Has Corning Turned the Corner?


Corning, the world's largest maker of optical fiber used in telecommunication networks, has been singing the blues for two years. As the U.S. economy sputtered and telecoms stopped expanding their systems, Corning began dripping red ink, and it responded with layoffs and factory closures. The restructuring is not yet complete, but some observers insist they're seeing a glimmer of light in the darkness.

If true, that's good news for investors. The latest push toward a return to profitability came in the fourth quarter, when Corning (GLW) closed several plants. On Jan. 23, it met fourth-quarter sales and earnings estimates. The company posted a net loss of $709 million on revenues of $736 million, vs. a loss of $655 million on revenues of $917 million in the year-ago quarter. And on Feb. 7, at its annual stockholder meeting, Corning announced not only that first-quarter losses will be smaller than expected but that it should once again be operating in the black by the middle of this year -- rather than late in 2004, as many analysts had been predicting. The stock jumped nearly 9% that day, to $4.57 a share. It closed at $5.40 on Feb. 10.

Now execs must decide the fate of Corning's photonics components, used in telecom equipment, a business not expected to recover for several years, says Jim Flaws, chief financial officer. Corning also needs to reduce long-term debt, which stood at $2.96 billion as of December 31, 2002. Flaws talked about Corning's progress and challenges with BusinessWeek Online reporter Olga Kharif on Feb. 7. What follows are edited excerpts of their conversation:

Q: A lot of analysts on Wall Street continue to say Corning won't turn profitable until 2004. What do you say?

A: Wall Street has, perhaps, underestimated our cost-cutting and growth. For starters, with the closing of three additional fiber factories at the end of last year, and with reductions in our selling and operating expenses, we are going to see a fairly dramatic improvement in our expenses starting in the first quarter. Many analysts didn't foresee how fast these cuts would show up on our financials.

Second, particularly in the LCD business, we've seen strong growth this past year, and we see it continuing in 2003. That's a highly profitable business. And we're the world's most efficient producer of that glass.

Q: You hope to turn profitable in 2003. How much will come from cutting costs and how much from sales growth?

A: Three-quarters comes from cost-cutting and one quarter from volume growth. We do expect to see growth in some of our businesses, such as LCDs. But we're not expecting a rebound in demand on fiber and cable this year. We expect volumes to be relatively flat and prices to remain under pressure.

Q: So nontelecom-related businesses will grow as a percentage of revenue this year?

A: You'll continue to see a shift of the company's revenues' between our two main segments: telecom and technologies [which includes glass for displays, among other products]. They will shift by maybe 6% at the most, with technologies going up and telecom going down.

Q: When will the restructuring be completed?

A: We're very far along. There's one strategic decision we still need to make, which is whether we continue to be in the photonic-components business, narrow our offerings, get out of the business, or partner with somebody. We've set a goal of making a decision by midyear. Plus, there will be some reductions of people that have been planned but not done yet. But 80% of the cost reductions are done.

Q: As part of the cost-cutting, you announced you would reduce research and development from between 14% and 15% of revenues to 10%. Where are the cuts occurring?

A: The major reduction came in photonics product development. We're continuing to spend on core research -- as Corning has always done, and we're increasing our spending against some businesses, such as new display and semiconductor technologies.

Q: It sounds like you don't expect the photonics business to recover any time soon. Why?

A: In the fourth quarter, our own photonics business actually didn't go down, it was a slight increase -- and it was the first time in two years that had happened. On the other hand, most of the photonics components have gone into long-distance networks and that build-out is complete. That leads us to believe there won't be much vibrancy to that market for a couple of years.

Q: In addition to photonics, your fiber sales were higher in the fourth quarter than expected. Why?

A: In the fourth quarter, we had expected the fiber volume to be down slightly sequentially, and it was actually up 6%. It was almost all driven by fiber demand in Japan, primarily because of that country's national policy to extend telecommunications networks to individual homes. We actually expect to see strong demand for fiber in Asia in the first part of this year. But this could be balanced by the U.S. market's continuing weakness.

Q: Let's talk about your debt. You've been reducing it for the past six months. How far along are you?

A: We paid off last year about $800 million of debt. In January, we've already spent $150 million in cash to [retire] more debt. And we're going to continue to reduce debt. We haven't announced any specific plans yet, as we'll be opportunistic, like last year, and try to [retire debt] at the right point in time.

Q: Does Corning have anything to worry about in terms of meeting obligations?

A: We ended 2002 with several billion dollars in cash. Our cash usage rate was very low last quarter, excluding restructuring charges. We feel we've made a lot of progress in reducing our cash-burn rate. This coming year, we'll actually switch to generating some cash. We have the cash, our $2 billion credit line -- and, most important, we're working to get back to profitability.

Q: Do you expect Corning to need additional funds in the next few years?

A: I won't speculate about future years, but we feel very good about our resources in this upcoming year.

Q: Your credit line stipulates that your debt-to-capital ratio can't rise too much. The ratio rose a little in the past quarter. Do you expect it to rise more in 2003?

A: The ratio rose between the third and the fourth quarter because of goodwill and restructuring charges. We're not expecting any more massive charges. Actually, I hope you'll see positive changes to the ratio as we reduce debt and return to profitability -- and add to our equity. The ratio should be relatively stable and should over the rest of the year actually go down.

Q: Corning is known as an optical-fiber company. Is that changing?

A: We've always thought of ourselves as a technology company. When telecom revenues climbed to well over half our total, we became known as a telecom company. But there have been times in our past when we've been known for other things. Back in the '60s, everybody thought we were just a glass television company. But as the LCD business grows dramatically -- which we believe it might the next four or five years -- we'll certainly become known as a more broad-based technology company. Whether we'll just be known for LCDs or not -- that's a bit hard to predict.


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