01—Abstract
Summary
Summary of the 10-K filed February 24, 1999. Cited figures are marked; the original filing is the authoritative source.
Corning's 1998 10-K shows a year of sharp earnings pressure driven by the Asian economic slowdown and pricing declines, especially in optical fiber.
Net sales were $3.48 billiona, roughly flat versus 1997's $3.52 billion, while income from continuing operations fell to $327.5 million, or $1.39 diluted EPS, from $408.9 million, or $1.72. Excluding an $84.6 million restructuring charge and $39.7 million in non-operating gains, EPS from continuing operations was $1.50, a 13% decline. Reported net income was $394.0 million, including a $66.5 million gain-driven contribution from the sale of the consumer housewares business.
Management guided to a return to earnings growth in 1999, with Telecommunications sales expected to rise significantly. The Telecommunications segment, which Corning's growth story rests on, was the weak point: segment net income dropped to $205.3 millionb from $297.5 million as fiber prices fell on global overcapacity. Advanced Materials and Information Display were more stable, with Information Display improving to $56.5 million in segment net income, helped by equity earnings from Samsung Corning.
Cash from operations was $637.6 millionc against capital spending of $713.6 million, and working capital was modestly lower at $235.6 million. Long-term debt was 31% of total capital, down from 36%. The main investor overhang is the Dow Corning breast-implant bankruptcy.
Corning's 50% stake is fully reserved, and the proposed Joint Plan could require Dow Corning to fund up to about $3.2 billiond over 16 years, with Corning sharing a $150 million credit commitment. Confirmation hearings are scheduled for June 1999, and the outcome is uncertain. Separately, the February 1999 redemption of the MIPS preferred securities is expected to convert most holders into common stock, which would add shares and dilute per-share figures.
02—Key points
Key Highlights
- Net sales of $3.48 billion in 1998, roughly flat from 1997, as pricing pressure offset volume gains, mainly in Telecommunications.
- Income from continuing operations fell 20% to $327.5 million ($1.39 diluted EPS) from $408.9 million ($1.72) in 1997; excluding one-time items, EPS was $1.50, down 13%.
- Telecommunications segment net income fell to $205.3 million from $297.5 million due to optical fiber price declines and global overcapacity; Corning delayed its Concord, NC fiber plant.
- Information Display segment net income rose to $56.5 million from $7.1 million, driven by Samsung Corning equity earnings and projection video growth.
- Dow Corning breast-implant bankruptcy remains a key risk: a Joint Plan could require up to $3.2 billion in funding over 16 years, with Corning sharing a $150 million credit facility; confirmation hearings begin June 28, 1999.
- Free cash flow was negative in 1998: operating cash flow of $637.6 million was below capital spending of $713.6 million, and the balance sheet showed $1.0 billion in long-term debt.
- Management expects a return to earnings growth in 1999, with Telecommunications sales projected to increase significantly, while MIPS redemption is expected to convert most holders into common stock.
03—Questions
Frequently Asked Questions
Why did Corning's earnings decline in 1998?
Earnings fell mainly because the Asian economic slowdown pushed down prices across many businesses, especially optical fiber, where global overcapacity intensified. Telecommunications segment net income dropped by about $92 million. A $84.6 million restructuring charge also weighed on results, partly offset by $39.7 million in non-operating gains.
What is the financial impact of the Dow Corning bankruptcy on Corning?
Corning fully reserved its 50% investment in Dow Corning in 1995, so there is no carrying value at risk on the balance sheet, and Dow Corning equity earnings are not being recognized. The Joint Plan would require Dow Corning to fund up to about $3.2 billion over 16 years, and Corning and Dow Chemical each agreed to a credit facility of up to $150 million. If the plan is confirmed and Dow Corning emerges, Corning would likely resume recognizing equity earnings, but the timing and outcome remain uncertain.
What does management expect for 1999?
Management is optimistic about resuming overall earnings growth in 1999. Telecommunications sales are expected to rise significantly on fiber, cable and photonics demand, and segment net income is expected to grow in double digits. Advanced Materials sales are expected to be up slightly, and Information Display sales are expected to increase, with segment net income roughly flat. Capital spending is projected at about $650 million, down from $713.6 million in 1998.
Is Corning's balance sheet and liquidity under pressure?
Liquidity is adequate but tighter than in prior years. Working capital was $235.6 million, the current ratio was 1.2, and long-term debt was 31% of total capital, down from 36%. Corning has $825 million in unused bank credit lines and up to $375 million of shelf-registered debt capacity. Operating cash flow of $637.6 million did not fully cover $713.6 million of capital spending, and about $172 million was used in discontinued operations, mostly for transaction costs and taxes related to the consumer housewares sale.
How will the MIPS redemption affect shareholders?
Corning called all Convertible Monthly Income Preferred Securities on February 16, 1999. Holders can take $51.80 in cash or convert into common stock at 1.534 shares per MIPS, which had a value of $74.88 per share on that date. Management expects most holders to convert, which would increase the common share count and could dilute per-share earnings, while removing about $365 million of preferred securities from the balance sheet.
04—Continue