You don’t normally associate the word “resilient” with glass. Yet resilience is exactly the quality that’s seemed to have helped Corning, the 158-year-old glass-making giant, survive two disastrous economic downturns over the last decade. Indeed, following a strong contraction in the supply chain incorporating LCD glass, Corning’s biggest-selling product, the company has bounced back with a vengeance.

On June 30, James Flaws, the company’s CFO and vice chairman, announced a drastic upward revision of the company’s expectations for its second-quarter sales volume. “Second-quarter glass demand is much stronger than we anticipated even a few weeks ago,” Flaws reported in a company press release. Because of that surge, the company boosted its second-quarter sales projection by about 100% at its wholly owned businesses. Corning had originally predicted a second-quarter sales-volume rise of more than 50%, and at the end of May hiked those expectations to more than 75%.

What happened was that, accordion-like, the supply chain for televisions, notebook and desktop computers, and other products featuring liquid-crystal-display screens had sharply contracted in anticipation of dire effects from the financial crisis. Meanwhile, as they long have done during recessions, consumers continued to stay at home and watch television and even buy some new sets, Flaws told CFO editors earlier this month.

As the supply chain snapped shut, Corning used up its inventories. With the growth of buyers of sets and the accelerating changeover from cathode-ray-tube screens to LCD, underlying demand for Corning’s products has surged. The widening gap between supply and demand has thus brightened the company’s sales expectation considerably.

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Such a comeback is nothing new to Flaws, who has seen the company last out six recessions since he joined it in 1973. He’s seen it make drastic shifts in its product mix, spinning off its blood-testing and pharmaceuticals businesses and selling its housewares operations, for example. Most seriously, he’s helped guide it all the way back from “the edge” following the telecom bust of 2000-2002. Through all those changes, however, the company has remained a mainstay of what Oppenheimer analysts call a “glass oligopoly.” In the case of LCD glass, Corning is one of only four or so providers in the world, according to the finance chief.

JimFlaws1-corning.bmp“This is my sixth recession since I started working at Corning. And all six have actually been somewhat different in nature.” — Corning CFO James Flaws

In his career, Flaws appears to have displayed his own kind of resilience. Since becoming CFO in 1997, he’s served under four different chief executives. “The number-one reason CFOs lose their jobs is a change of CEOs,” he notes, wryly.

In a wide-ranging interview with CFO deputy editor David Katz, senior editor Vincent Ryan, and senior writer Alix Stuart on July 1, Flaws discussed his approaches to inventory, cash, and working-capital management, bank credit, human capital, and much else. An edited version of the interview follows.

What has driven the bounce-back in sales?
The primary bounce-back has been in the display business. It stems from the fact that our customers in the fourth quarter and the beginning of the first quarter dramatically cut their production, really emptying the supply chain from us through the end consumer. We sell to the panel maker, the panel maker sells to assembly, then it ends up in Best Buy. In the fourth quarter of last year, there had been a little bit of a buildup in inventory. But with the bankruptcy of Lehman and the stock market dropping dramatically in October, there actually was a fear that there would be no Christmas in this country. So everybody’s supply chain started to back way off. What happened to us was that our sales volume was cut almost in half in the late fourth quarter and in January.

But if you look at what actually happened, [products that use LCD glass] continued to sell quite well in retail and didn’t really contract at all during the fourth quarter and in the first quarter. What happened was that the supply chain wanted to bring inventories way down because they were afraid of things going wrong. Now they’ve realized that that hasn’t happened, and, in fact, the supply chain is too thin, and therefore our sales volume is ramping up. We focus all the time on how the supply chain builds and contracts — on how many notebooks, how many televisions are going to be sold — because ultimately that’s what drives our volume.

So the downturn isn’t having as bad an effect as the rest of supply chain thought it would.
Yes. So, for instance, IT products are definitely down, probably approaching 10% down. But although television growth may have slowed a little from what it was supposed to be originally, it’s remained very strong.

The supply chain is now realizing that this wasn’t the end of the world and that the LCD business is doing fine. That’s not true for all of our businesses and obviously for a lot of other companies. For example, we make catalytic converters for the car industry around the world. The car industry around the world is in a depression, so that business is down. And it’s down not just because the supply chain is down, but because people aren’t buying cars.

On balance, then, how would you say the recession has affected you? Are people actually buying more TVs? Why?
In the United States, the market we’re most familiar with, we’ve gone back and looked at all recessions since the ’60s. That’s when color television really started rolling out. In only one recession since then did the television market shrink; in all others, it grew. The reason is the phenomenon of consumers retreating from buying homes, buying cars, going out to eat. People retreat to their homes. But television and going to the movies usually do well during recessions.

