Corning Incorporated: Q1 2010 Form 10-Q Summary
Business Context and Reporting Period
Corning Incorporated reported unaudited results for the three months ended March 31, 2010, compared with the first quarter of 2009. The company operates through Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences. Results reflected a sharp recovery in LCD glass demand, improved automotive and diesel markets, higher Specialty Materials sales, and the contribution from the 2009 Axygen Bioscience acquisition.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $1,553 million | $989 million | +57% |
| Gross margin | $731 million; 47% | $270 million; 27% | +20 percentage points |
| Operating income (loss) | $403 million | $(260) million | Improved by $663 million |
| Income before taxes | $913 million | $(52) million | Improved by $965 million |
| Net income attributable to Corning | $816 million | $14 million | Significantly higher |
| Diluted EPS | $0.52 | $0.01 | Higher |
| Operating cash flow | $643 million | $264 million | +144% |
| Capital expenditures | $173 million | $276 million | Down $103 million |
Gross margin was approximately 47% of sales, operating margin was approximately 26%, and net margin attributable to Corning was approximately 53%. Equity earnings from affiliated companies increased to $469 million from $195 million, including $350 million from Samsung Corning Precision and $112 million from Dow Corning.
Cash, cash equivalents, and short-term investments totaled $3.873 billion at March 31, 2010, compared with $3.583 billion at December 31, 2009. Total debt was approximately $1.942 billion, consisting of $23 million of current debt and $1.919 billion of long-term debt. The debt-to-capital ratio was 11%, and the current ratio was 4.7 to 1. Corning had access to a $1.1 billion unsecured revolving credit facility through November 2011 and was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- Display Technologies sales increased 119% to $782 million, driven by a 127% increase in volume, partly offset by an 8% price decline. The segment operated at or near capacity.
- Environmental Technologies sales increased 75% to $192 million as automotive production and diesel demand recovered from recessionary levels.
- Specialty Materials sales increased 60% to $96 million, primarily due to higher Gorilla Glass and display optics sales.
- Life Sciences sales increased 55% to $118 million, largely reflecting the Axygen acquisition completed in the third quarter of 2009.
- Telecommunications sales declined 5% to $364 million because of lower fiber-to-the-premises and hardware sales and the absence of two divested businesses.
- The company recorded only a $2 million restructuring credit in Q1 2010 versus $165 million of restructuring, impairment, and other charges in Q1 2009. Management estimated annualized savings from the 2009 actions at approximately $195 million.
- Asbestos litigation produced a $52 million credit in Q1 2010 versus a $4 million charge in Q1 2009. The estimated asbestos liability declined to $630 million from $682 million at December 31, 2009.
- The effective tax rate was 10.6% in Q1 2010 versus 126.9% in Q1 2009. The 2010 tax provision included a $56 million charge related to reversing a deferred tax asset associated with a retiree medical subsidy, partly offset by a $74 million benefit from excess foreign tax credits related to planned repatriation.
Guidance, Outlook, Risks, and Unusual Items
Management described the outlook for the remainder of 2010 as favorable. It expected full-year sales to exceed 2009 levels, total-company gross margin to expand, equity earnings to improve, and operating cash flow to remain strong. Planned 2010 capital spending was approximately $1 billion, including $450 million to $550 million for Display Technologies and capacity expansion in Taiwan.
- Management expected the 2010 LCD glass market to grow approximately 18% to 27% by square feet versus 2009. Display Technologies volume was expected to increase in the mid-single digits sequentially in Q2 2010, with similar price declines to Q1.
- Q2 2010 Telecommunications sales were expected to increase approximately 10% to 15% sequentially.
- Q2 2010 Specialty Materials sales were expected to increase 15% to 25%, driven by Gorilla Glass, and Life Sciences sales were expected to increase approximately 5%.
- Environmental Technologies sales were expected to be approximately flat sequentially; truck demand remained weak and was not expected to recover to historical levels until the following year.
- Principal risks included LCD demand volatility, excess industry capacity, customer concentration, pricing pressure, foreign-exchange movements, economic and political conditions, supply-chain constraints, facility disruptions, technology changes, and the ability to realize restructuring and productivity savings.
- Display Technologies customer concentration was substantial: three customers represented approximately 71% of segment sales. Three Environmental Technologies customers represented approximately 84% of segment sales.
- The proposed Pittsburgh Corning asbestos settlement remained subject to bankruptcy-court approval, objections, appeal, insurance disputes, and changes in estimated non-PCC claims. Corning could not estimate potential losses from the insurance litigation.
- Corning disclosed ongoing competition investigations involving LCD glass and a supply-contract dispute with a significant Asian LCD customer. A Chinese antidumping investigation initiated after quarter-end could result in prospective duties on imported optical fiber, but the impact was not estimable.
- Dow Corning-related contingencies included commercial-creditor claims estimated at $79 million to $257 million and unresolved insurer claims; adverse outcomes could reduce Corning’s equity earnings.
Investor Verification Checklist
- Verify whether LCD glass demand, pricing, capacity utilization, and customer concentration supported the projected 18% to 27% market growth.
- Reconcile reported earnings with nonrecurring items, particularly the $52 million asbestos credit, the absence of 2009 restructuring charges, tax effects, and Dow Corning tax credits.
- Monitor cash conversion, including the effects of customer-deposit credits, working-capital growth, and planned approximately $1 billion of 2010 capital spending.
- Track the status and eventual cash and equity requirements of the Pittsburgh Corning asbestos plan and related insurance litigation.
- Assess exposure to concentrated customers, Asian manufacturing facilities, foreign-exchange movements, supply constraints, and potential LCD overcapacity.
- Review developments in the LCD glass competition investigations, the Asian supply dispute, and the Chinese optical-fiber antidumping proceeding.