Corning Incorporated — Q1 2015 Form 10-Q Summary
Business context and reporting period
Corning Incorporated reported unaudited results for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Corning operates in Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences and other development activities. The company filed the Form 10-Q on May 1, 2015.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $2.265 billion | $2.289 billion | (1)% |
| Gross margin | $929 million; 41% | $935 million; 41% | $(6) million |
| Operating income | $412 million | $315 million | 31% |
| Income before taxes | $493 million | $481 million | 2% |
| Net income attributable to Corning | $407 million | $301 million | 35% |
| Diluted EPS | $0.29 | $0.20 | 50% |
| Effective tax rate | 17.4% | 37.4% | Down 20.0 percentage points |
| Cash flow from operations | $601 million | $1.737 billion | $(1.136) billion |
| Capital expenditures | $333 million | $246 million | 35% |
Gross margin percentage remained stable despite substantial foreign-exchange pressure. Selling, general and administrative expense declined 20% to $316 million, while research, development and engineering expense declined 5% to $189 million.
At March 31, 2015, cash and cash equivalents were $4.304 billion and short-term investments were $763 million, for total cash, cash equivalents and short-term investments of $5.067 billion. Total debt was approximately $3.271 billion, consisting of $106 million of current debt and $3.165 billion of long-term debt. Debt to total capital was 13.3%, compared with 13.1% at year-end 2014. Corning had no commercial paper outstanding and access to a $2.0 billion unsecured revolving credit facility.
Segment performance
| Segment | Q1 2015 sales | Year-over-year change | Key driver |
|---|---|---|---|
| Display Technologies | $808 million | (13)% | Japanese yen translation and price declines offset higher volume |
| Optical Communications | $697 million | 18% | Higher carrier and enterprise network demand and acquisitions |
| Environmental Technologies | $282 million | 3% | Strong heavy-duty diesel demand |
| Specialty Materials | $272 million | 4% | Higher Gorilla Glass sales |
| Life Sciences | $197 million | (6)% | Lower volume and unfavorable foreign exchange |
Management reported core net sales of $2.430 billion, up 4%, and core net income of $484 million, up 14%. Core diluted EPS was $0.35, compared with $0.29 in the prior-year quarter. These are non-GAAP measures and exclude foreign-exchange effects, acquisition-related costs, discrete tax items, litigation and other items.
Material changes versus the prior comparable period
- Net income increased by $106 million, primarily because Q1 2014 included a $102 million South Korean withholding tax charge on a dividend from Samsung Corning Precision Materials.
- Display Technologies net income increased $85 million despite a $121 million reported sales decline, reflecting higher volume, manufacturing efficiencies, lower operating expenses and the absence of approximately $100 million of prior-year acquisition-related costs.
- Optical Communications sales increased $104 million and net income increased $30 million, supported by volume growth, manufacturing efficiencies and a first-quarter acquisition.
- Foreign-exchange movements reduced consolidated sales by approximately $186 million and income before taxes by approximately $108 million year over year.
- Operating cash flow was lower than in Q1 2014 primarily because the prior-year period included a $1.6 billion dividend received from Samsung Corning Precision Materials. Excluding that dividend, management stated that operating cash flow increased by approximately $500 million.
- Corning repurchased 21.1 million shares for $502 million under its $1.5 billion repurchase authorization. Dividends paid were $177 million.
- Corning completed four acquisitions for total purchase consideration of approximately $547 million, including $220 million of acquired goodwill and $233 million of other intangible assets. Potential additional contingent consideration is capped at $28 million.
Cash flow, liquidity and balance sheet
- Operating activities provided $601 million; investing activities used $713 million, including $531 million for acquisitions and $333 million for capital expenditures; financing activities used $574 million.
- Cash and cash equivalents decreased by $1.005 billion during the quarter, including a $319 million negative effect from exchange rates.
- Working capital was $7.343 billion and the current ratio was 4.9 to 1 at March 31, 2015.
