01—Abstract
Summary
Summary of the 10-K filed March 12, 1997. Cited figures are marked; the original filing is the authoritative source.
Corning Incorporated's 1996 10-K reflects a company in the midst of a strategic repositioning.
On December 31, 1996, Corning distributed its health care services businesses (Quest Diagnostics and Covance) to shareholders, reporting them as discontinued operations. The core business performed strongly: consolidated net sales from continuing operations rose 12% to $3.7 billiona, and income from continuing operations was $342.9 million, or $1.50 per share, versus a loss of $71.5 million in 1995 that was driven by the Dow Corning write-off and a restructuring charge. Excluding those 1995 items, continuing earnings per share grew about 16%.
The Communications segment, led by optical fiber, was the primary growth engine, with sales of $1.97 billionb, up 15%. The balance sheet changed materially. Stockholders' equity fell to $961 million from $2.1 billion after the Distributions, and long-term debt rose to 42% of total capital from 33%.
Net income was $175.6 millionc after a $167.3 million loss from discontinued operations, which included a $176.5 million provision for loss on the Distributions tied largely to government billing claims at Quest Diagnostics. Management plans roughly $600 million of capital spending in 1997, concentrated on optical-fiber capacity expansions in North Carolina, and expects to reduce the debt-to-capital ratio over the year. The main risk overhang is the Dow Corning breast-implant litigation.
Dow Corning remains in Chapter 11, and Corning's investment in it is fully reserved. Corning also faces ongoing tort suits, with dismissals to date in over 6,500 cases, and several shareholder class actions.
Corning is not a party to the Global Settlement and says the outcome of the Dow Corning bankruptcy is impossible to predict. Investors should weigh strong operating momentum in optical fiber against a more leveraged balance sheet and the unresolved litigation exposure.
02—Key points
Key Highlights
- Continuing-operations net sales rose 12% to $3.7 billion in 1996, led by the Communications segment (sales $1.97 billion, up 15%).
- Income from continuing operations was $342.9 million ($1.50 per share), recovering from a 1995 loss of $71.5 million that included the Dow Corning reserve and restructuring charge.
- Net income was $175.6 million ($0.76 per share) after a $167.3 million loss from discontinued operations, mainly the Quest Diagnostics/Covance distribution and related government claims reserves.
- Stockholders' equity fell to $961.1 million from $2,103.0 million, and long-term debt rose to 42% of total capital from 33%, reflecting the Distributions.
- Capital spending reached $597.8 million in 1996 and is expected to be about $600 million in 1997, mainly for optical-fiber capacity expansion in North Carolina and Asia/Europe equity ventures.
- Dow Corning (50% owned) remains in Chapter 11 following the breast-implant litigation; Corning's investment is fully reserved and recognition of equity earnings was discontinued in 1995.
- Quarterly dividend held at $0.18 per share ($0.72 annually), with management intending to maintain it in 1997.
03—Questions
Frequently Asked Questions
What did Corning's 1996 spin-off of Quest Diagnostics and Covance mean for investors?
On December 31, 1996, Corning distributed its shares of Quest Diagnostics and Covance to shareholders pro rata, a transaction the IRS ruled tax-free. Corning reclassified the health care services segment as discontinued operations, reduced stockholders' equity by about $1.1 billion, and recorded a $176.5 million after-tax loss on the Distributions. Corning says it can now focus on its core Communications, Specialty Materials and Consumer Products businesses. Corning also indemnifies Quest Diagnostics for certain government billing claims.
How strong is the growth outlook for Corning's optical-fiber business?
Management described demand for optical fiber as strong worldwide, with Corning producing at maximum capacity. It is investing about $250 million to expand its Wilmington, North Carolina plant, substantially online by the end of 1997, and plans a new Concord, North Carolina facility with several hundred million dollars of investment and production starting in 1999. Management expects Communications sales and earnings to rise in 1997, though equity-company earnings are projected to decline because of start-up costs at Samsung-Corning Precision Glass and American Video Glass.
What is the main litigation risk facing Corning?
The largest risk is the breast-implant litigation involving Dow Corning, a 50%-owned company that filed for Chapter 11 in May 1995. Corning remains a defendant in roughly 11,400 state and federal tort suits, has been dismissed from more than 6,500 of them, and faces several shareholder class and derivative actions. Corning accrued about $20 million for environmental liabilities at 19 Superfund-type sites. Management states that the outcome of the Dow Corning bankruptcy cannot be predicted and that the Distributions-related indemnities are not expected to have a material adverse effect on overall financial condition.
How did Corning's balance sheet and leverage change in 1996?
Stockholders' equity fell to $961.1 million from $2.1 billion, largely due to the Distributions. Long-term debt as a share of total capital rose to 42% from 33%, and loans payable beyond one year were $1.2 billion. Working capital increased to $611.2 million, and the current ratio improved to 1.8. Corning has $815 million of bank credit lines and can issue up to $375 million of debt under shelf registrations. Management expects positive operating cash flow in 1997 and actions to reduce the debt-to-capital ratio.
04—Continue