Why did Corning report a net loss in 1995 after a profitable 1994?

The loss was driven mainly by Dow Corning. Corning recorded a $365.5 million after-tax charge in Q2 1995 to fully reserve its investment after Dow Corning filed for Chapter 11 in May 1995, and it stopped recognizing equity earnings from that venture. Dow Corning equity losses totaled $348.0 million for 1995, versus $2.8 million in 1994. Restructuring charges of $40.5 million after tax added to the loss, and the business itself grew, with pre-charge net income of $337.7 million.

What is the outlook for the Dow Corning investment and its liability exposure?

Dow Corning expected to file a reorganization plan in the first half of 1996, but the filing says creditors and the bankruptcy court are not expected to approve it for some time, and Corning says it is impossible to predict if or when Dow Corning will emerge. Corning was not a signatory to the 1994 Global Settlement, which has effectively terminated. Corning remains a defendant in about 11,400 tort lawsuits and in shareholder securities and derivative suits tied to the breast-implant issue, and it has dismissals in over 6,400 state tort cases, some on appeal.

Which business segments are driving growth, and which are weakening?

Communications is the main growth driver, with sales of $1.71 billion and pre-tax income of $434.9 million, supported by optical-fiber demand and video components. Management says optical-fiber production is at maximum capacity, with a $250 million Wilmington expansion due in 1998. Health Care Services had higher sales ($2.06 billion) but lower pre-tax profit ($106.3 million), reflecting clinical-lab pricing pressure and uncollectible receivables. Consumer Products sales fell to $673.5 million after the European consumer business was sold, and pre-tax income dropped to $10.1 million.

Are there material legal or regulatory risks beyond breast implants?

Yes. Corning's clinical-lab subsidiaries are subject to ongoing federal and state investigations into billing practices, including subpoenas tied to Medicare/CHAMPUS testing, a grand jury investigation of Damon in Boston, and a Bioran/CLSI settlement for $6.7 million. Corning says it has reserved adequately, but it acknowledges claims could exceed those reserves. Corning is also named as a potentially responsible party at 19 Superfund sites, with about $21 million accrued for environmental liabilities.

How is Corning funding its capital spending and balance sheet?

Operating cash flow was $698.6 million in 1995, which covered $495.3 million in capital expenditures and $165.2 million in common dividends, with the balance supported by debt. Long-term debt to total capital rose to 34% from 33%. Liquidity is supported by $788 million in unused bank revolving credit and up to $375 million of shelf-registered debt capacity. Management expects 1996 capital spending of about $700 million, which will likely require additional external financing or continued strong operating cash generation.

GLW 10-K Filed Mar 7, 1996

01—Abstract

Summary

Summary of the 10-K filed March 7, 1996. Cited figures are marked; the original filing is the authoritative source.

Corning Incorporated's 1995 10-K shows a company whose headline results were dominated by a single non-recurring-type charge: the full write-off of its 50%^a stake in Dow Corning.

After Dow Corning filed for Chapter 11 on May 15, 1995 over breast-implant litigation, Corning recorded an after-tax charge of $365.5 million^b in Q2 1995 and stopped recognizing equity earnings from the venture. The result was a 1995 net loss of $50.8 million, or $0.23 per share, versus net income of $281.3 million ($1.32 per share) in 1994. Excluding Dow Corning and restructuring/special charges, net income was roughly flat at $337.7 million and EPS was $1.49, down about 6% on an adjusted basis.

Revenue grew 11% to $5.3 billion^c, and the growth was driven by the Communications segment (optical fiber, video components) and pharmaceutical services. Operating performance was mixed. Communications was the clear standout, with sales of $1.71 billion and pre-tax income of $434.9 million, and management says optical-fiber capacity is at maximum, with a roughly $250 million expansion in Wilmington, North Carolina underway.

Health Care Services (clinical labs) grew sales to $2.06 billion but its pre-tax income fell to $106.3 million^d, hurt by a $62 million charge for uncollectible receivables and pricing pressure. Consumer Products declined in sales and profit. Balance-sheet liquidity remained adequate, with working capital of $669.2 million, a current ratio of 1.6, and $788 million in bank credit lines, though long-term debt to total capital rose to 34%.

