Tekelec is taking a $51.3 million charge against fourth quarter earnings, the move being triggered by slow sales of telecommunications gear technology it acquired in 2004.

Tekelec also said it would restate earnings back to 2003 following an internal review.

The news triggered a $1.46, or nearly 10 percent drop, in Tekelec (Nasdaq: TKLC) stock on Wednesday to close at $13.45. More than 6 million shares were traded, or five times the average daily total.

Two analyst firms also downgraded the stock. Morgan Joseph lowered Tekelec to “hold” from “buy” and Oppenheimer lowered to “neutral” from “buy”.

The charge includes some $22.7 million in write-off of purchased technology from Taqua and some $28.6 million in goodwill related to the Taqua unit.

“We have written about the sluggish growth of Taqua in prior research pieces and believe the writedown is the right move,” wrote analyst Eric Zamkoff of Morgan Joseph in a research note. “We believe that while this represents the latest in a string of troubling events concurrent with a problematic acquisition, it should represent the final action needed to rationalize Taqua. In our view, Taqua was a $0.15-$0.20 drag on (earnings per share) which will now be removed following the writedown. Tekelec has said that a large part of the problems Taqua has experienced are related to the pace of small Class 5 switch replacement. This restatement should allow Tekelec to put the problems behind it and allow the company to
reduce its operating losses from Taqua in 2006.”

Tekelec bought Taqua, a telecom switch manufacturer, in February of 2004 for $85 million.

“The total non-cash impairment charge of $51.3 million reflects the slower than anticipated pace at which the market is replacing small Class 5 switches, particularly in North America,” said Frank Plastina, the new president and chief executive officer of Tekelec.

Class 5 switches are the “monsters” of telephony and network backbones, capable of handling 10,000 or more lines. According to Telephony Magazine, the average share of lines for a Class 5 in current networks is 36,000.

A study at the time of Tekelec’s purchase showed than network carriers are in the process of replacing more than 20,000 Class 5 switches, especially with networks moving toward voice over Internet Protocol technology.

Tekelec will continue to support Taqua products and customers, Plastina added.

The company said Tuesday that it is also restating its statements of operations for 2003, 2004 and the first three quarters of 2005.

“While this should have no impact on top- or bottom-line results, the reclassifications will heighten investor concerns over Tekelec’s financial reporting,” the analyst Zamkoff said. “Management noted that its ongoing review could include revenue recognition issues.”

Tekelec announced last week that it was delaying its fourth-quarter and 2005 earnings reports.

“(T)he Company has identified certain customer service costs that had historically been incorrectly classified in its consolidated statements of operations, resulting in an understatement of cost of goods sold and an equal overstatement of operating expenses,” Tekelec said in a statement on Tuesday after the markets closed.

“The restatement of such financial statements for the issue described above is not expected to have any impact on the Company’s previously reported revenues, income from operations, net income or earnings per share amounts, nor is it expected to impact the Company’s consolidated balance sheets or consolidated statements of cash flows,” Tekelec added.

Other issues are being reviewed as well, and the company said its “restated financial statements may not be timely filed.”

Tekelec: www.tekelec.com