Nokia Corporation — 2018 Form 20-F Summary
Business context and reporting period
Filed March 21, 2019, this audited annual report covers the fiscal year ended December 31, 2018, with comparisons to 2017 and 2016. It is not a standalone fourth-quarter report; the filing text does not provide a clear, complete set of Q4-only financial results. Nokia reports under IFRS as issued by the IASB and adopted by the EU. Its continuing operations comprise the Networks business and Nokia Technologies, with Networks equipment, software and services serving communications providers and selected enterprise markets; Nokia Technologies primarily licenses patents and its brand.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | EUR 22.563bn | EUR 23.147bn |
| Gross profit / margin | EUR 8.446bn / 37.4% | EUR 9.139bn / 39.5% |
| Operating profit (loss) / margin | EUR (59)m / (0.3)% | EUR 16m / 0.1% |
| Loss from continuing operations | EUR (549)m | EUR (1.437)bn |
| Loss attributable to parent shareholders | EUR (340)m | EUR (1.494)bn |
| Diluted EPS, continuing operations | EUR (0.10) | EUR (0.26) |
| Cash flow from operating activities | EUR 360m | EUR 1.811bn |
| Capital expenditure | EUR 672m | EUR 601m |
| Cash and current financial investments | EUR 6.873bn | EUR 8.280bn |
| Net cash and current financial investments | EUR 3.051bn | EUR 4.514bn |
| Interest-bearing liabilities | EUR 3.822bn | EUR 3.766bn |
Operating cash flow fell mainly due to EUR 943m absorbed by net working capital, including higher inventories and lower liabilities. Cash outflow from investing activities was EUR 315m; cash outflow from financing activities was EUR 969m, including EUR 1.081bn of dividends paid. The company also reported an undrawn EUR 1.579bn revolving credit facility, with no financial covenants. Management said available liquidity was sufficient for working capital, investment and debt service at least through 2019. Credit ratings were BB+ from S&P and Ba1 from Moody’s.
Material changes versus the prior year
- Reported net sales declined 3%; CEO commentary cited 1% growth excluding foreign-exchange effects. Gross margin declined 2.1 percentage points and operating results moved from a small profit to a small loss.
- Networks sales fell 2% to EUR 20.121bn and segment operating profit declined to EUR 1.199bn from EUR 1.711bn; segment margin fell to 6.0% from 8.3%. The decline reflected lower gross profit across its reportable segments.
- Nokia Technologies sales fell 9% to EUR 1.501bn, principally from lower one-time licensing revenue, partly offset by higher recurring licensing. Operating profit increased 7% to EUR 1.203bn as R&D and SG&A costs declined. Nokia sold its Digital Health business in May 2018 and focused Technologies on licensing.
- Discontinued operations recorded EUR 214m profit versus a EUR 21m loss in 2017, largely from resolution of an Indian withholding-tax dispute and release of uncertain tax positions.
- Operating cash flow was substantially lower than in 2017, when working capital released cash. Total cash and current financial investments decreased by EUR 1.407bn.
Outlook, management commentary, risks and unusual items
- Management described 2018 performance as below expectations overall, but said second-half Networks sales grew year over year excluding currency effects and the company exited the year with a strong Networks order backlog. Nokia reported more than 25 signed 5G commercial deals and nearly 100 trials and pilots.
- Nokia announced a new program targeting EUR 700m in annual cost savings by the end of 2020. Its prior program, targeting EUR 1.2bn of recurring annual savings by 2018, was reported complete and achieved. The 2018 income statement included EUR 319m of restructuring and associated charges and EUR 548m of product portfolio integration-related costs within gross profit.
- The Board proposed authorization for a maximum EUR 0.20 per share annual distribution for 2018, subject to shareholder and Board approvals. Beginning with the 2018 distribution, Nokia planned quarterly installments. This is a proposal, not a guaranteed future payment.
- Material risks include intense competition and price pressure, dependence on a limited number of large customers and multiyear contracts, timing and execution of 5G deployments, component supply constraints, currency movements, patent licensing uncertainty, cybersecurity and privacy threats, and the execution and potential disruption of restructuring. The filing also describes ongoing legal and tax matters, including an internal investigation into compliance practices at the former Alcatel Lucent business reported to relevant authorities; potential outcomes and costs are uncertain.
- IFRS 9 and IFRS 15 were adopted in 2018 without restating comparative periods. Management identified and remediated a material weakness in controls over IFRS 15 contract balances; management and the auditor concluded year-end internal control over financial reporting was effective. The auditor issued an unqualified opinion on the financial statements and internal controls.
- After year-end, Nokia repaid EUR 231m of notes maturing in February 2019 and issued EUR 750m of senior unsecured notes in March 2019, due 2026 with a 2.00% coupon. The company also reported a shift to three reportable segments beginning in Q1 2019.
Key facts for investors to verify
- Reconcile reported sales decline of 3% with management’s 1% constant-currency growth statement, and examine the underlying segment and geographic trends.
- Assess whether Networks margins and operating cash flow recover as 5G deployments scale, and whether working capital and inventory levels normalize.
- Track the EUR 700m savings program: timing, implementation costs, cash outflows, workforce effects and impact on R&D and competitiveness.
- Confirm approval and payment terms for the proposed EUR 0.20 per-share distribution, and distinguish it from dividends already paid during 2018.
- Review debt maturities, refinancing and liquidity after the 2019 repayment and subsequent EUR 750m bond issuance; consider the non-investment-grade ratings.
- Monitor outcomes and potential financial exposure from tax disputes, litigation, guarantees and the disclosed compliance investigation, as well as the effect of IFRS 9/15 and the 2019 segment-reporting changes on comparability.