Olympus Corp. (OTC:OCPNF) said it returned to a profit during the six months ended September 30, but the equipment maker also warned that it will sell fewer digital cameras than expected. Investors should prepare for the possibility of more surprises down the road.
Olympus earned ¥8.015 billion during the six month period - boosted by ¥15.887 from the sale of some business - compared to a net loss of ¥32.329 billion the same time frame last year. The company said in a statement Nov. 12 that its situation remained uncertain mainly due to numerous macroeconomic challenges, ranging from the European debt crisis to the strong Japanese yen. Olympus President Hiroyuki Sasa said at a news conference that "smartphones equipped with cameras have spread globally so that has shrunk the compact camera market," the AFP reported from Tokyo. Olympus also said its operating profit for the year ended March 2013 would amount to 38 billion, down from the 50 billion yen forecast earlier, amid lower than anticipated sales.
Some red flags in Olympus' recent financial results suggest the risk of other possible surprises, and as a result of more than macroeconomic factors. The company said it had paid nearly ¥124.5 billion above book value for acquisitions and ¥72.7 billion for intangible assets, together amounting to ¥197.1 billion and more than 20% of total assets as of March 31. This means that a chunk of Olympus' assets, and by extension also its earnings, consist of estimates that are far less concrete than digital cameras. In but a small improvement, Olympus adjusted its estimates downward to ¥91.8 billion in goodwill and ¥65.8 billion of intangible assets as of September 30, or 18% of assets. Meanwhile competition from smartphones also call into question the valuation of Olympus' tangible assets.
To be sure, the company is taking steps to battle its problems, but this also puts it into flux. In September it agreed to establish a joint medical business venture with the Tokyo electronics and entertainment firm Sony, as part of an effort to restore its financial health and streamline assets, among other things. In another development, about 100 workers at Olympus are expected to take voluntary retirements on Nov. 30. Such changes bring uncertainties and make it harder for investors to parse Olympus' financial results.
While Olympus' corporate governance has improved, it continues to show weaknesses, which increases the uncertainty about its financial statements. We warned in September that Olympus is still cleaning up its act since its former CEO Michael C. Woodford raised questions last year about its deal-making. For example, Olympus called an extraordinary meeting in April to replace much of its management and board, which now comprises eleven members instead of the unwieldy fifteen it had in June 2011. But some found that Olympus' "independent" directors were weighted toward creditors, as board chairman Yasuyuki Kimoto is a former executive from Sumitomo Mitsui Banking Corp., the company's largest creditor.
In part due to such issues, Olympus is rated "D" on its environmental, social and governance (ESG) overall. It does not have an Accounting and Governance Risk (AGR ®) score that would indicate the level of its risk relative to peers.
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Business relationship disclosure: The article has been written by a financial reporter at GMI. The reporter has no business relationship with any company whose stock is mentioned in this article. Nobody paid GMI to write this article on his or her behalf.