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Ericsson Makes Provision for SEK 12B to Resolve U.S. Probes

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Ericsson (ERIC - Free Report) said that its third-quarter 2019 results will be impacted by a 12 billion Swedish krona provision. This is due to a possibility of unfavorable outcome of the ongoing investigations by U.S. authorities into its business ethics breaches in six countries.

The Swedish telecom equipment maker has been cooperating since 2013 with an investigation by the U.S. Securities and Exchange Commission (SEC) and with another investigation by the U.S. Department of Justice (DOJ) since 2015, into its compliance with the U.S. Foreign Corrupt Practices Act (FCPA).

The company had earlier announced that the resolution of the investigations will result in financial and other measures. The investigation covers a period ending first-quarter 2017 and revealed breaches of Ericsson’s Code of Business Ethics and the FCPA in China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam.

The provision includes Ericsson’s estimate of expenditure related to resolving the investigations, of which the total financial sanctions from SEC and DOJ is anticipated to be $1 billion. The balance is attributable to other expenses for resolving the investigation. The amount of provision will be accounted as other operating expenses in the income statement of the company’s Emerging Business and Other segment.

Additionally, Ericsson is likely to experience reputational damage as a result of these matters. Any resulting disruption in customer or supplier relationships could have material adverse impact on the company’s business. Over the past two years, Ericsson has turned around its operations and established a strong portfolio along with competitive cost structure. It has made substantial investments in ethics and compliance program including investigative capabilities.

Meanwhile, Ericsson continues to focus on 5G system development and has undertaken several notable endeavors to position itself for market leadership. The growth in 5G subscriptions is estimated to be the fastest in North America with 63% of projected mobile subscriptions within the next five years, followed by North East Asia with 47% and Europe with 40%.

As 5G devices increasingly become available and more 5G networks go live, more than 10 million subscriptions are estimated globally by the end of 2019. Ericsson has been working with operators to help in their network modernization, while optimizing on plenty of opportunities.

Ericsson’s shares have lost 7.3% against the industry’s growth of 17.2% in the year-to-date period. Favorable industry trends are likely to boost its long-term growth and profitability. The company intends to accelerate its planned cost cuts and efficiency measures.

Ericsson currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Nokia Corp. (NOK - Free Report) , PCTEL, Inc. (PCTI - Free Report) and Viasat, Inc. (VSAT - Free Report) . While Nokia and PCTEL sport a Zacks Rank #1 (Strong Buy), Viasat carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nokia surpassed earnings estimates thrice in the trailing four quarters, the average positive surprise being 89.3%.

PCTEL surpassed earnings estimates thrice in the trailing four quarters, the average positive surprise being 146.4%.

Viasat surpassed earnings estimates in each of the trailing four quarters, the average surprise being 230.6%.

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