Right now we also have an added benefit because there’s a technology change going on as the cathode-ray tube device for entertainment television goes away. Five years ago, about 200 million televisions were sold around the world. About 95% or more of those were made with cathode-ray tubes. Today, only about 35% or 40% of them are cathode-ay tubes, and LCD is becoming the majority. That gives us growth because of penetration. The absolute television market isn’t growing that much, but because people are buying far more LCDs and not buying CRTs, we see the growth.

Corning‘s revenues dropped by 13.8% in the first quarter compared to the first quarter of 2008. What caused that, and what are you doing in terms of cash management to deal with it?
Well, we have quite a bit of cash [the company had about $2.6 billion in cash and short-term investments as of June 26, according to Capital IQ]. In 2007 our sales were $7 billion. By the time we got to the depth of the telecom crash in 2002-2003, we had fallen to maybe $3 billion. The company got very close to the edge of going away. And one of the lessons we learned then was that we exist in some markets that can have fairly extreme volatility. Coming out of that, we positioned the company to carry a lot more cash. We do have debt, but we have more cash than debt [the company holds about $1.6 billion in long-term debt, according to a June 30 Oppenheimer report].

And we always have what we call a “clear runway” strategy in terms of debt. We’re constantly clearing out any debt due in the next three years at the very minimum, just in case something goes wrong. The other thing we do is model scenarios. For example, we have yet to find anybody who really predicted that the telecom boom would collapse until it actually did. We actually had 20 years in a row where optical fiber grew — some years 40%, some years 20%, and it never, ever went down. So it’s human nature to think it’s always going to grow. And then it fell back by over 60% from 2000 to 2002.

What we do now is develop scenarios in which there’s a severe recession and it really dramatically impacts the sale of LCD or in which the yen goes from 100 to 135. And then we ask ourselves if we would have enough cash to survive as a company. And we recognize that when you enter a crisis it always takes a while.

You said that following the bursting of the telecom bubble you were on the edge. How far off the edge are you now?
Against where we were in 2002, we’re all the way back. We’re nowhere close to the edge. Just to give you a feeling for it, in 2002 our sales went from $7 billion to $3 billion. Our employees went from 44,000 to 20,000. We had $2 billion of cash, which sounds great. But we had $5 billion of debt, with more than half of it due within a few years. Entering this year we have about $3 billion in cash, about a billion and a half of debt, and none of it is coming due for quite a while. We’ve been free-cash-flow-positive every year since 2004. And we will be again this year, despite the impact of the recession.

You mentioned our quarter-over-quarter sales being down. Last year our sales for the total year were just under $6 billion. If you look at our first quarter this year, it’s as if we fell to $4 billion as a run rate. By the end of this year our total sales will be back to $5 billion, and our run rate will be over that.

We have reduced our head count by 13%. We shuttered facilities. I mean, we are taking actions. But we weren’t threatened in any way because of not being prepared for this. So we’re nowhere close to what that edge was in 2002.

When did the layoffs and the other reductions you’ve done happen?
Some of them happened in November, and a large chunk happened in February and March.

Have you learned any lessons about how to do more with fewer people? Did you ever hire back the 24,000 from the last recession when demand picked up? Now, as you think about your finance staff and your workforce in general, do you see things going back to the way they were — or will you be doing more with fewer people?
It’s a complicated answer. Coming out of 2002, we did hire back people. We went from 20,000 to about 26,000, and I’m not just talking about production workers. I’m talking about engineers and others who wanted to come back to Corning. You know, I think you learn from every recession. This is my sixth recession since I started working at Corning. And all six have actually been somewhat different in nature.

One of the lessons we learned coming out of the telecom downturn is that when times are good we add people at too fast a rate. One of things we put in place is to not let our operating expense, particularly our SG&A, grow at any more than half the rate our sales go up. So that when the inevitable downturn comes, we don’t have to rip out those people.

You mentioned finance staff. Back in 2005, our sales was about $5 billion. And it got to $6 billion last year. We’re now back to $5 billion. Along the way we actually have had about the same number of finance people — slightly lower than what we had. We learned that when times are good you don’t ramp up your infrastructure cost. Although you obviously ramp up your production people, because you have more products going out, you try to avoid letting overhead in various forms go up by too much.

Did you have to cut anyone from your finance staff in this past year?
No, not really, because we had really held it down. We did offer an early-retirement program across parts of the company. We decided not to offer it in finance because we didn’t need to reduce the head count.

How large a department is finance?
We have a little under 600 people around the world.

Have you fundamentally changed any processes in finance over the last year to cope with the downturn?
One area we’re probably more focused on is cash and our customers’ financial health. We always pay attention to that. Seventy percent of our sales is from outside this country. We have a number of Asian customers who live on low margins with big debt. As their profitability has diminished during this downturn, we pay even closer attention to that.

Another is our own inventories. To keep working capital down and cash up, we’re being very careful about inventories this year.

