01—Abstract
Summary
Summary of the 10-K filed February 20, 2003. Cited figures are marked; the original filing is the authoritative source.
Corning's 2002 10-K shows a company in severe downturn, driven by the collapse in telecommunications capital spending.
Net sales fell 48% to $3.16 billiona from $6.05 billion, and gross margin compressed from 30% to 19%. The company reported a net loss of $1.30 billion (loss per share of $1.39), including $2.08 billion in restructuring, impairment, and other charges, of which $400 million was a goodwill impairment in the Telecommunications segment. The Telecommunications segment sales fell 63%, while the Technologies segment (display glass, environmental substrates, life sciences) was comparatively resilient, declining only 4%.
Balance sheet and liquidity remain the central investor concern. Management reports $2.1 billionb in cash and short-term investments and an undrawn $2.0 billion revolver, and states that it has sufficient liquidity for 2003. However, all three major rating agencies have cut Corning to sub-investment grade (S&P BB+, Moody's Ba2, Fitch BB, all with negative outlooks), which removes access to the commercial paper market.
The debt-to-capital ratio stood at 47%c against a 60% covenant. Management also expects earnings to be insufficient to cover fixed charges in 2003, and it guides to flat 2003 sales with a goal of returning to profitability before one-time charges. Legal exposure is significant but largely unquantified.
The most material item is asbestos litigation tied to Pittsburgh Corning, where management estimates a possible after-tax settlement charge of $125 million to $175 milliond, while noting that it currently appears more likely than not that Corning will litigate. Other contingencies include the Dow Corning bankruptcy (with a $270 million unrecognized equity difference), the Schwinger/Stevens toxic-tort suits, and securities class actions. Management characterizes most of these as remote or without material impact, but investors should weigh these contingencies against the company's depressed earnings base.
02—Key points
Key Highlights
- Net sales declined 48% to $3.16 billion in 2002, with Telecommunications sales down 63% and Technologies sales down 4%.
- Net loss of $1.30 billion ($1.39 per share), including $2.08 billion in restructuring, impairment, and other charges; gross margin fell to 19% from 30%.
- A $400 million goodwill impairment in the Telecommunications segment and a $269 million impairment in photonic technologies were recorded in Q4 2002.
- Liquidity of $2.1 billion in cash and short-term investments plus an undrawn $2.0 billion revolver, though commercial paper access was lost after downgrades to sub-investment grade.
- Debt-to-capital ratio of 47% against a 60% revolver covenant; management expects earnings not to cover fixed charges in 2003.
- Asbestos exposure via Pittsburgh Corning could produce an after-tax charge of $125–175 million if a global settlement is reached; litigation is currently considered more likely.
- Precision lens business sold to 3M for about $850 million (gain of $415 million after tax), a key source of 2002 liquidity.
03—Questions
Frequently Asked Questions
How much did Corning's revenue and profitability decline in 2002?
Net sales fell 48% to $3.16 billion from $6.05 billion in 2001. The company posted a net loss of $1.30 billion, or $1.39 per share, compared with a $5.50 billion loss in 2001. Results were heavily affected by restructuring and impairment charges of $2.08 billion, partly offset by a $415 million after-tax gain on the precision lens sale, which is reported in discontinued operations.
Is Corning's liquidity sufficient to fund operations in 2003?
Management says yes. Corning ended 2002 with $2.1 billion in cash and short-term investments and had full access to an undrawn $2.0 billion revolving credit facility expiring in 2005. However, the sub-investment grade credit ratings eliminate commercial paper access, and long-term debt market access is expected to be limited and more expensive. Capital spending is guided to $350–450 million in 2003.
What are the main litigation risks for investors?
The largest contingency is the asbestos exposure from Pittsburgh Corning, which filed for Chapter 11 in 2000 and has more than 240,000 open claims. Management estimates an after-tax charge of $125–175 million if a global settlement is reached, and says it appears more likely than not that the company will litigate. Other matters include the Dow Corning bankruptcy, toxic-tort suits (Schwinger/Stevens), securities class actions, and a Japanese patent suit (Furukawa), which management considers without material impact.
What is management's 2003 outlook?
Corning expects 2003 net sales to approximate 2002 levels, with a decline in Telecommunications offset by growth in Technologies, particularly display glass. The company expects a significantly smaller operating loss, with a goal of returning to profitability before restructuring and one-time charges. For Q1 2003, it guides to sales of $700–730 million and a loss of $0.01 to $0.04 per share, excluding debt-repurchase gains and restructuring charges.
Why did Corning's credit ratings fall, and what does that mean for the business?
In July 2002, Fitch downgraded Corning's long-term debt to BB, S&P cut it to BB+ (with short-term debt at B), and Moody's reduced it to Ba2 (Not Prime), all with negative outlooks. The downgrades followed sharp telecommunications-driven earnings declines. Consequences include loss of commercial paper access, higher borrowing costs, and in some cases requirements to post cash collateral for performance bonds and letters of credit, which may cause some customers to seek alternative suppliers.
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