Credit analyst skeptical of Corning despite progress this year

By Ronda Fears

Nashville, Dec. 6 - Carol Levenson, director of research at Gimme Credit, said she would continue to avoid Corning Inc. as she still sees more negative than positive factors in the credit.

Since May, she noted, Corning has been downgraded to junk, announced yet another restructuring, enticed the capital markets to purchase a convertible preferred, agreed to sell one of its most promising businesses and has made more money buying back its distressed bonds than it earned for several quarters.

"But one thing that worried us, the likelihood of a substantial goodwill charge in the telecommunications segment that could cause leverage to approach the limit in Corning's bank agreement, appears to have been forestalled, if not eliminated," Levenson said in a report Friday.

There are other lingering concerns, however.

"Moreover, Corning continues to bleed cash, despite dramatically lower capital spending and no common dividends. Year-to-date, Corning's free cash flow was negative by $500 million, and we expect in the current quarter it will consume another $200 million or so," Levenson said.

"The promise of returning to meaningful profitability next year seems optimistic, and every new cost-cutting scheme requires additional cash outflows. We would continue to avoid this name."

Corning announced Thursday its long-awaited goodwill charge at $400 million.

Corning also expects to take a $400 million to $425 million asset impairment charge in the current quarter for its photonics and conventional television glass businesses, in addition to the previously announced $550 million to $650 million charge for cost-cutting efforts.

The charges will have no cash impact, the analyst said, but roughly one quarter of the cost-cutting charge announced in October will result in cash outflows for severance and the like.

Levenson noted Corning's liquidity benefits from $1.6 billion in cash and marketable securities on hand, no significant debt maturities until 2005, nothing outstanding under its bank facility and an asset sale to 3M Co.

"On the other hand, Corning's business prospects continue to worsen as telecom carriers cut back further on their capital spending, and its earnings visibility is severely impaired," Levenson said.

"Cost-cutting can only take the company so far, as the third quarter proved. Despite lower SG&A expenses, the ratio of these costs to sales rose 300 basis points year-over-year as sales failed to keep up while gross margins fell by more than 14 percentage points."

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