Corning Incorporated — 2011 Q3 Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. Its principal businesses include Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences. Results benefited from strong demand for Gorilla Glass, improved telecommunications and environmental technology sales, and a rebound from weak third-quarter 2010 LCD supply-chain conditions.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $2.075 billion | $1.602 billion | $6.003 billion | $4.867 billion |
| Gross margin | $978 million; 47% | $724 million; 45% | $2.741 billion; 46% | $2.282 billion; 47% |
| Operating income | $587 million | $319 million | $1.471 billion | $1.152 billion |
| Net income attributable to Corning | $811 million | $785 million | $2.314 billion | $2.514 billion |
| Diluted EPS | $0.51 | $0.50 | $1.46 | $1.59 |
| Operating cash flow | Not separately provided | Not separately provided | $2.032 billion | $1.743 billion |
- Q3 sales increased 30%, while nine-month sales increased 23%. Q3 net income rose 3%, but nine-month net income declined 8%.
- Q3 net margin was approximately 39%, compared with 49% in the prior-year quarter; nine-month net margin was approximately 39%, compared with 52%.
- Equity earnings from affiliates declined 36% in Q3 to $324 million and 21% year to date to $1.150 billion. Samsung Corning Precision contributed $229 million in Q3 and $853 million year to date; Dow Corning contributed $89 million and $275 million, respectively.
- Q3 research, development, and engineering expense increased 12% to $166 million. Nine-month expense increased 13% to $494 million.
- Cash, cash equivalents, and short-term investments totaled $6.421 billion at September 30, 2011, versus $6.350 billion at December 31, 2010. Total debt was approximately $2.309 billion, including $2.282 billion of long-term debt.
- Working capital was $7.255 billion, the current ratio was 4.6:1, and debt to total capital was 10%, compared with 11% at year-end 2010.
- Capital expenditures were $1.666 billion through nine months, compared with $534 million in the prior-year period. Management expected approximately $2.4 billion of 2011 capital spending and approximately $1.8 billion in 2012.
Material changes versus the prior comparable period
- Specialty Materials sales increased 88% in Q3 and 119% year to date, primarily from Gorilla Glass. Segment net income improved to $38 million in Q3 from a $5 million loss and to $69 million year to date from a $29 million loss.
- Telecommunications sales increased 21% in Q3 and 25% year to date; segment net income increased to $82 million and $169 million, respectively. Results included a $22 million reduction in an acquisition-related contingent liability.
- Environmental Technologies sales increased 19% in Q3 and 31% year to date, driven mainly by diesel products. Segment net income increased 191% in Q3 and 244% year to date.
- Display Technologies sales increased 26% in Q3 and 5% year to date, but segment net income declined 8% and 12%, respectively, because of LCD glass price declines, lower affiliate earnings, and lower royalties.
- Q3 SG&A declined 14% to $216 million, partly because of lower performance-based compensation and the acquisition-related liability reduction. Research and development spending increased.
- Foreign exchange movements favorably affected Q3 sales by approximately $100 million and nine-month sales by approximately $293 million. Management estimated a $216 million favorable year-to-date impact on net income versus 2010.
- The nine-month comparison was affected by the absence of 2010 benefits, including a $41 million asbestos reserve credit, a $21 million share of Dow Corning tax credits, and lower 2010 tax expense associated with repatriation.
- Operating cash flow increased despite lower net income, while investing cash use increased substantially because of capacity expansion and a small acquisition. Financing cash flow was a $175 million use versus a $173 million source in 2010.
Guidance, outlook, commentary, and risks
- Management expected significant 2011 sales growth, led by Gorilla Glass, but reduced expected 2011 LCD glass market demand to approximately 3.2 billion square feet from 3.3 to 3.4 billion previously.
- Management expected lower 2011 equity earnings, higher taxes, and potentially lower operating cash flow because of lower affiliate dividends.
- For Q4 2011, management expected equity earnings to decline approximately 5% sequentially, including an approximately 40% decline in Dow Corning equity earnings. It expected Dow Corning pressure from softer silicone demand, price declines, raw-material costs, and lower solar-related demand at Hemlock.
- Q4 segment outlook included telecommunications sales down 10% to 15% sequentially, environmental technologies sales down 5% to 10%, specialty materials sales down approximately 15%, and life sciences sales slightly lower. Wholly owned Display Technologies volume was expected to be flat to slightly down, with more significant price declines.
- On October 5, 2011, after quarter-end, the board increased the quarterly dividend 50%, from $0.05 to $0.075 per share, and authorized up to $1.5 billion of share repurchases through the end of 2013.
- Corning reported adequate liquidity, compliance with debt covenants, and access to a $1.0 billion revolving facility and an RMB 4.0 billion facility, approximately $627 million at the reported exchange rate.
- Asbestos liabilities were estimated at $649 million at September 30, 2011, versus $633 million at year-end 2010. The amended Pittsburgh Corning reorganization plan remained subject to court approval, objections, appeal, insurance disputes, and further changes in estimated liability.
- Other notable exposures include concentrated customers, dependence on Asian Display Technologies facilities, LCD pricing and inventory cycles, foreign exchange, affiliate performance, raw-material costs, environmental matters, antitrust and trade-secret litigation, Chinese antidumping duties, and potential impairment of precious-metal and other long-lived assets.
- Corning accrued approximately $30 million for environmental cleanup and related litigation. Contingent guarantees totaled $176 million and purchase obligations totaled $265 million at September 30, 2011.
Most important facts for investors to verify
- Whether LCD glass price declines and supply-chain conditions offset volume growth and capital investments.
- The sustainability of Gorilla Glass growth and the expected Q4 sequential decline in Specialty Materials.
- The magnitude and timing of declines in Samsung Corning Precision and Dow Corning earnings and related affiliate dividends.
- The cash-flow impact of approximately $2.4 billion of 2011 capital spending, the 2012 spending plan, the higher dividend, and the $1.5 billion repurchase authorization.
- Developments in the Pittsburgh Corning asbestos reorganization, insurance litigation, and the $649 million recorded liability.
- Customer concentration and the potential effect of disruption at specialized Asian display facilities.
- Changes in tax rates as foreign tax holidays expire and prior repatriation-related benefits do not recur.
- Actual execution against management’s Q4 segment outlook and the effect of foreign exchange movements on reported results.