Corning Incorporated: Q2 2012 Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2012. Its principal segments were Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences. Results were dominated by lower LCD glass pricing and weaker earnings from equity affiliates, partially offset by growth in Gorilla Glass, telecommunications fiber and cable, and improved Environmental Technologies manufacturing performance.
Financial performance and liquidity
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net sales | $1,908 million | $2,005 million | $3,828 million | $3,928 million |
| Gross margin | $797 million; 42% | $889 million; 44% | $1,611 million; 42% | $1,763 million; 45% |
| Operating income | $309 million | $424 million | $651 million | $884 million |
| Equity earnings of affiliates | $259 million | $428 million | $477 million | $826 million |
| Net income attributable to Corning | $462 million | $755 million | $924 million | $1,503 million |
| Diluted EPS | $0.30 | $0.47 | $0.61 | $0.95 |
| Operating cash flow | Not separately provided | Not separately provided | $1,332 million | $1,119 million |
Second-quarter net sales declined 5%, gross margin declined 10%, operating income declined 27%, and net income declined 39% year over year. First-half net sales declined 3% and net income declined 39%. The effective tax rate increased to 16.8% from 14.0% for the quarter and to 18.1% from 13.6% for the first half.
At June 30, 2012, cash and cash equivalents were $5.0 billion and short-term investments were $1.3 billion, for total cash, cash equivalents, and short-term investments of $6.3 billion versus $5.8 billion at December 31, 2011. Total debt was approximately $3.3 billion, including $3.2 billion of long-term debt, compared with $2.4 billion of long-term debt at year-end. Debt to total capital increased to 13% from 10%, while the current ratio improved to 5.0:1 from 4.1:1.
Operating cash flow was $1.3 billion in the first half. Investing cash outflow was $1.1 billion, including $853 million of capital expenditures. Financing cash inflow was $260 million, reflecting $886 million of net debt issuance proceeds, partly offset by $407 million of share repurchases and $227 million of dividends paid. Corning reported adequate liquidity, access to a $1.0 billion revolving credit facility and a Chinese Renminbi credit facility, and compliance with applicable financial covenants.
Material changes versus the prior comparable period
- Display Technologies sales fell 16% in the quarter and 13% year to date; segment net income fell 41% and 37%, respectively, primarily because of double-digit LCD glass price declines amid excess capacity and reduced supply-chain inventories.
- Equity earnings declined 39% in the quarter and 42% year to date. Samsung Corning Precision earnings declined to $193 million from $325 million in the quarter, while Dow Corning earnings declined to $61 million from $95 million.
- Royalty income from Samsung Corning Precision declined to $21 million from $64 million in the quarter and to $43 million from $125 million year to date, reflecting lower sales and an approximately 50% reduction in the applicable royalty rate effective December 1, 2011.
- Telecommunications sales increased 2% in the quarter and 4% year to date, but segment net income declined 22% and 34% due to higher operating, manufacturing, research, development, and project expenses.
- Specialty Materials sales increased 5% in the quarter and 9% year to date, while net income increased 48% and 77%, driven by Gorilla Glass volume growth and the absence of prior-year cover-glass start-up and tank-conversion costs.
- Environmental Technologies net income increased 6% in the quarter and 21% year to date, despite modestly lower sales, due primarily to improved manufacturing performance and lower air-freight costs.
- Life Sciences sales increased 5% in the quarter and 6% year to date, but net income declined 27% and 23% due to higher raw-material costs and acquisition-related expenses.
- Research, development, and engineering expense increased 9% in the quarter and 14% year to date; SG&A increased 2% and 7%, respectively.
Guidance, outlook, risks, and unusual items
- Management expected 2012 sales to remain relatively consistent with 2011, with growth in Telecommunications, Specialty Materials, Life Sciences, and Environmental Technologies offsetting lower Display Technologies sales.
- 2012 capital spending guidance was $1.8 billion to $1.9 billion, including approximately $900 million for Display Technologies.
- Management expected the LCD glass retail market to expand from 3.3 billion square feet in 2011 to approximately 3.6 billion square feet in 2012, with moderate sequential price declines during the remainder of the year.
- For the third quarter, management expected low-double-digit sequential LCD glass volume growth and moderate price declines; Telecommunications and Environmental Technologies sales were expected to be broadly consistent with the second quarter; Specialty Materials sales were expected to increase 10% to 15%; and Life Sciences sales were expected to be flat to slightly higher.
- Sequential Dow Corning equity earnings were expected to decline approximately 30% in the third quarter, primarily because of the absence of approximately $11 million of second-quarter non-recurring gains.
- Corning recorded an asbestos litigation liability of $663 million, including $150 million for approximately 9,900 current non-Pittsburgh Corning cases and future non-Pittsburgh Corning cases. Asbestos litigation expense was $5 million in the quarter and $6 million year to date.
- A U.S. Department of Justice grand jury subpoena sought documents concerning a possible antitrust investigation involving automotive products. Corning could not estimate the financial impact; a violation could materially affect results in a particular period.
- Dow Corning faced Chinese antidumping and countervailing-duty investigations involving solar-grade polysilicon imports. The outcome and financial impact were uncertain.
- Corning identified significant customer and facility concentration risks, especially in Display Technologies, where four customers represented approximately 78% of second-quarter segment sales. Specialized Asian manufacturing capacity could not be replaced quickly if disrupted.
- Other risks included LCD market capacity and pricing, customer demand and creditworthiness, foreign exchange movements, affiliate performance, environmental and asbestos claims, intellectual-property litigation, regulatory developments, and possible impairment of precious-metal assets if demand or profitability deteriorates.
Most important facts for investors to verify
- Whether LCD glass pricing and excess-capacity pressures continued to moderate after the second quarter.
- The sustainability of Samsung Corning Precision and Dow Corning earnings, dividends, and royalty contributions.
- Actual 2012 capital spending relative to the $1.8 billion to $1.9 billion guidance and the pace of Display Technologies capacity adjustments.
- The outcome and potential financial exposure from the U.S. antitrust investigation and Chinese polysilicon trade investigations.
- Developments in the $663 million asbestos liability and Dow Corning’s estimated $88 million to $287 million commercial-creditor liability range.
- Customer concentration, Asian facility continuity, and the recoverability of Display Technologies-related assets and precious-metal holdings.
- The effect of higher debt, foreign-held cash, tax-rate changes, share repurchases, and the planned dividend on future liquidity.