Writedown Hammers Corning

The company's fiber business remains weak, prompting a $2.9 billion goodwill and asset writedown.
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Corning (GLW) - Get Report sank 5% after rolling out some $2.9 billion in charges to write down the value of its struggling telecommunications business.

The Corning, N.Y., glass company said the bulk of the charge, $1.82 billion, would reflect goodwill writedowns and asset impairments on the telecom unit. The company said it made the decision to take the writedown as a result of continued weakness in the premium telecommunications fiber business.

"Depressed pricing and low demand for premium fiber may persist well beyond 2005, and the industry rebound from depressed conditions may be slower and less robust than previously forecast," finance chief James Flaws said.

Corning jumped into the telecommunications components busines in the late 1990s when investors were betting that the Internet boom would fuel massive growth in fiber-optic networks. But that boom soon turned bust, and the company has spent the last two years shifting its focus to liquid crystal display glass and environmental technologies.

The unchanged dim outlook on the fiber business may have taken some on Wall Street by surprise. In recent months, investors had started to build a slightly bullish case on Corning and on rival optical component maker

JDS Uniphase

(JDSU)

around the possibility that demand for new fiber and optical gear was reviving after three years of collapse. But those assumptions were dashed a bit Thursday. JDS dropped 1%.

Corning said an added $1 billion charge would be taken to establish a valuation allowance against certain deferred tax assets related to the telecom business. Corning said that excluding the charges, it expects to meet Wall Street's third-quarter earnings estimates.

Corning said the $1.4 billion goodwill writedown would eliminate all but $300 million of its second-quarter-end goodwill. The company said the goodwill recoverability assessment included reviewing the company's long-term view of the telecommunications market, projections of future cash flows and the estimated fair-market value of the overall business segment. Corning also wrote off a $420 million upgrade of a North Carolina plant it has since mothballed.

"Although our results in the telecommunications segment in 2003 and 2004 have been on track with our projections, we are not seeing significant signs of the broad uplift in industry conditions previously projected for 2005 and beyond," Flaws said. "As a result, we have updated and lowered our estimates of future cash flows for the telecommunications segment. Our revised cash flow projections no longer support the goodwill related to this segment. Therefore, it is appropriate that we take an impairment charge."

Flaws said the company remains pleased with the current strength in North American telecommunications sales, due to its participation in

Verizon's

(VZ) - Get Report

fiber-to-the-premises buildout. But he said that isn't enough to signal a broad recovery in the global telecommunications market.

Early Thursday, Corning slipped 58 cents to $10.77 and JDS dropped a nickel to $3.41.