Business Context and Reporting Period
Company: Corning Incorporated (NYSE: GLW)
Filing Type: Form 8-K (Current Report)
Reporting Period: Second Quarter ended June 30, 2009
Date of Report: July 27, 2009
Corning reported a significant sequential recovery in the second quarter of 2009, driven primarily by a resurgence in demand for LCD glass substrates. The company restarted idled glass melting capacity to meet increased industry appetite, resulting in substantial volume growth across its Display Technologies segment and equity affiliates.
Key Financial Metrics
| Metric | Q2 2009 | Q1 2009 | Q2 2008 |
|---|---|---|---|
| Net Sales | $1,395 million | $989 million | $1,692 million |
| Gross Margin | 41% | 27% | 50% |
| Net Income (GAAP) | $611 million | $14 million | $3,211 million |
| EPS (GAAP) | $0.39 | $0.01 | $2.01 |
| EPS (Non-GAAP) | $0.39 | $0.10 | $0.49 |
| Operating Cash Flow | $368 million | N/A | $690 million |
| Free Cash Flow (Non-GAAP) | $156 million | N/A | N/A |
| Cash & Equivalents | $2,234 million | $1,873 million | N/A |
| Total Debt | $2,018 million | $1,605 million | N/A |
Note: Total Debt calculated as Current portion of long-term debt ($80M) + Long-term debt ($1,938M). Q1 2009 debt figures derived from year-end 2008 balance sheet adjusted for Q2 activity where explicit Q1 debt is not isolated in the text.
Material Changes vs. Prior Periods
- Sequential Recovery (Q2 vs. Q1 2009): Net sales increased 41% sequentially. Net income surged 4,264% to $611 million, driven by a $165 million restructuring charge in Q1 that was absent in Q2, alongside improved operating performance.
- Year-Over-Year Decline (Q2 2009 vs. Q2 2008): Net sales decreased 18% and Net Income decreased 81%. The 2008 comparison is skewed by a $2.4 billion one-time tax benefit (valuation allowance release) recorded in Q2 2008.
- Volume Growth: Display Technologies glass volume increased 101% sequentially in Corning's wholly owned business and 50% at Samsung Corning Precision (SCP). Combined glass volume rose 66% sequentially.
- Equity Earnings: Equity earnings increased 85% sequentially to $361 million, largely due to improved performance at Dow Corning Corporation ($58M vs. $5M in Q1) and SCP ($294M vs. $187M in Q1).
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Q3 2009 Expectations: Management expects third-quarter glass shipments to be flat to slightly up compared to the strong second quarter. Glass substrate prices are expected to remain even with Q2 levels.
- 2009 Full Year Volume: Corning increased its 2009 LCD glass market volume forecast to approximately 2.3 billion square feet (15% growth over 2008), up from a previous estimate of 2.0 billion.
- Capital Expenditures: 2009 CapEx is forecast at approximately $1.1 billion; 2010 CapEx is expected to be around $600 million.
- Tax Rate: The 2009 effective tax rate is expected to be between 0% and 3%. The 2010 rate is estimated around 10%, subject to economic recovery and tax code changes.
Risks and Contingencies
- Restructuring: While no corporate-wide downsizing is currently anticipated, the company is evaluating specific business unit restructuring needs, particularly in the Environmental Technologies segment due to the slow rebound in the auto industry. Restructuring charges are possible in the back half of 2009.
- Asbestos Litigation: The company continues to negotiate an amended plan for asbestos claims. A $5 million charge was recorded in Q2 2009 to adjust the liability.
- Economic Uncertainty: Management remains cautious regarding the pace of economic recovery, which impacts decisions on restarting capacity for Q4 2009 and early 2010.
Investor Verification Checklist
- Inventory Levels: Verify the extent of inventory drawdown in Q2 (approx. 40% of shipments) and the timeline for replenishment to ensure Q3 volume sustainability.
- Restructuring Charges: Monitor upcoming announcements for potential restructuring charges in the Environmental Technologies segment and R&D alignment costs in Q4 2009.
- Equity Earnings Volatility: Assess the sustainability of the sharp increase in equity earnings from Dow Corning and SCP, which significantly boosted Q2 net income.
- Asbestos Liability: Review the status of the Amended PCC Plan negotiations and potential future adjustments to the asbestos liability reserve.
- CapEx Execution: Track the execution of the $1.1 billion 2009 capital expenditure plan against the backdrop of a slowing economic recovery.