Corning, Inc. (GLW)

[DewDiligence]

Q4 results: mostly positive:

GLW’s press release ran 35 pages (!) on my printer (using medium-sized fonts), so there may be a lot of stuff I missed. Here are what I consider some of the highlights:

Overall, the 4Q02 operations were weak, but the company more than compensated for the operational shortcomings by making some great financial maneuvers: i.e., selling the precision lens division to 3M and buying back deeply-discounted debt on the open market.

Let’s start with the debt repurchases. In 4Q02, the company bought back $215M face value of debt at an average of 58 cents on the dollar!! For the full year, they bought back $493M face value at an average of 62 cents on the dollar. These kinds of opportunistic debt repurchases effectively neutralize some of the sins committed during the tech bubble!

Thanks to these debt repurchases, the convertible offering last August, and the sale to 3M, the balance sheet is now quite solid. The 12/31/02 debt/capital ratio was 46.7%, which is well below the 60% covenant on the still-untapped $2B credit line. In other words, GLW has unfettered access to $2B of credit – but will probably never need it.

(Solomon Smith Barney’s warnings from last summer of GLW’s eventual demise from its inability to access the credit line can now be seen for the B.S. that they were. And this is hardly surprising because SSB was, after all, the home of our dear friend, Jack Grubman.)

It gets even better: since January 1, 2003, GLW has bought back an *additional* $158M face value of debt on the open market. (We will know what they paid for this debt when Q1 results are reported.)

Segment info: GLW has changed the way business segments are reported, combining all non-telecom businesses into the new “technologies” segment. This will make it somewhat harder to determine the profitability of the LCD operation and the specialty-materials business. I believe that GLW made this reporting change for competitive reasons. (This is a more credible explanation than the one given in the PR.) Sales, but not profits, continue to be reported by detailed business lines.

Share count: As of 12/31/02, all but $155M of the $575M of convertibles issued last August had already been converted into common stock. Assuming that the remainder is eventually converted at $1.97/sh, the converts will produce 79M additional shares. Adding these to the 1.267M basic shares outstanding at 12/31/02 gives an effective basic share count of 1.35B shares.

Guidance: I posted earlier about the positive signal management is sending by re-establishing financial guidance on Feb. 7. Although I personally would be content to have the company forgo guidance, I am impressed by the confidence they are showing and I believe that guidance *does* matter to a large cross-section of the investing public. Hence, the re-establishment of guidance can be expected to boost the share price to a non-trivial degree.

That’s it for now. More comments after the CC in about eight hours. Dew