalties or sanctions, related to the ongoing regulatory  and criminal investigations of Nortel in the U.S. and Canada; any significant pending civil litigation actions not encompassed by Nortel's  proposed class action settlement; any substantial cash payment and/or  significant dilution of Nortel's existing equity positions resulting from  the finalization and approval of its proposed class action settlement, or  if such proposed class action settlement is not finalized, any larger  settlements or awards of damages in respect of such class actions; any  unsuccessful remediation of Nortel's material weaknesses in internal  control over financial reporting resulting in an inability to report  Nortel's results of operations and financial condition accurately and in a timely manner; the time required to implement Nortel's remedial measures;  Nortel's inability to access, in its current form, its shelf registration  filed with the United States Securities and Exchange Commission (SEC), and  Nortel's below investment grade credit rating and any further adverse  effect on its credit rating due to Nortel's restatements of its financial  statements; any adverse affect on Nortel's business and market price of its  publicly traded securities arising from continuing negative publicity  related to Nortel's restatements; Nortel's potential inability to attract  or retain the personnel necessary to achieve its business objectives; any  breach by Nortel of the continued listing requirements of the NYSE or TSX  causing the NYSE and/or the TSX to commence suspension or delisting  procedures; (ii) risks and uncertainties relating to Nortel's business  including: yearly and quarterly fluctuations of Nortel's operating results;  reduced demand and pricing pressures for its products due to global economic  conditions, significant competition, competitive pricing practice, cautious  capital spending by customers, increased industry consolidation, rapidly  changing technologies, evolving industry standards, frequent new product introductions and short product life cycles, and other trends and industry  characteristics affecting the telecommunications industry; the sufficiency  of the restructuring actions announced in this press release, including the  potential for higher actual costs to be incurred in connection with  restructuring actions compared to the estimated costs of such actions and  the ability to achieve the targeted cost savings and reductions of Nortel's  unfunded pension liability deficit; any material and adverse affects on  Nortel's performance if its expectations regarding market demand for particular products prove to be wrong or because of certain barriers in its  efforts to expand internationally; any reduction in Nortel's operating  results and any related volatility in the market price of its publicly  traded securities arising from any decline in its gross margin, or  fluctuations in foreign currency exchange rates; any negative developments  associated with Nortel's supply contract and contract manufacturing  agreements including as a result of using a sole supplier for key optical  networking solutions components, and any defects or errors in Nortel's  current or planned products; any negative impact to Nortel of its failure  to achieve its business transformation objectives; additional valuation  allowances for all or a portion of its deferred tax assets; Nortel's  failure to protect its intellectual property rights, or any adverse  judgments or settlements arising out of disputes regarding intellectual  property; changes in regulation of the Internet and/or other aspects of the industry; Nortel's failure to successfully operate or integrate its strategic acquisitions, or failure to consummate or succeed with its strategic alliances; any negative effect of Nortel's failure to evolve  adequately its financial and managerial control and reporting systems and  processes, manage and grow its business, or create an effective risk  management strategy; and (iii) risks and uncertainties relating to Nortel's  liquidity, financing arrangements and capital including: the impact of  Nortel's most recent restatement and two previous restatements of its  financial statements; any inability of Nortel to manage cash flow  fluctuations to fund working capital requirements or achieve its business objectives in a timely manner or obtain additional sources of funding; high  levels of debt, limitations on Nortel capitalizing on business  opportunities because of credit facility covenants, or on obtaining  additional secured debt pursuant to the provisions of indentures governing  certain of Nortel's public debt issues and the provisions of its credit  facilities; any increase of restricted cash requirements for Nortel if it  is unable to secure alternative support for obligations arising from  certain normal course business activities, or any inability of Nortel's  subsidiaries to provide it with sufficient funding; any negative effect to  Nortel of the need to make larger defined benefit plans contributions in  the future or exposure to customer credit risks or inability of customers  to fulfill payment obligations under customer financing arrangements; any  negative impact on Nortel's ability to make future acquisitions, raise  capital, issue debt and retain employees arising from stock price  volatility and further declines in the market price of Nortel's publicly  traded securities, or any future share consolidation resulting in a lower  total market capitalization or adverse effect on the liquidity of Nortel's  common shares. For additional information with respect to certain of these  and other factors, see Nortel's 2005 10-K/A, Quarterly Report on Form 10-Q  and other securities filings with the SEC. Unless otherwise required by applicable securities laws, Nortel disclaims any intention or obligation to  update or revise any forward-looking statements, whether as a result of new  information, future events or otherwise.

    (x) Nortel, the Nortel logo and the Globemark are trademarks of Nortel  Networks.

ots Originaltext: Nortel Networks
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