GLW

Business Context and Reporting Period

Company: Corning Incorporated (NYSE: GLW)
Filing Type: Form 8-K (Current Report)
Reporting Period: Second Quarter ended June 30, 2003
Report Date: July 21, 2003

Corning reported second-quarter results that exceeded its guidance range. The company is actively restructuring, exiting its conventional video components (CAV) and photonics businesses, and managing a significant asbestos liability settlement. Management emphasized a focus on cost management, debt reduction, and investment in future technologies, particularly in the liquid crystal display (LCD) glass sector.

Key Financial Metrics

Segment Performance (Q2 2003):

• Technologies Segment: $400 million (up from $388 million in Q1). Driven by LCD glass volume gains of >15%.
• Telecommunications Segment: $347 million (down from $352 million in Q1). Fiber volumes declined 20% due to seasonal slowdowns in Asia.

Material Changes and Unusual Items

The reported net loss of $22 million includes significant non-recurring charges and credits:

• Restructuring & Exit Charges: Net pretax charges of $75 million (after-tax $47 million). This includes $54 million for the shutdown of Corning Asahi Video Products (CAV), $33 million for exiting the photonics business, and $38 million for other cost reductions. These were partially offset by a $76 million reversal of prior restructuring liabilities.
• Asbestos Settlement Adjustment: A $39 million charge (after-tax $24 million) to mark-to-market the value of Corning common stock to be contributed to the asbestos settlement trust.
• Debt Repurchase Gain: A net gain of $13 million (after-tax $8 million) from the repurchase of zero-coupon convertible debentures.
• Other Charges: $21 million increase in deferred tax asset valuation allowance and $7 million impairment of equity investments related to the photonics exit.

Guidance, Outlook, and Management Commentary

Third-Quarter Outlook (Q3 2003):

• Sales: Expected to range between $740 million and $765 million.
• Earnings Per Share: Expected to range from $0.01 to $0.03, excluding remaining gains/losses from CAV/photonics exits and asbestos stock price adjustments.

Operational Outlook:

• LCD Glass: Anticipates sequential volume gains of 5-10% in consolidated business and 10-15% at Samsung Corning Precision. Plans to ramp up Generation 5 and 6 glass production.
• Telecommunications: Fiber volumes expected to increase 5-10% sequentially due to renewed demand in Japan. Pricing pressure expected to remain moderate.
• Environmental: Sales expected to be consistent with Q2, with a shift toward premium-priced thin-wall products.
• Exiting Businesses: Photonics and conventional TV glass sales expected to decline modestly in Q3 and cease in Q4.

Liquidity & Capital Structure:
Corning ended Q2 with $1.5 billion in cash and short-term investments. The company reduced its debt-to-capital ratio to 40% (from 45.6% in Q1) by issuing $267 million in equity and retiring $834 million in debt during the quarter. Management is considering increasing voluntary pension contributions to approximately $160 million for 2003.

Investor Verification Checklist

• Restructuring Execution: Verify the actual cash outflow for the CAV shutdown and photonics exit against the estimated $45-$60 million range.
• Asbestos Liability: Monitor Corning's stock price fluctuations, as the settlement reserve is marked-to-market quarterly, creating volatility in earnings.
• LCD Growth Sustainability: Confirm if the >15% sequential volume growth in LCD glass can be sustained given the ramp-up of Gen 5 and 6 production.
• Debt Reduction Strategy: Track future debt repurchase activities and the impact of increased pension contributions on free cash flow.
• Telecom Recovery: Assess whether the anticipated 5-10% sequential fiber volume increase materializes in Q3, given historical volatility in the sector.