- Management stated that liquidity was sufficient to fund operations, acquisitions, asbestos obligations, capital expenditures, debt repayments, dividends and share repurchases for the foreseeable future.
- Approximately 60% of cash, cash equivalents and short-term investments were held outside the United States. Management stated that U.S. liquidity and borrowing capacity were sufficient without repatriating foreign cash.
- 2015 capital spending guidance was approximately $1.3 billion to $1.4 billion, including approximately $650 million for Display Technologies.
Guidance, outlook and management commentary
- Management expected 2015 sales growth led by Optical Communications, with additional expected growth in Environmental Technologies and Life Sciences, subject to foreign-exchange pressure.
- Consumer demand for smartphones was expected to support Gorilla Glass 4 volume growth.
- For Q2 2015, Display Technologies volume was expected to increase by a low-single-digit percentage sequentially, with price declines less severe than in Q1.
- Optical Communications Q2 sales were expected to increase by a mid-teen percentage year over year.
- Environmental Technologies Q2 sales were expected to decline by a mid-single-digit percentage year over year, principally because of the weaker euro.
- Specialty Materials Q2 sales were expected to decline by a mid-single-digit percentage, while Gorilla Glass sales were expected to remain strong.
- Life Sciences Q2 sales were expected to decline slightly year over year because of foreign-exchange effects.
- Display Technologies remained exposed to LCD industry capacity, price declines, customer concentration, consumer demand and Japanese yen movements. Management noted that additional workforce reductions or capacity-consolidation charges could occur.
Risks, contingencies and unusual items
- Corning and its affiliates remain subject to significant asbestos-related matters. The estimated liability for the Pittsburgh Corning Plan and non-PCC asbestos claims was $682 million at March 31, 2015.
- Dow Corning had a $363 million reserve for breast implant litigation. Separate commercial-creditor claims were estimated at $100 million to $328 million; Corning could bear 50% of amounts above the recorded minimum, net of tax benefits.
- The Pittsburgh Corning Plan remained subject to appeal. If finally affirmed, Corning must contribute its PCC and PCE interests and make fixed payments totaling $290 million, recorded at present value.
- Corning was involved in insurance litigation concerning coverage for non-PCC asbestos claims, and management could not predict the outcome.
- Environmental reserves were approximately $41 million for 15 active hazardous-waste sites. Management considered material additional losses beyond the reserve remote.
- Contingent guarantees totaled $178 million and purchase obligations totaled $300 million at March 31, 2015.
- Corning’s precious-metal production assets had a carrying value exceeding fair market value by $393 million. Management considered the assets recoverable based on segment cash flows, but future impairment could result from materially weaker demand or profitability.
- Dow Corning contributed $92 million of equity earnings. Its results included unusual settlement gains and derivative effects, making reported affiliate earnings sensitive to non-operating items.
- The company had significant foreign-exchange hedging exposure, including $14.7 billion of translated-earnings contract notional value and a $33 million net foreign-currency transaction and hedge gain in Q1 2015.
- Corning’s disclosure controls and procedures were deemed effective, with no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Optical Communications growth and recent acquisitions offset continuing Display Technologies price pressure and currency headwinds.
- The sustainability of the 17.4% effective tax rate after the nonrecurring $102 million prior-year withholding-tax charge is excluded.
- Operating cash flow excluding the unusually large Q1 2014 affiliate dividend and the effect of working-capital movements.
- Progress against the $1.3 billion to $1.4 billion 2015 capital-spending plan and the effect on free cash flow.
- Remaining authorization and pace of share repurchases relative to debt, dividends and acquisition spending.
- Developments in Pittsburgh Corning, Dow Corning and non-PCC asbestos litigation, including potential insurance recoveries and payment timing.
- Exposure to Japanese yen, euro and Korean won movements, including the economic effect of the company’s hedging programs.
- Customer concentration, particularly in Display Technologies and Environmental Technologies, and the risk of demand or pricing deterioration.