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Sun's Big Charge a Bad Sign for the Quarter

Shares drop on worries that the $1.05 billion charge is a reflection of poor results.

Updated from Sept. 29

Shares of

Sun Microsystems

(SUNW) - Get Sunworks, Inc. Report

were dropping sharply Tuesday, a day after the tech giant announced it would take a noncash charge of $1.051 billion for its already-reported June quarter.The accounting maneuver reflects worries over the soon-to-close September quarter -- concerns that were reflected in Sun's share price. In recent trading, shares were down 56 cents, or 14.5%, to $3.30.

As a result of the charge, the company's slim $12 million profit for the June quarter has now turned into a massive loss of $1.039 billion. Instead of break-even earnings per share, the company has a loss of 32 cents a share, according to generally accepted accounting principles.

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After the close Sun shares dipped 32 cents, or 8.2%, to $3.54. In regular trading the stock had closed 2 cents higher, up 0.5%, to $3.86.

The downward revision occurred because the company decided to take a noncash charge of $1.05 billion to increase a valuation allowance for its net deferred tax assets.

"You're only allowed to record the benefit from a deferred tax asset if you're more than 50% confident that you will have taxable assets in the future that are sufficient to absorb it," explains Robert Willens, an accounting and tax analyst at Lehman. "What they're telling you is that their level of confidence in their ability to generate taxable income in the future has taken a turn for the worse; their level of confidence has dipped below the 50% line. It's clearly not a positive development. The larger the valuation allowance, the lower your confidence level in your ability to generate any sort of income."

Also in a release today, Sun called the September quarter that's just about to end -- the kickoff of fiscal year 2004 -- a "particularly difficult quarter for the company due in part to intense market and competitive dynamics."

It said it expects a GAAP loss per share of 7 cents to 10 cents, including a tax provision of about $34 million or one penny per share, for the period.

Analysts were expecting a pro forma loss of 2 cents a share.