Corning Incorporated 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing includes unaudited fourth-quarter results but is an annual Form 10-K, not a standalone quarterly filing. Corning is a global materials-science company operating in Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences and All Other.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $9.111 billion | $9.715 billion | Down 6% |
| Gross margin | $3.653 billion; 40% | $4.052 billion; 42% | Margin down 2 points |
| Operating income | $1.322 billion | $1.931 billion | Down 32% |
| Income before taxes | $1.486 billion | $3.568 billion | Down 58% |
| Net income attributable to Corning | $1.339 billion | $2.472 billion | Down 46% |
| Diluted EPS | $1.00 | $1.73 | Down 42% |
| Core earnings, non-GAAP | $1.882 billion; $1.40 per diluted share | $2.023 billion; $1.42 per diluted share | Down 7% on earnings |
| Operating cash flow | $2.809 billion | $4.709 billion | Down 40% |
| Capital expenditures | $1.250 billion | $1.076 billion | Up 16% |
Fourth-quarter 2015 net sales were $2.231 billion, gross margin was $857 million, and net income attributable to Corning was $224 million, or $0.17 diluted EPS.
- Segment sales: Display Technologies $3.086 billion, Optical Communications $2.980 billion, Environmental Technologies $1.053 billion, Specialty Materials $1.107 billion, Life Sciences $821 million and All Other $64 million.
- Segment trends: Optical Communications sales increased 12%; Display Technologies declined 20%; Environmental Technologies declined 4%; Specialty Materials declined 8%; and Life Sciences declined 5%.
- Cash and liquidity: Cash, cash equivalents and short-term investments totaled $4.600 billion at year-end, with approximately 71% held outside the United States. Corning also had an undrawn $2 billion revolving credit facility expiring in 2019.
- Debt: Long-term debt was $3.910 billion, commercial paper outstanding was $481 million, and total debt to total capital was 19%, compared with 13% in 2014. Corning reported compliance with its debt covenants.
- Balance sheet: Working capital was $5.455 billion, total assets were $28.547 billion and Corning shareholders’ equity was $18.788 billion.
- Shareholder returns: Corning repurchased 151 million shares during 2015 for approximately $3.0 billion and paid $679 million in common-stock dividends. The quarterly dividend was increased from $0.12 to $0.135 per share beginning in the first quarter of 2016.
Material Changes Versus 2014
- The sales and profit decline was driven primarily by Display Technologies, where Japanese yen depreciation reduced sales by $446 million, LCD glass prices declined in the low-teens percentage range, and television and consumer-electronics demand softened. Volume increased in the mid-single digits.
- Foreign-currency translation reduced consolidated sales by $663 million and net income by approximately $294 million versus 2014. Net foreign-currency hedge gains fell to $85 million from $1.411 billion, materially reducing reported earnings.
- Optical Communications benefited from higher carrier and enterprise-network volumes, data-center demand and acquisitions completed in 2015. Segment sales rose $328 million and segment net income rose $43 million.
- SG&A increased $312 million, principally due to pension mark-to-market losses, the absence of a favorable 2014 contingent-consideration adjustment and acquisition-related spending.
- Equity earnings increased to $299 million from $266 million, primarily due to higher Dow Corning earnings. Corning’s 50% interest in Dow Corning represented approximately 94% of 2015 equity earnings.
- Operating cash flow declined primarily because 2014 included a $1.574 billion special dividend from Samsung Corning Precision Materials, while 2015 included working-capital outflows and only a $197 million customer deposit.
- Corning completed five acquisitions for approximately $725 million of consideration, generating approximately $300 million of goodwill. It also recorded a $29 million goodwill impairment charge related to a small acquisition.
Outlook, Strategy and Unusual Items
- Management’s strategy targets approximately 80% of research, development and engineering spending and capital expenditures toward three core technologies, four manufacturing and engineering platforms and five market-access platforms through 2019.
- Corning expects to generate and deploy more than $20 billion of cash through 2019, return more than $10 billion to shareholders and increase the dividend by at least 10% annually through 2019.
- For 2016, management expected moderate LCD glass price declines and mid-single-digit annual glass-volume growth; mid-single-digit sales growth in Optical Communications; low-teens sales growth in Specialty Materials; slightly lower Environmental Technologies sales; and Life Sciences growth faster than its low-single-digit market.
- Corning announced a Gen 10.5 LCD glass facility in Hefei, China, supported by a long-term supply agreement. A customer deposit of approximately $400 million is expected, of which $197 million was received in 2015 and $197 million was expected in 2016. Production is targeted to support panel production by the third quarter of 2018.
- Corning announced an agreement to exchange its 50% Dow Corning interest for a wholly owned entity holding approximately $4.8 billion in cash and approximately 40% of Hemlock Semiconductor. The transaction was expected to close in the first half of 2016 and would transfer full ownership of Dow Corning to Dow Chemical.
- Material contingencies include a $678 million estimated liability for the Pittsburgh Corning asbestos plan and non-PCC asbestos claims, including $290 million of fixed payments, $150 million for non-PCC claims and $238 million related to the fair value of Pittsburgh Corning Europe. The asbestos stay was expected to be lifted in the second half of 2016.
- Corning faced an unresolved U.S. Department of Justice antitrust investigation involving automotive emissions products and could not estimate the ultimate financial impact. A Chinese anti-dumping determination imposed a 41.79% dumping margin on certain U.S.-origin optical-fiber preforms.
- Environmental cleanup reserves were approximately $37 million for 17 active hazardous-waste sites. Pollution-control capital expenditures were approximately $14 million in 2015 and were estimated at $26 million for 2016.
- At year-end, Corning had approximately $11 billion of foreign earnings that management expected to remain indefinitely reinvested; no associated repatriation taxes had been provided.
Key Investor Verification Items
- Verify the sustainability of Display Technologies’ pricing, volume growth, customer concentration and exposure to LCD overcapacity.
- Reconcile GAAP earnings with core earnings, particularly the effects of foreign-currency hedges, pension mark-to-market losses, tax adjustments, acquisitions and litigation items.
- Assess the timing and final economics of the Dow Corning ownership exchange, including the expected $4.8 billion cash transfer and Hemlock Semiconductor interest.
- Monitor the PCC asbestos plan, non-PCC asbestos claims, insurer litigation and potential cash-payment timing beginning in 2016.
- Evaluate liquidity after share repurchases, capital spending, debt maturities, customer-deposit obligations and planned shareholder distributions.
- Review customer and geographic concentration: international markets represented 70% of sales, the ten largest customers represented 45% of sales, and three Display Technologies customers represented 62% of segment sales.
- Confirm the effect of the 2015 goodwill impairment, the recoverability of precious-metal assets whose carrying value exceeded fair value by $976 million, and the sensitivity of results to foreign-exchange movements.