Corning Incorporated: FY2019 Form 10-K Summary
Business context and reporting period
Corning Incorporated is a materials-science and advanced manufacturing company serving optical communications, display technology, specialty glass, automotive emissions control, and life sciences markets. The filing covers the fiscal year ended December 31, 2019; fourth-quarter information is presented only as unaudited quarterly data within the annual filing.
Corning operated five reportable segments: Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, and Life Sciences. It operated 116 manufacturing plants in 15 countries and had approximately 49,500 full-time employees at year-end.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $11.503 billion | $11.290 billion | Up 2% |
| Gross margin | $4.035 billion; 35% | $4.461 billion; 40% | Down $426 million |
| Operating income | $1.306 billion | $1.575 billion | Down $269 million |
| Income before taxes | $1.216 billion | $1.503 billion | Down 19% |
| Net income attributable to Corning | $960 million | $1.066 billion | Down 10% |
| Diluted EPS | $1.07 | $1.13 | Down 5% |
| Operating cash flow | $2.031 billion | $2.919 billion | Down $888 million |
| Capital expenditures | $1.978 billion | $2.242 billion | Down $264 million |
| Cash and equivalents | $2.434 billion | $2.355 billion | Up $79 million |
| Long-term debt | $7.729 billion | $5.994 billion | Up $1.735 billion |
| Working capital | $3.942 billion | $3.723 billion | Up $219 million |
Net income margin declined to approximately 8% from 9%, while gross margin declined five percentage points. The effective tax rate improved to 21.1% from 29.1%, primarily reflecting the absence of the prior-year IRS audit settlement and other tax adjustments.
Core net income, a non-GAAP measure, was $1.578 billion, or $1.76 per diluted share, compared with $1.673 billion, or $1.78 per diluted share, in 2018. Core results exclude, among other items, currency effects, acquisition costs, litigation, restructuring and impairment charges, equity-affiliate items, and pension mark-to-market adjustments.
Segment results
| Segment | 2019 sales | 2019 segment net income | Sales change | Key driver |
|---|---|---|---|---|
| Display Technologies | $3.254 billion | $786 million | Down 1% | Higher volume offset by low-single-digit price declines; weaker second-half utilization |
| Optical Communications | $4.064 billion | $489 million | Down 3% | Lower carrier-network sales, partly offset by enterprise growth |
| Specialty Materials | $1.594 billion | $302 million | Up 8% | Strong Gorilla Glass demand |
| Environmental Technologies | $1.499 billion | $263 million | Up 16% | Growth in gasoline particulate filters |
| Life Sciences | $1.015 billion | $150 million | Up 7% | Broad-based volume growth and improved manufacturing efficiency |
Material changes versus the prior comparable period
- Sales increased modestly, but profitability weakened because of lower Display Technologies and Optical Communications sales, lower factory utilization, accelerated depreciation, and asset write-offs.
- Optical Communications results were pressured by reduced capital spending by two significant customers in the second half of 2019.
- Environmental Technologies and Life Sciences provided meaningful growth, while Specialty Materials sales grew but segment income declined because of higher new-product development costs and the absence of prior customer support.
- Equity earnings from affiliates fell to $17 million from $390 million. Hemlock Semiconductor Group experienced solar-market overcapacity, price declines, a $916 million pre-tax asset impairment, and a $257 million inventory write-down; Corning’s pre-tax shares were $369 million and $105 million, respectively. Fourth-quarter revenue recognition and contract settlements partially offset these effects.
- Operating cash flow declined because customer deposits received decreased by $558 million and working capital movements were unfavorable by $352 million.
- Corning repurchased 31.0 million common shares for approximately $0.9 billion, versus 74.8 million shares for approximately $2.2 billion in 2018. It declared $0.80 per common share in dividends for 2019.
Debt, liquidity and capital allocation
Corning issued approximately $349 million of net yen-denominated debt and approximately $1.5 billion of net U.S.-dollar debt in 2019, and redeemed $300 million of notes due in 2020. Total debt to total capital was 37%, compared with 30% in 2018. Debt maturities at maturity value included $11 million in 2020, $77 million in 2021, $390 million in 2022, $432 million in 2023, $316 million in 2024, and $6.569 billion thereafter.
Liquidity included $2.434 billion of cash and cash equivalents, an undrawn $1.5 billion revolving credit facility expiring in 2023, and no outstanding commercial paper. Management stated that available liquidity and operating cash flow were sufficient for operations, capital expenditures, acquisitions, debt service, dividends, and planned repurchases. The company was in compliance with its 60% leverage covenant, reporting leverage of approximately 37%.
Corning plans to invest approximately $10 billion to $12 billion for growth and return $8 billion to $10 billion to shareholders during 2020 through 2023. It expects approximately $1.5 billion of capital expenditures in 2020.
Guidance, outlook, risks and unusual items
- For 2020, management expected Display Technologies volume to grow at a mid-single-digit rate, with display-glass prices declining at a mid-single-digit rate.
- Optical Communications sales were expected to decline 5% to 10% year over year.
- Environmental Technologies and Life Sciences sales were expected to grow at mid-single-digit rates, while Specialty Materials sales were expected to grow at a high-single-digit rate.
- The outlook excluded any potential effect from the coronavirus outbreak. Corning had operations in Wuhan and elsewhere in China and stated that the financial impact could not yet be determined.
- Principal risks include display-glass pricing and capacity pressure, customer concentration, weakness in telecommunications spending, foreign-exchange volatility, tariffs and geopolitical events, concentrated manufacturing sites, supply-chain constraints, cyberattacks, intellectual-property disputes, environmental and tax matters, litigation, and the uncertain returns from research and development.
- Foreign-exchange hedges generated a $248 million net translated-earnings contract gain in 2019, compared with a $93 million loss in 2018. The gross notional value of outstanding derivatives was approximately $14.3 billion.
- Customer deposits were approximately $1.0 billion at year-end, primarily non-refundable deposits securing future display-glass supply. Approximately $927 million was classified as non-current.
- Corning had $19.204 billion of disclosed contractual obligations and commitments, including debt, interest, leases, capital expenditure obligations, purchase obligations, guarantees, and uncertain tax positions.
- Environmental cleanup reserves were approximately $41 million. Remaining Pittsburgh Corning asbestos-plan payments totaled $135 million through 2023. Management considered material adverse outcomes from disclosed litigation remote, but certain Dow Corning environmental indemnification amounts could not be estimated.
- Corning recorded a $415 million non-current receivable for South Korean tax deposits and a $33 million current receivable related to a refund expected in January 2020; recovery depends on the outcome of tax disputes.
Most important facts for investors to verify
- Whether Display Technologies can sustain volume growth while offsetting ongoing glass-price declines and avoiding further utilization-related margin pressure.
- Whether Optical Communications demand and customer capital spending recover after the 2019 decline.
- The sustainability of earnings excluding unusual HSG revenue-recognition and settlement effects, currency-hedging gains, impairments, and other non-GAAP adjustments.
- Debt-service requirements, long-dated maturities, rising leverage, and the effect of continued dividends, share repurchases, and planned growth investment on free cash flow.
- The outcome and timing of South Korean tax appeals and the recoverability of the related $448 million of recorded tax deposits and receivables.
- The operational and financial effects of coronavirus-related disruptions, tariffs, foreign exchange, customer concentration, and geographically concentrated manufacturing capacity.
- The assumptions supporting HSG’s solar-business valuation and the potential for additional equity-affiliate losses or impairments.