Corning Catches Cold
Corning Inc. (NYSE: GLW) reported the layoff of 1,000 additional hourly and salaried employees last night, citing "surprise" fiber order cancellations by incumbent carriers.
While Corning had predicted a slowdown in fiber sales during its last quarterly report, execs say they were caught off guard by order reductions from their largest telecom customers, which up to now have continued to spend on fiber despite the overall telecom slowdown.
The news hits the heart of Corning's business. While the company won't say what percentage of its revenues comes directly from fiber sales, it has disclosed that its telecommunications unit, which includes fiber and cable as well as photonics, makes up about 75 percent of the company's sales.
The company says it's in the process of notifying the workers involved. The cuts will occur worldwide, although most of those to be affected are concentrated at Corning's largest North American fiber-making factories in Wilmington and Concord, N.C.
Corning also plans short-term plant shutdowns in these key locations over the coming Labor Day holiday weekend.
In a conference call last night with analysts, CEO John W. Loose said the layoffs were needed to offset a sudden slowing in orders for fiber, most significantly in the U.S. and European markets. The reductions were across all fibers in its product line, including premium LEAF and MetroCor fibers.
He said MetroCor and LEAF presently make up roughly 20 percent of all Corning's fiber volume, although that proportion may fall during the second half of 2001.
Loose and Corning CFO James B. Flaws said restructuring charges pertaining to the layoffs would be contained within the previously announced $300 million to $400 million to be recorded during the second half of 2001. They refused to provide any further specific financial forecasts or guidance, except to say that total growth in fiber sales for 2001 would be considerably below the 15 percent mark they had previously predicted.
The layoffs announced last night are the latest in a series for Corning, bringing its pink slip total to 8,000 for the year, or roughly 20 percent of the 41,000 employees the company had in January 2001.
Some analysts seem to have anticipated Corning's latest bad news. Back in April, some had openly questioned Corning's increased reliance on its fiber business to see it through the crunch it felt in other areas of its business, such as sales of phonotic components (see Corning: Solid Quarter, Sour Outlook).
On last night's call, many also questioned Corning's growing emphasis on the market in China. During Corning's latest earnings report (see Corning Touts China, Rips Analyst), the Chinese market was featured by execs as a key to the growth of the company near term. And they openly attacked analyst reports that pricing pressure in the fiber business had resulted in alleged price reductions in the Chinese market (see Corning Price Cuts Scrutinized).
Last night, execs reiterated their position on China, saying that prospects there were still good, that sales there were predominantly of long-haul fiber, not the fibers that are central to the latest woes. The company is also standing by its position on fiber pricing.
"There have been no price reductions in China, I'm not sure where that's coming from," said Flaws. He also denied rumors that fiber pricing worldwide has fallen by double digits, such as 15 percent: "Pricing has been very stable. We have not seen anything approaching that kind of figure."
Flaws and Loose also said Corning is on track with its planned purchase of equity interests in Chinese optical fiber companies from Lucent Technologies Inc. (NYSE: LU) (see Corning Buys Lucent China Interests ). They don't anticipate that a push for Chinese business by rival Furukawa Electric Co. Ltd. will affect their plans abroad. "We've competed with Furukawa for years, particularly in the Asian markets," Flaws said.
Analysts seem to agree that Corning's long-term view is good, based on several key positive features (see Corning (NYSE: GLW)), but they believe the report reflects a downturn in the fiber market resulting from carriers seeking to keep a cap on network buildouts until they can make the best use of existing fiber. Most seem to think an upswing won't occur until after 2002.
In a note this morning, for example, SG Cowen Securities initiated coverage on Corning with a "neutral" rating. They estimate 2001 earnings per share will be $0.81 on revenues of $6.9 billion, while 2002 EPS will be $0.50 on revenues of $6.5 billion.
Corning says it is undeterred from its key goals and will continue to pursue a future in optical networks. "Corning is at the center of [the] transformation from current opaque networks -- those filled with electronics -- to the new more efficient transparent optical network," Loose told analysts last night. "We are using this period of business softness to strengthen our hand."
As this went to press, Corning shares were trading at 12.30, down 2.30 (15.75%).
— Mary Jander, Senior Editor, Light Reading