What other steps are you taking to reduce your working capital?
We’re really not doing much on accounts receivable because there’s very little flexibility that we have with our customers. Particularly in Asia, many of the terms are longer than what we experience in the United States. We don’t have a lot of payables because we’re not an assembly company.

In addition, we don’t have a lot of ability to influence our payables. And in many cases we’re the sole customer for some exotic materials and variations of sand. It’s not like we can say to a sand mine or clay mine, surprise! We’re going to pay you 20 days later. They might tell us, surprise! We’re not going to ship to you.

But we’re very focused on reducing the amount of inventory we have. It’s actually been one of the relative weaknesses for our company over time. Inventory management isn’t what we call one of our world-class skills. So all of our manufacturing managers are focusing on trying to reduce inventory. 

What are you doing to monitor your customers’ creditworthiness?
We have very large, concentrated customers. In many of our businesses, our customers are far larger than us. In the LCD business, our largest business, we actually model our customers’ financials. We’re constantly looking forward to see if they will have enough money. And we project their operating cash flow because we understand their businesses so well because our product is the enabler for them. 

We pay a lot of attention to their inventories and actually get them to report to us in some cases on a regular basis. We monitor how well they’re doing with their customers. We would be concerned if one of our customers, for example, was a big supplier to an IT company and then lost that business to somebody else.

But that said, we don’t make money unless we ship to somebody. And one of the things that I always find interesting is when people say, oh my God, I had to write off that account receivable. If you’d cut them off in advance you wouldn’t have had to write that off; but you’d still be stuck with the fixed cost of making that part. And the true cash cost differential of writing off a receivable versus not shipping to somebody in the first place is far less than some people think. So we work really hard on trying to keep our customers in business. In some cases we make the decision to extend terms with them because we want them to stay in business.

How has the credit crunch affected you? How are your relationships with your banks?
Our relationship is pretty good. We have an undrawn revolving credit line. Part of our preparation for bad times is always having some liquidity resources beyond our own cash. So we try to always maintain a revolver, and while we like it to be undrawn, we have the ability to access it. We also try to be well above our covenants. So right now it’s not impacting us and we don’t need it. 

Now, we’re in the midst of a five-year revolver which expires in November 2011. I could not go out today and get that deal repeated. So one of the things we’re thinking about is, if I went out to get a new revolver today it would probably be less than the two-and-a-half years remaining on [the existing credit facility]. We’re thinking about whether the current credit environment will still exist in late 2010 and 2011 or whether we might have to prepare for a life of not having what I call liquidity insurance.

We don’t intend to use our revolver unless something really terrible occurs. Up until now we’ve been lucky, unlike a number of other companies who couldn’t access commercial paper and didn’t have much in the way of revolving credit available to them. We did go out in May and do some new long-term debt because we want to have debt, but we don’t want to have much of it coming due. We have some debt that will come due in 2010, not a whole lot. We’ll be prepared to pay that and roll our debt more.

Spreads for the first four months of this year were extraordinarily high. But we were all ready to go, and, like other companies, we saw in May that spreads had come down and we got what we would consider a good rate. So we went out and sold $300 million of debt. But we prepared for this downturn as if we couldn’t float commercial paper and we couldn’t issue long-term debt. We were prepared by having a revolver and having cash in our balance sheet.

What do you plan to use that new debt issuance for?
It could be multiple things. It could just be that it stays on our balance sheet until we pay some debt in 2010. Or we could do some small acquisitions again. We haven’t done any for most of this decade, and we now think that valuations have come to a point where there actually could be good transactions.

Would you be interested in buying businesses that help smooth out your results and make you less subject to market fluctuations?
I don’t think that is a primary goal for us. Back in the mid to late ’90s, we changed the nature of Corning. We narrowed the company’s focus a great deal. We spun off, for example, all of our medical businesses. We used to own one of the largest blood-testing companies, which is now known as Quest Diagnostics, and we spun that off. We spun off our pharmaceutical business. We sold our consumer housewares business. We probably didn’t realize as we were doing this that we were becoming a bit more volatile company. But I think we recognize now that we generally want to participate in some volatility. So we wouldn’t say that we’d go buy something just to make it countercyclical to the businesses we’re in. It would have to be a good business. 

The primary motivator would probably be to buy something within the segment we’re in today, like telecom or life sciences, that could expand our strategic reach. But just trying to smooth out bumps in the business, the answer would be no. Frankly it’s not clear to me that that’s as easy to do as people think. I could go out and buy a toothpaste company and say: people buy toothpaste every month, and therefore that would be balancing LCD and telecom. Our shareholders would say, are you a complete idiot? What expertise do you bring to that? So it’s really hard to do.

There’s no glass in toothpaste, as far as I know.
No, but at one time we made ceramic teeth. We got out of the business because not many people wanted it.

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