Is Corning's business recovering from the telecom downturn?

Partly. Management says Telecommunications sales stabilized from Q3 2002 through Q4 2003 and that losses shrank sharply after plant closures. It still expects a loss in 2004 with flat to slightly lower sales, and sees telecom recovery only in 2005. The growth driver is the Technologies segment, especially LCD glass, which rose 47% in 2003 and has $425-475M of 2004 capacity expansion planned.

How large is the asbestos liability and how could it affect investors?

Corning recorded $413M in 2003 charges ($263M after tax) to settle current and future claims against Pittsburgh Corning Corporation, a 50% affiliate in bankruptcy. The settlement requires contributing 25M Corning shares, its PCC equity stake, and $136M in cash payments starting in 2005. Because the share contribution is marked to market each quarter, further stock-price moves would change the charge. Two primary insurers and several excess insurers are litigating coverage, and the bankruptcy plan still needs creditor and court approval.

Why did the net loss improve so much, and is the improvement sustainable?

Most of the improvement came from non-recurring items. Restructuring and impairment charges fell to $111M from $2.08B, and 2002 included a $400M goodwill impairment. Lower depreciation and cost cuts also lifted gross margin. Those gains are real, but 2003 still included the $413M asbestos charge, and management expects a loss again in 2004, though a smaller one.

What are the main balance-sheet and financing risks?

Debt fell to about $2.8B, and the debt-to-capital ratio is 34% against a 60% covenant on the $2B revolver. Ratings remain below investment grade, so Corning cannot use commercial paper and any new long-term debt would likely carry high-yield pricing. Corning also has $385M of zero-coupon convertibles putable in November 2005, and it has said it may need to fund asbestos payments early for tax reasons. Operating cash flow of $133M was thin in 2003.

What could cause a large non-cash charge in future periods?

Three areas stand out. First, the Telecommunications goodwill of $1.6B could be impaired if the recovery slips; management says a change in segment definition could trigger up to a $600M charge tied to 2002. Second, the $1.3B of net domestic deferred tax assets could require a valuation allowance if U.S. profitability does not return by 2005. Third, the asbestos settlement charge moves with Corning's stock price until the shares are transferred to the trust.

GLW 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 1, 2004. Cited figures are marked; the original filing is the authoritative source.

Corning Inc.'s 2003 Form 10-K shows a company in the late stages of a severe telecom-driven downturn, with 2003 marking a turn toward stabilization.

Net sales were $3.09 billion^a, down 2% from $3.16 billion in 2002, but gross margin rose to 27% from 19%, and the net loss narrowed to $223 million ($0.18 per share) from $1.3 billion in 2002. The improvement came mainly from far lower restructuring, impairment and other charges ($111 million versus $2.08 billion in 2002), partly offset by a new $413 million asbestos settlement charge tied to the Pittsburgh Corning (PCC) bankruptcy plan. Management says Telecommunications sales have stabilized, and Technologies is the growth engine, with display (LCD glass) sales up 47% to $595 million.

The balance sheet improved meaningfully. Management cut debt from about $4.2 billion to $2.8 billion^b through $630 million of equity offerings and cash-funded repurchases of zero-coupon convertible debentures, lowering the debt-to-capital ratio from 47% to 34%. Cash and short-term investments were $1.3 billion at year-end, and a $2 billion revolver remains undrawn.

Operating cash flow was weak at $133 million^c, and 2003 earnings did not cover fixed charges. Credit ratings remain sub-investment grade (S&P BB+, Moody's Ba2, Fitch BB), which keeps Corning out of the commercial paper market.

Key risks for investors include a potential valuation allowance against the $1.3 billion^d of net domestic deferred tax assets if U.S. profitability does not return by 2005, a possible goodwill impairment (the Telecommunications unit carries $1.6 billion of goodwill), asbestos settlement costs that move with Corning's share price, a $425-475 million 2004 LCD capex program, and a Chinese anti-dumping investigation into U.S. fiber exports. Management guides to a 2004 telecom sales decline of flat to slightly down with a loss, and to a 2005 telecom recovery.

02—Key points

Key Highlights

Net loss narrowed to $223M ($0.18/share) in 2003 from $1.30B ($1.39/share) in 2002, as restructuring and impairment charges fell to $111M from $2.08B.
Net sales were $3.09B, down 2%, but gross margin rose to 27% from 19% on lower fixed costs after 2002 plant closures and mothballing.
A $413M pre-tax asbestos settlement charge (PCC bankruptcy plan) was recorded, including 25M Corning shares to be contributed and $136M in future cash payments.
Total debt was cut from about $4.2B to $2.8B, and the debt-to-capital ratio improved to 34% from 47%, funded by $630M of equity offerings and $1.1B of cash used on convertible debenture repurchases.
Display technologies (LCD glass) sales rose 47% to $595M, while Telecommunications sales fell 13% to $1.43B and the company exited photonics.
Liquidity is $1.3B of cash and short-term investments plus an undrawn $2B revolver, but operating cash flow was only $133M and credit ratings remain sub-investment grade (BB+/Ba2/BB).
Goodwill of $1.6B in Telecommunications and $159M in Technologies carries impairment risk, and $1.3B of net domestic deferred tax assets could require a valuation allowance if U.S. profitability does not return by 2005.

03—Questions

Frequently Asked Questions

Is Corning's business recovering from the telecom downturn?
Partly. Management says Telecommunications sales stabilized from Q3 2002 through Q4 2003 and that losses shrank sharply after plant closures. It still expects a loss in 2004 with flat to slightly lower sales, and sees telecom recovery only in 2005. The growth driver is the Technologies segment, especially LCD glass, which rose 47% in 2003 and has $425-475M of 2004 capacity expansion planned.
How large is the asbestos liability and how could it affect investors?
Corning recorded $413M in 2003 charges ($263M after tax) to settle current and future claims against Pittsburgh Corning Corporation, a 50% affiliate in bankruptcy. The settlement requires contributing 25M Corning shares, its PCC equity stake, and $136M in cash payments starting in 2005. Because the share contribution is marked to market each quarter, further stock-price moves would change the charge. Two primary insurers and several excess insurers are litigating coverage, and the bankruptcy plan still needs creditor and court approval.
Why did the net loss improve so much, and is the improvement sustainable?
Most of the improvement came from non-recurring items. Restructuring and impairment charges fell to $111M from $2.08B, and 2002 included a $400M goodwill impairment. Lower depreciation and cost cuts also lifted gross margin. Those gains are real, but 2003 still included the $413M asbestos charge, and management expects a loss again in 2004, though a smaller one.
What are the main balance-sheet and financing risks?
Debt fell to about $2.8B, and the debt-to-capital ratio is 34% against a 60% covenant on the $2B revolver. Ratings remain below investment grade, so Corning cannot use commercial paper and any new long-term debt would likely carry high-yield pricing. Corning also has $385M of zero-coupon convertibles putable in November 2005, and it has said it may need to fund asbestos payments early for tax reasons. Operating cash flow of $133M was thin in 2003.
What could cause a large non-cash charge in future periods?
Three areas stand out. First, the Telecommunications goodwill of $1.6B could be impaired if the recovery slips; management says a change in segment definition could trigger up to a $600M charge tied to 2002. Second, the $1.3B of net domestic deferred tax assets could require a valuation allowance if U.S. profitability does not return by 2005. Third, the asbestos settlement charge moves with Corning's stock price until the shares are transferred to the trust.

04—Continue

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