Corning Incorporated — Form 10-Q Summary
Business context and reporting period
Corning designs and manufactures glass, ceramics and specialty materials through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences and All Other. This filing covers the quarter and six months ended June 30, 2021, compared primarily with the corresponding 2020 periods.
Corning consolidated Hemlock Semiconductor Group results in All Other beginning September 9, 2020, affecting year-over-year comparability.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $3,501 million | $2,561 million | $6,791 million | $4,952 million |
| Gross margin | $1,315 million; 38% | $756 million; 30% | $2,471 million; 36% | $1,317 million; 27% |
| Operating income (loss) | $575 million | $(103) million | $1,077 million | $(224) million |
| Net income (loss) | $449 million | $(71) million | $1,048 million | $(167) million |
| Diluted EPS | $(0.42) | $(0.13) | $0.27 | $(0.28) |
| Core net income | $459 million; $0.53 core diluted EPS | $218 million; $0.25 | $861 million; $0.97 | $395 million; $0.45 |
Six-month operating cash flow was $1,494 million versus $798 million in 2020. Capital expenditures were $613 million, producing operating cash flow less capital expenditures of approximately $881 million before other investing items.
At June 30, 2021, cash and cash equivalents were $2,320 million, working capital was $3,024 million, and the current ratio was 1.7:1. Total debt was $7,378 million, including $353 million of current debt and $7,025 million of long-term debt. No commercial paper was outstanding, and the $1.5 billion revolving credit agreement was undrawn. Debt represented approximately 38% of total capital, below the 60% covenant maximum.
Material changes versus the prior comparable period
- Q2 sales increased 37%; first-half sales increased 37%. Sales rose in every segment, led by Environmental Technologies, Life Sciences, Display Technologies and Optical Communications.
- Q2 gross margin increased eight percentage points and first-half gross margin increased nine percentage points, driven by higher volume, cost control and substantially lower restructuring and capacity realignment charges. Higher freight and certain raw-material costs partially offset the improvement.
- Q2 net income improved by $520 million, and first-half net income improved by $1,215 million, reflecting stronger segment performance, lower restructuring and impairment charges, and the absence of the 2020 customer-contract revenue adjustment and asset impairment.
- Environmental Technologies sales increased 80% in Q2 and 55% in the first half, supported by improved automotive markets, increased content and strong diesel demand.
- Optical Communications sales increased 21% in Q2 and 20% in the first half, driven by 5G, fiber-to-the-home and cloud-computing demand.
- Display Technologies sales increased 25% in Q2 and 20% in the first half, primarily from approximately 20% volume growth with largely stable pricing.
- All Other sales increased materially because of HSG consolidation; the segment’s loss narrowed to $15 million in Q2 and $39 million in the first half.
Guidance, outlook, unusual items and risks
- Management forecast third-quarter 2021 core net sales of approximately $3.5 billion to $3.7 billion and expected another quarter of year-over-year sales growth.
- The reported Q2 diluted loss per share was distorted by the Samsung Display transaction. Preferred stock was converted into 115 million common shares; Corning repurchased and retired 35 million shares for approximately $1.5 billion. The transaction reduced retained earnings and net income available to common shareholders by $803 million. Approximately $507 million was paid at closing, with approximately $507 million due on each of the first two anniversaries.
- Corning redeemed $375 million of 2.9% debentures due in 2022 and recorded an $11 million loss. It subsequently redeemed $250 million of 3.7% debentures in July 2021 and expects a $20 million loss in Q3 2021.
- No material restructuring, impairment or other charge activity occurred in the first half of 2021, compared with $562 million in the first half of 2020.
- Management cited COVID-19, global economic conditions, supply-chain disruption, critical-material costs, product demand, pricing, foreign-exchange movements, tariffs, customer concentration, technology changes, cyber and operational disruption, legal matters and tax developments as material risks.
- Environmental reserves were approximately $60 million, and asbestos reserves were approximately $96 million. Management stated that material adverse outcomes from disclosed contingencies were remote, although certain environmental and indemnification matters remain subject to uncertainty.
- Corning expects approximately $31 million of 2021 cash contributions to international pension plans and expects to maintain positive free cash flow and sufficient liquidity for operations, capital expenditures, debt repayments and dividends.
Most important facts for investors to verify
- Whether the Q3 core-sales outlook of $3.5 billion to $3.7 billion was achieved and whether volume growth continued across the major segments.
- The sustainability of the Q2 gross-margin improvement after excluding lower restructuring charges and considering freight and raw-material inflation.
- The cash-flow impact of the remaining approximately $1.0 billion of Samsung Display repurchase payments and other debt maturities.
- The comparability of future results given the HSG consolidation and the unusually weak, charge-heavy 2020 baseline.
- Exposure to COVID-19 developments, global supply-chain constraints, foreign-exchange volatility and demand from major customers.
- The status and ultimate cost of South Korean tax appeals, environmental matters, asbestos claims and Dow-related indemnification obligations.
- The difference between GAAP results and management’s non-GAAP core measures, particularly the effects of foreign-exchange hedges, acquisition-related costs, tax items and other excluded charges.