For investors, the key issues are the remaining breast-implant exposure (about 11,400 tort suits named against Corning, with some dismissals), the Department of Justice and Inspector General investigations into clinical-lab billing practices, and the capital-intensive growth plan (about $700 million of capex expected in 1996). The Dow Corning reserve means any future recovery would be a benefit, but the filing gives no timeline for emergence from bankruptcy.

02—Key points

Key Highlights

Net loss of $50.8 million ($0.23 per share) in 1995, compared with net income of $281.3 million ($1.32 per share) in 1994, driven by a $365.5 million after-tax write-off of the Dow Corning investment
Excluding Dow Corning and restructuring charges, net income was $337.7 million ($1.49 per share), roughly flat year over year on net income and down 6% on EPS
Net sales rose 11% to $5.3 billion, led by Communications (sales up 17% to $1.71 billion, pre-tax income of $434.9 million) and pharmaceutical services
Health Care Services sales rose to $2.06 billion, but pre-tax income fell to $106.3 million after a $62 million receivables reserve charge and pricing pressure in clinical labs
Dow Corning, 50%-owned, filed for Chapter 11 on May 15, 1995 over breast-implant litigation; Corning has ceased recognizing its equity earnings and says it cannot predict emergence
Corning faces about 11,400 state and federal tort suits, several securities class actions, and multiple DOJ/HHS-OIG investigations into clinical-lab billing, with about $21 million accrued for environmental liabilities
Liquidity remains adequate with $669.2 million working capital, a 1.6 current ratio, $788 million in unused bank credit lines, and planned 1996 capital spending of roughly $700 million

03—Questions

Frequently Asked Questions

Why did Corning report a net loss in 1995 after a profitable 1994?
The loss was driven mainly by Dow Corning. Corning recorded a $365.5 million after-tax charge in Q2 1995 to fully reserve its investment after Dow Corning filed for Chapter 11 in May 1995, and it stopped recognizing equity earnings from that venture. Dow Corning equity losses totaled $348.0 million for 1995, versus $2.8 million in 1994. Restructuring charges of $40.5 million after tax added to the loss, and the business itself grew, with pre-charge net income of $337.7 million.
What is the outlook for the Dow Corning investment and its liability exposure?
Dow Corning expected to file a reorganization plan in the first half of 1996, but the filing says creditors and the bankruptcy court are not expected to approve it for some time, and Corning says it is impossible to predict if or when Dow Corning will emerge. Corning was not a signatory to the 1994 Global Settlement, which has effectively terminated. Corning remains a defendant in about 11,400 tort lawsuits and in shareholder securities and derivative suits tied to the breast-implant issue, and it has dismissals in over 6,400 state tort cases, some on appeal.
Which business segments are driving growth, and which are weakening?
Communications is the main growth driver, with sales of $1.71 billion and pre-tax income of $434.9 million, supported by optical-fiber demand and video components. Management says optical-fiber production is at maximum capacity, with a $250 million Wilmington expansion due in 1998. Health Care Services had higher sales ($2.06 billion) but lower pre-tax profit ($106.3 million), reflecting clinical-lab pricing pressure and uncollectible receivables. Consumer Products sales fell to $673.5 million after the European consumer business was sold, and pre-tax income dropped to $10.1 million.
Are there material legal or regulatory risks beyond breast implants?
Yes. Corning's clinical-lab subsidiaries are subject to ongoing federal and state investigations into billing practices, including subpoenas tied to Medicare/CHAMPUS testing, a grand jury investigation of Damon in Boston, and a Bioran/CLSI settlement for $6.7 million. Corning says it has reserved adequately, but it acknowledges claims could exceed those reserves. Corning is also named as a potentially responsible party at 19 Superfund sites, with about $21 million accrued for environmental liabilities.
How is Corning funding its capital spending and balance sheet?
Operating cash flow was $698.6 million in 1995, which covered $495.3 million in capital expenditures and $165.2 million in common dividends, with the balance supported by debt. Long-term debt to total capital rose to 34% from 33%. Liquidity is supported by $788 million in unused bank revolving credit and up to $375 million of shelf-registered debt capacity. Management expects 1996 capital spending of about $700 million, which will likely require additional external financing or continued strong operating cash generation.

04—Continue

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