Corning Outperforms in Q2

CORNING, N.Y. -- Corning Incorporated (NYSE:GLW - News) today announced that its second-quarter sales were $752 million and that it incurred a net loss of $22 million or $0.02 per share. This net loss includes $47 million or $0.04 per share of after-tax charges primarily related to the shutdown of Corning Asahi Video Products Company (CAV); the planned exit from its photonics business; and a mark-to-market adjustment to the portion of its asbestos liability settlement to be paid in Corning common stock.

"We are pleased that our results exceeded our second-quarter guidance. This performance gives us confidence that we will achieve our goals for the year. We continue to maintain our focus on managing costs, paying down debt and investing in future technologies," said James R. Houghton, chairman and chief executive officer.

Second-Quarter Charges

Corning said its second-quarter results include net pretax charges of $75 million (net after-tax charges totaling $47 million or $0.04 per share). These include:

Restructuring charges of $54 million related to the shutdown of CAV, $33 million related to the exit of its photonics business and $38 million related to other cost reduction programs primarily in the telecommunications segment, offset by a reversal of $76 million of liabilities relating to prior years' restructuring charges. These charges and credits total $49 million, which after tax of $18 million and minority interest of $28 million had a $3 million impact on Corning's second-quarter net loss.

Charges to increase the deferred tax asset valuation allowance of $21 million and impair equity investments of $7 million, both of which are directly related to the decision to exit the photonics business.

A $39 million charge ($24 million after-tax) to reflect the increase in the market value of Corning common stock to be contributed to settle the asbestos litigation related to Pittsburgh Corning Corporation.

A net gain of $13 million ($8 million after-tax) related to debt repurchase as a result of the company's recently completed tender offer.

In addition to these items, Corning recorded a $9 million inventory write-off in gross margin related to the closure of CAV.

Second-Quarter Operating Results

Second-quarter sales of $752 million exceeded the company's guidance range of $715 million to $745 million and increased from first-quarter sales of $746 million. Corning's technologies segment recorded sales of $400 million, an increase over first-quarter sales of $388 million. The increase was primarily driven by the continued strong performance of the liquid crystal display (LCD) glass business that experienced sequential volume gains of more than 15 percent and stable pricing. The growing popularity of notebook computers and increasing market penetration of LCD desktop monitors fueled the quarter's growth. In the second quarter, LCD desktop monitors outpaced cathode ray tube monitors for the first time achieving a level of 52 percent of the U.S. market.

These gains were partially offset by lower sales in the company's semiconductor business. Sales in Corning's environmental business were flat versus the first quarter, as an anticipated general slowdown in the automotive industry did not materialize.

Corning's telecommunications segment sales were $347 million, a slight decline from $352 million in sales for the first quarter. As expected, the quarterly sales decline was due to lower fiber and cable volumes in Asia, resulting from seasonal slowdowns in Japan. Fiber volume declined in the second quarter by 20 percent, slightly less than the company expected. Fiber pricing in the second quarter was down about 5 percent. The fiber and cable sales decline was partially offset by sequential increases in the hardware and equipment business.

Corning's second-quarter results benefited from the receipt of $17 million in royalties at CAV, foreign exchange gains and a higher effective tax benefit rate. Corning's second-quarter results also included $25 million of equity earnings from Dow Corning, which the company began to recognize effective January 1, 2003.

Liquidity Update

Corning ended the second quarter with $1.5 billion in cash and short-term investments, a decline from $1.85 billion at the end of the first quarter. The decline was primarily due to financing transactions. In the quarter, Corning raised net proceeds of $267 million from the issuance of 50 million shares of common stock and used $623 million of cash to retire $834 million aggregate principal amount of its outstanding zero-coupon convertible debentures. In July, Corning repaid an additional $123 million of debt. Corning said that it might continue from time-to-time to retire its debt securities in open market, privately negotiated or other transactions.

Corning ended the quarter with a debt-to-capital ratio of 40 percent compared with 45.6 percent at the end of the previous quarter. Corning's revolving credit facility includes one financial covenant limiting the ratio of total debt to total capital, as defined, to not greater than 60 percent. The company also said that it is considering increasing its voluntary contributions to its pension plans in 2003 from approximately $60 million to approximately $160 million. In the first half of this year, Corning made $30 million in contributions to its U.S. pension plan.

Third-Quarter Outlook

Corning said it expects third-quarter sales to be in the range of $740 million to $765 million. The company anticipates earnings per share in the range of $0.01 to $0.03, excluding any remaining gains or losses related to the exit of CAV or its photonics business and any further adjustments to the asbestos settlement reserve required by movement in Corning's stock price.

Corning anticipates sequential volume gains for its LCD glass business of about 5 percent to 10 percent in its consolidated business and 10 percent to 15 percent at Samsung Corning Precision. The company plans to ramp up Generation 5 and 6 glass production in the third quarter and move forward with its capacity expansion plans to meet accelerating global industry demand. Corning will incur start-up costs with these expansions.

Corning said it anticipates that sales in its environmental business will be consistent with the second quarter. The company also expects that a shift to more premium-priced thin-wall products will continue in the third quarter. Sales of diesel products are projected to continue growing with increased retrofits on emissions systems for heavy-duty equipment and off-road vehicles. The company's new diesel product manufacturing facility in Erwin, N.Y., will phase in limited production through the second half of this year.

Third-quarter fiber volumes are expected to increase sequentially in the range of 5 percent to10 percent due to renewed demand in Japan and a slight increase in North American orders. Pricing pressure is anticipated to remain moderate, at a level consistent with the second quarter.

Corning expects sales in its photonics and conventional TV glass businesses to decline modestly in the third quarter and then effectively cease in the fourth quarter with the final exit from these businesses.

James B. Flaws, vice chairman and chief financial officer, said, "We continue to be pleased by the strength of our LCD business. This business has certainly hit its stride and it is providing Corning with significant opportunity for growth and profitability." Flaws said that signs of stability across the telecommunications sector are giving the company some cause for optimism. "The preliminary FCC ruling on fiber deployments is also very promising for the industry and we have been further encouraged by the announcement of three Regional Bell Operating Companies to work together in developing standards for future fiber to the premises investments. However, we do not expect any significant revenue impact this year from these developments," Flaws said.

Corning Inc.