Filter
Top Products
exposure to international markets, we regularly monitor all of our material foreign currency exposures. We cannot predict whether we will
incur foreign exchange gains or losses in the future. However, if significant foreign exchange losses are experienced, they could have a
material adverse effect on our business, results of operations and financial condition.
We use sensitivity analysis to measure our foreign currency risk by computing the potential decrease in cash flows that may result from
adverse changes in foreign exchange rates. The balances are segregated by source currency, and a hypothetical unfavorable variance in foreign
exchange rates of 10% is applied to each net source currency position using year-end rates, to determine the potential decrease in cash flows
over the next year. The sensitivity analysis includes all foreign currency-denominated cash, short-term and long-term debt, and derivative
instruments that will impact cash flows over the next year that are held at December 31, 2003 and 2002, respectively. The underlying cash
flows that relate to the hedged firm commitments are not included in the analysis. The analysis is performed at the reporting date and assumes
no future changes in the balances or timing of cash flows from the year-end position. Further, the model assumes no correlation in the
movement of foreign exchange rates. Based on a one-year time horizon, a 10% adverse change in exchange rates would result in a potential
decrease in after-tax cash flows of $195 as of December 31, 2003 and $132 as of December 31, 2002. This potential decrease would result
primarily from our exposure to the Canadian dollar, the British pound and the euro.
A portion of our long-term debt is subject to changes in fair value resulting from changes in market interest rates. We have hedged a portion of
this exposure to interest rate volatility using fixed for floating interest rate swaps. The change in fair value of the swaps are recognized in
earnings with offsetting amounts related to the change in the fair value of the hedged debt attributable to interest rate changes. Any ineffective
portion of the swaps is recognized in income immediately. We record net settlements on these swap instruments as adjustments to interest
expense.
Historically, we have managed interest rate exposures, as they relate to interest expense, using a diversified portfolio of fixed and floating rate
instruments denominated in several major currencies. We use sensitivity analysis to measure our interest rate risk. The sensitivity analysis
includes cash, our outstanding floating rate long-term debt and any outstanding instruments that convert fixed rate long-term debt to floating
rate. A 100 basis point adverse change in interest rates would result in a potential decrease in cash flows of $51 as of December 31, 2003 and
$39 as of December 31, 2002.
Equity price risk
The values of our equity investments in several publicly traded companies are subject to market price volatility. These investments are
generally in companies in the technology industry sector and are classified as available for sale. We typically do not attempt to reduce or
eliminate the market exposure on these investment securities. We also hold certain derivative instruments or warrants that are subject to market
price volatility because their value is based on the common share price of a publicly traded company. These derivative instruments are
generally acquired through business acquisitions or divestitures. In addition, derivative instruments may also be purchased to hedge exposure
to certain compensation obligations that vary based on future Nortel Networks Corporation common share prices. We do not hold equity
securities or derivative instruments for trading purposes. As of December 31, 2003, a hypothetical 20% adverse change in the stock prices of
our publicly traded equity securities and the related underlying stock prices of publicly traded equity securities for certain of our derivative
instruments would result in a loss in their aggregate fair values of $52 and $12, respectively, which would be offset by a corresponding
reduction in future compensation expense. As of December 31, 2002, a hypothetical 20% adverse change in the stock prices of our publicly
traded equity securities and the related underlying stock prices of publicly traded equity securities for certain of our derivative instruments
would result in a loss in their aggregate fair values of $27.
Environmental matters
We are subject to numerous environmental protection laws and regulations in various jurisdictions around the world, primarily due to our
manufacturing operations. As a result, we are exposed to liabilities and compliance costs arising from our past and current generation,
management and disposition of hazardous substances and wastes.
We have remedial activities under way at twelve of our facilities which are either currently occupied or were previously owned or occupied.
We have also been listed as a potentially responsible party at six Superfund sites in the U.S. An estimate of our anticipated remediation costs
associated with all such facilities and sites, to the extent probable and reasonably estimable, is included in our environmental accruals in an
approximate amount of $33.
For a discussion of Environmental matters, see “Contingencies” in note 22 of the accompanying consolidated financial statements.
92