The charges reflect the declining value of Corning's intangible assets, such as goodwill, in its telecom-related businesses. The company plans to record the following:
Bottom line? Corning's expecting to take about $2 billion in pretax restructuring and impairment charges for 2002. What's more, the vendor says it doesn't expect the telecom spending slump that's forcing the intangible asset writeoffs to improve before "late 2004."
The news is yet another shoe dropping. In its last quarterly report (see Corning Reports Q3), Corning told investors to expect a charge against intangible assets like goodwill to be added to the $619 million in restructuring and impairment charges it already had accumulated at the end of September. In addition, the company predicted it would have $550 to $650 million in pretax structuring and impairment charges separate from goodwill in the fourth quarter.
Bad news, eh? Sure, but perhaps not so bad. While Corning's charges reflect the company's belief that market conditions have substantially reduced the earning potential of its telecom segment businesses, at least one analyst thinks Corning's heading the right way.
"This is another important step towards 'clearing the decks' for GLW's return to profitability (albeit slight) by the second half of next year, in our view," writes Steven B. Fox, director at Merrill Lynch & Co. Inc., in a note today. Fox thinks the final step toward Corning's recovery could be the sale of the very photonics business the company has been forced to devalue.
In Fox's view, the negative impact of Corning's news, including a reduction in shareholder equity and an increase in the company's debt-to-capital ratio, are partially offset by the company's plans to sell its Precision Lens business to 3M Company (NYSE: MMM) for $850 million, a deal that's expected to close by year's end (see Corning Taps 3M for 850M).
It's also possible that reevaluating its photonics business is a first step toward selling it. "We believe the value of the remaining photonics assets is now below $200 million, and GLW continues to evaluate strategic alternatives for this business," Fox writes. He thinks a decision on what to do with it could come as early as the first quarter of 2003.
Now, what about that dire market prediction? Two more years is a long time to wait!
Some say Corning may not be mistaken about its own near-term future, but that's not a sign of total bleakness. In an announcement today, for instance, market researcher Strategies Unlimited claims it's still expecting a resurgence in optical components in 2003 (see Strategies U. Sees Component Surge). While revenues won't be nearly what they were pre-boom, it's likely some vendors will see sales rise 30 percent, the firm says.
That's not to say Corning is wrong in its predictions. "[Thirty percent] growth is good, but it only brings us to 1998 levels or so, because we have fallen so much," writes Tom Hausken, Strategies Unlimited's director, optical communications components, in an email to Light Reading today. "We are bouncing off the bottom. So, it's significant if your sales are zero, but not if you need them to be at 2001 levels. Also, Corning's focus is more on fiber, which will take longer than other telecom segments."
It's also possible that what helps Corning in the near term -- namely, selling its photonics business -- could wind up stalling growth in the market in general, by simply reshuffling unprofitable businesses around from owner to owner.
"Lack of vendor consolidation and low barriers to new capacity suggest future earnings [in optical components] could remain elusive," wrote Max Schuetz of Credit Suisse First Boston Corp. in a note on November 13. "Despite decisions from several vendors to exit the optical component market, few of these businesses have actually been shut down. Rather, a new series of suppliers are acquiring the product lines. Even though some physical capacity is being removed, we believe that new capacity could be quickly brought online (the industry added over $3B of capacity in 2000 alone) making a reduction in the number of competing vendors key to pricing stability and profits."
In the end, what happens to Corning and the optical components market in general could be separate issues. But one thing is clear: There are no easy answers.
At press time, Corning shares were trading at $3.93, down $0.30 (7.09%).
— Mary Jander, Senior Editor, Light Reading