Corning Inc. (NYSE: GLW) is the latest company to give an advance warning of disappointing earnings following its decision to write off nearly $3 billion from its balance sheet.

Corning, which admits it overestimated the strength of the telecom recovery, will include a charge of between $2.8 billion and $2.9 billion in its third quarter results, the company announced yesterday evening (see Corning Takes Q3 Charges).

The charges will toss the company into the red, as analysts are expecting net income of $221 million for the quarter ended in September, according to Reuters Research.

The company will release its third quarter numbers after the market closes on October 20.

Last night's news hit Corning's stock by nearly 3 percent in pre-market trading, as it dipped 32 cents to $11.03.

While much of Corning's focus these days is on liquid crystal displays, the charges stem from its telecom business. They include a $1.4 billion erasure of goodwill related to telecom, and another $420 million to cancel the already postponed expansion plans at its Concord, N.H.-based optical fiber plant. The remaining $1 billion is an allowance against deferred income taxes.

Corning's balance sheet shows $1.7 billion in goodwill, $1.6 billion of which comes from its telecom business. Nearly all of that will be wiped out with the third-quarter charges.

The problem is that the telecom recovery is coming too slowly. As much as Corning has cut back, it seems the company still overestimated the volume of telecom business it would be getting.

"We are not seeing significant signs of the broad uplift in industry conditions previously projected for 2005 and beyond," says CFO James Flaws in a written statement. As a result, the cash flow from Corning's telecom business can "no longer support the goodwill related to this segment," Flaws says.

Specifically, Corning doesn't see the pricing for fiber getting any better, because the telecom industry still carries an oversupply of long-haul capacity. Moreover, Corning's LEAF premium fiber has become a bust. Sales have dropped to basically nothing, officials said on a conference call this morning, and during the past year, Corning has come to believe that the business won't be coming back.

"We are seeing increasing evidence that single-mode [fiber] is going to be used for jobs that previously would have [used] LEAF," Flaws said on the conference call.

What's interesting is that the goodwill writeoff isn't directly related to fiber. The goodwill came mostly from photonics, based on Corning's acquisitions during the bubble. But according to Corning officials, accounting rules state that goodwill be treated as a single entity, so it's possible for a weak forecast in one area (fiber) to cause a writeoff of goodwill generated by another area (photonics).

It's one more speed bump in the telecom recovery. Several telecom-related companies have announced bad news for their September-quarter earnings. (See Earnings Warning Turns Redback Blue, Adtran Falls Short in Q3, Avici Target out of Reach , Nortel Sees Light Revenues, Slow Growth, Broadcom Lowers Q3 Guidance, and Inventory Bugaboo Haunts Chips.)

Corning's telecom work these days consists of selling optical fiber, with a particular eye towards fiber-to-the-premises. The company sold its optical components division to Avanex Corp. (Nasdaq: AVNX) last year (see Avanex to Buy Alcatel, Corning Units).

Goodwill's intangibility makes it a sticky subject. JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) built up goodwill, for example, by overpaying for startups during the bubble. As the market crashed, JDSU had to recalculate the value of those acquisitions, wiping out more than $40 billion of goodwill (see JDSU's Acquisition Hangover and JDSU Writes Off Billions More).

As with JDSU, Corning's losses will look enormous but aren't expected to interrupt cash flow.

Goodwill aside, Corning is writing off $420 million related to the expansion of its manufacturing facility in Concord, N.H. Construction was halted in October 2002, and Corning's prognosis is grim: "We no longer believe that the global optical fiber market will ever reach a demand level that would justify completing this facility," Flaws states.

The first phase of the Concord plant was up and running, but is now being shut down and depreciated, actions included in the $420 million charge. If fiber demand picks up, Corning might reopen this portion of the facility, Flaws says.

Corning will discuss the charges in a conference call at 8:30 a.m. Eastern today.

— Craig Matsumoto, Senior Editor, Light Reading

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