Larry..independent research firm just issued Corning report:
Argus Research 11-4-02
CORNING INC. (NYSE: GLW, $2.15) .....................................................................................................HOLD
HOLD-rated Corning Inc. is taking steps to insure its financial survival, including a new round of downsizing.
But Corning’s telecom markets remain deeply depressed and highly unpredictable, limiting near-term growth
prospects.
We are reaffirming our pro forma loss estimates of $0.31 per share for 2002 and $0.10 per share for 2003.
We expect the GLW shares to market-perform until a sustainable recovery in carrier spending gets underway.
ANALYSIS
HOLD-rated Corning Inc. (NYSE: GLW) is taking steps to insure its financial survival, including a new round of
downsizing. Corning’s telecom markets remain deeply depressed and highly unpredictable, limiting near-term growth
prospects. The company has shifted its R&D and marketing focus to its non-telecom businesses of advanced materials and
information displays, which together now represent more than half of sales. In short, we expect Corning to survive the severe
shakeout in the telecom equipment space, even with a large debt load ($4 billion). But we do not expect the shares to
outperform in this environment, supporting our HOLD rating. Investments in the telecom equipment space are for risktolerant
investors fully apprised of the pitfalls and volatility of investing in this space.
For the third quarter of 2002, Corning reported sales of $837 million, representing a 45% year-over-year decline
and a 7% sequential drop off. On a GAAP basis, the company lost $0.25 per share, which included $0.12 per share for a
one-time dividend payment to convertible preferred shareholders, $0.07 in restructuring costs, and a $0.01 gain on early
retirement of debt. Kicking out those items, Corning lost $0.06 on a pro forma basis in the quarter, compared with pro forma
profits of $0.09 per share in the year-earlier period and a pro forma loss of $0.07 in the second quarter of 2002. Results were
largely in line with expectations. Nine-month pro forma loss amounted to $0.24 per share, compared with a year-earlier pro
forma profit of $0.47 per diluted share. We are reaffirming our pro forma loss estimates of $0.31 per share for 2002 and $0.10
per share for 2003.
By segment, sales of telecom equipment fell to $366 million from $1.1 billion a year earlier and $437 million in
the 2002 second quarter. Fiber and cable sales, still the biggest part, were off 75% year over year, to $195 million. However,
advanced materials sales rose 2% year over year to $239 million, driven by environmental technologies and life sciences,
both up in double digits. And Information Display sales rose 25% year over year, to $228 million, led by display technologies
(up 34%) and precision lenses (up 32%). Sales gains for display technologies was led by rapid adoption of LED displays
for desk-top computers, while digital and projection television set sales drove the precision lens business. Both of the nontelecom
businesses were profitable, but not sufficiently so to offset the $137 million loss from operations in the telecom
business.
Investors in the GLW shares are pleased to see the performance of the non-telecom sectors salvage the operating
performance or at least partly offset telecom-related losses. For now, their chief focus is on Corning’s ability to survive afterexpanding its telecom assets too rapidly immediately ahead of the withering industry downturn. Corning, like many telecom
equipment companies, has been in an ongoing downsizing mode for more than a year. Management had hoped that markets
would have stabilized by now, but that has not been the case in telecommunications.
Therefore, the company announced a new restructuring program that will entail a fourth-quarter charge of between
$550 million and $650 million. On top of 4,600 layoffs announced in the year to date (about 70% complete), the company
is furloughing a further 2,200 positions. Corning will permanently close a fiber facility in Australia, is highly likely to do
the same to a plant in Germany, and will “mothball” its newest plant, in Concord, North Carolina. (Mothballed plants remain
on the books and, though creating almost no operating costs, are still a depreciable asset.) Virtually all the company’s fiber
will come from its largest facility, in Wilmington, North Carolina. The Concord plant can be restarted as need be in six to
nine months.
Some of Corning’s actions in this difficult time have elicited criticism in the financial community. Corning in July
issued $500 million worth of high-yielding convertible preferred shares. The shares convert to approximately 300 common
GLW shares in summer 2005. The convertible preferred also came with a one-time $7 per share teaser, paid as a dividend,
which cost the company $127 million against GAAP income in the quarter.
Simultaneously, for the past several quarters Corning has been repurchasing discounted debt. Overall, we support
the strategy. Corning is repurchasing its debt for about 58% of face value, representing a much better return on assets than
it could gain in the nearly moribund fiber & cable business. The financial gains are twofold. First, the company is reducing
its debt-to-capitalization ratio, now at 43%. The only loan on which Corning has restrictive covenants is a $2 billion undrawn
revolver. A debt-to-cap ratio north of 60% would prompt immediate repayment, so Corning has an interest in paying down
debt. Moreover, Corning records an income statement gain for the value of prematurely retired debt, lessening the net income
drain on retained earnings and, again, protecting its debt cap ratio from violating the covenant on the revolver.
Corning does face substantial cash drain in coming quarters from past restructuring and the newly announced
fourth-quarter program; we believe cash outlays could be $450 million all in going forward. But given the depressed state
of the market, Corning has little choice but to act. Recently, capacity utilization in optical fiber has been “substantially”
below 50%, and we estimate the level at about 30%-to-35%. Even after the planned plant closings in Germany, Australia,
and Concord, Corning’s fiber operations will be running at less than 60% of capacity.
Like other mature industrial companies, Corning faces a potential hit to retained earnings based on the gap between
pension plan assets and accumulated benefit obligation. Corning has made voluntary contributions into its plans throughout
the bull market to the tune of approximately $25 million, and plans a $60 million infusion in January 2003. The company
is not required to make any contributions for 2003 or 2004 at the very least. Like many technology companies, Corning also
must subject its assets to an impairment test at its fiscal year end, in this case in December. Asset impairments here would
also be reduce net income and retained earnings. Management notes that its telecom-related goodwill totals $2.2 billion,
after several prior reductions. We could see an impairment charge, but we do not expect it to exceed $500 million. The
impairment would have to reduce substantially all of the $2.2 billion in value to push debt to cap to 60%.
We expect Corning to survive this difficult phase, aided by its $1.6 billion in cash, its $2 billion undrawn revolver
(which does not expire until 2005), and its strong non-telecom businesses. Eventually, recovering telecom carrier demand
will spur a new round of spending. Announcements such as that made by Verizon are encouraging, but amount to a drop
in the ocean at this point. We expect the GLW shares to market-perform at least until a sustainable recovery in carrier
spending gets underway.
On Monday, HOLD-rated GLW closed at $2.15, up 0.09. (Jim Kelleher) |
