Corning Incorporated 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, 2009. The company manufactures specialty glass, optical fiber and cable, environmental technology products, specialty materials, and life sciences products. Results were affected by the global economic recession, weaker demand, lower pricing, and reduced customer inventory levels.
Financial performance and position
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $1,395 | $1,692 | $2,384 | $3,309 |
| Gross margin | $575; 41% | $852; 50% | $845; 35% | $1,696; 51% |
| Operating income (loss) | $221 | $417 | $(39) | $1,194 |
| Income before taxes | $607 | $830 | $555 | $1,933 |
| Net income attributable to Corning | $611 | $3,211 | $625 | $4,240 |
| Diluted EPS | $0.39 | $2.01 | $0.40 | $2.65 |
- Second-quarter sales declined 18% year over year; first-half sales declined 28%. Gross margin fell primarily because of lower Display Technologies volume and pricing, as well as reduced volume in other businesses.
- Operating income declined 47% in the quarter. First-half operating results included the $165 million restructuring charge recorded in the first quarter and a $9 million asbestos litigation charge.
- Net income comparisons were heavily distorted by the $2.4 billion U.S. deferred-tax valuation allowance release recorded in the second quarter of 2008 and the $318 million asbestos-related credit recorded in the first half of 2008.
- Equity earnings from affiliated companies were $361 million in the quarter and $556 million for the first half, including $294 million and $481 million, respectively, from Samsung Corning Precision. Dow Corning equity earnings declined to $58 million in the quarter and $62 million year to date.
- Operating cash flow was $632 million for the first half of 2009, compared with $985 million in the prior-year period. Capital expenditures were $491 million versus $864 million.
- Cash, cash equivalents, and short-term investments totaled $3.1 billion at June 30, 2009, compared with total debt of approximately $2.0 billion. Working capital was $3.5 billion and the current ratio was 3.3 to 1.
- Long-term debt was $1.938 billion, up from $1.527 billion at December 31, 2008. Corning issued $250 million of 6.625% senior notes due 2019 and $100 million of 7% senior notes due 2024.
- Debt to total capital was 13%, compared with 11% at year-end 2008. Corning had access to a $1.1 billion committed revolving credit facility through November 2011 and was in compliance with its covenants.
Material changes versus the prior comparable period
- Display Technologies sales decreased 17% in the quarter and 37% year to date, reflecting price declines and lower volumes. However, second-quarter sales were nearly double the first quarter as LCD television demand and supply-chain replenishment improved.
- Telecommunications sales decreased 8% in both the quarter and first half, although optical fiber and cable demand in China provided support.
- Environmental Technologies sales declined 37% in the quarter and 40% year to date because of weak automotive and freight markets; the segment reported a $9 million quarterly loss.
- Specialty Materials sales declined 32% in the quarter and 30% year to date, while Life Sciences sales declined 7% in both periods.
- Operating expenses declined following workforce reductions and other restructuring actions. SG&A decreased 19% in the quarter and 17% year to date; research, development, and engineering expenses decreased 17% and 9%, respectively.
- Customer deposit liabilities declined to $182 million from $369 million at year-end as deposits were applied through product shipments, reducing future operating cash flow as credits are used.
Guidance, outlook, risks, and unusual items
- Management expected 2009 capital spending of approximately $1.1 billion, including approximately $700 million for Display Technologies.
- Management expected restructuring actions to generate approximately $195 million of annualized savings, with approximately $35 million of savings anticipated in the third quarter. Total cash restructuring expenditures were expected to be approximately $105 million, mostly completed by early 2010.
- For the third quarter, management expected Display Technologies volume to be flat to slightly higher sequentially and pricing to be flat. The company raised its expectation for the overall 2009 LCD glass market to approximately 15% growth over 2008.
- Third-quarter expectations included telecommunications sales comparable with the second quarter, modest sequential growth in Environmental Technologies, strong Specialty Materials growth driven partly by Gorilla glass, and Life Sciences sales consistent with the second quarter.
- Management cautioned that global economic conditions could continue to reduce sales and profitability and could require additional workforce reductions or capacity consolidation.
- Corning recorded a $671 million asbestos litigation liability at June 30, 2009. The proposed Pittsburgh Corning plan remained subject to bankruptcy-court approval, creditor voting, appeals, insurance issues, and other contingencies. The company could not estimate potential losses from related insurance litigation.
- Corning was involved in asbestos, environmental, Dow Corning bankruptcy, Samsung-related, and European Commission LCD glass competition matters. Management generally assessed the likelihood of a material adverse effect as remote, but some outcomes could not be estimated clearly.
- Corning’s equity affiliate Dow Corning had substantial breast-implant and commercial-creditor contingencies, including an estimated commercial-creditor liability range of $80 million to $235 million and unresolved insurance-related claims.
- Key operating risks included recessionary demand, customer concentration, excess capacity, pricing pressure, foreign-exchange volatility, dependence on LCD customers, disruption of specialized Asian manufacturing facilities, litigation, regulatory developments, and access to capital markets.
Most important facts for investors to verify
- Whether the improvement in LCD supply-chain demand and pricing was sustainable after the second quarter.
- Progress toward the stated $195 million annualized restructuring savings and any additional restructuring or impairment charges.
- The final outcome, timing, and funding sources for the proposed Pittsburgh Corning asbestos plan and related insurance litigation.
- Performance and distributions from Samsung Corning Precision and Dow Corning, which contributed materially to Corning’s earnings and cash resources.
- Customer concentration and credit exposure, particularly in Display Technologies and Environmental Technologies.
- Execution of the approximately $1.1 billion 2009 capital-spending plan and its effect on cash flow and capacity utilization.
- Realizability of Corning’s U.S. deferred tax assets; the filing states that approximately $8.3 billion of future U.S. profits would be required to fully realize the deferred tax assets as of December 31, 2008.