Business Context and Reporting Period
Company: Corning Incorporated (NYSE: GLW)
Filing Type: Form 8-K (Current Report)
Reporting Period: Second Quarter ended June 30, 2007
Date of Report: July 25, 2007
Business Overview: Corning is a specialty glass and ceramics manufacturer serving consumer electronics, mobile emissions control, telecommunications, and life sciences sectors.
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 | Q1 2007 |
|---|---|---|---|
| Net Sales | $1.42 billion | $1.26 billion | $1.31 billion |
| Gross Margin | 46.5% (Record High) | 42.9% | 44.7% |
| Net Income (GAAP) | $489 million | $514 million | $327 million |
| Diluted EPS (GAAP) | $0.30 | $0.32 | $0.20 |
| Net Income (Non-GAAP) | $546 million | $421 million | $452 million |
| Diluted EPS (Non-GAAP) | $0.34 | $0.26 | $0.28 |
| Cash & Short-Term Investments | $3.2 billion | N/A | $2.9 billion |
| Total Debt | $1.5 billion | N/A | $1.5 billion |
| Operating Cash Flow | $475 million | N/A | $193 million |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 12.7% year-over-year and 8.4% sequentially, driven primarily by the Display Technologies segment.
- Segment Performance:
- Display Technologies: Sales rose 32% YoY ($610M) due to strong demand for LCD glass substrates for TVs and monitors. Volume increased 58% YoY.
- Telecommunications: Sales declined 7% YoY ($438M) due to a labor strike at a European customer and softer fiber-to-the-home demand. Excluding the divested European submarine cabling business, sales were flat sequentially.
- Environmental Technologies: Sales increased 26% YoY ($191M) driven by heavy-duty diesel product ramp-up and automotive sales in Europe.
- Life Sciences: Sales increased 4% YoY ($78M).
- Special Items:
- Asbestos Charge: A $76 million non-cash pretax and after-tax charge was recorded due to the increase in Corning's stock price, which affects the value of shares to be contributed to the asbestos settlement trust.
- Divestiture Gain: A $19 million after-tax gain was recognized from the sale of the European submarine cabling business.
- Tax Rate: The effective tax rate was very low due to a favorable tax ruling in Taiwan ($17M benefit). The forecasted ongoing tax rate was lowered to 14-15%.
Guidance, Outlook, and Management Commentary
- Q3 2007 Guidance:
- Sales: Expected range of $1.525 billion to $1.575 billion.
- EPS (Non-GAAP): Expected range of $0.34 to $0.37.
- Gross Margin: Expected range of 47% to 48%.
- Tax Rate: Anticipated at approximately 17% for the quarter (includes a $14M deferred tax adjustment in Germany).
- Capital Allocation:
- Dividend: Board declared a third-quarter cash dividend of $0.05 per share (first since April 2001).
- Share Repurchase: Board approved a $500 million share repurchase program through the end of 2008.
- Rating: All three major rating agencies upgraded Corning's credit rating to BBB+.
- Outlook Commentary: Management expects LCD glass volume growth to remain strong heading into the seasonally heavy retail season. Telecommunications sales are expected to grow ~10% sequentially in Q3 (excluding divested business). Environmental Technologies sales are expected to be flat sequentially as diesel growth is offset by automotive declines.
- Risks & Contingencies:
- Asbestos Liability: Future earnings will continue to be impacted by mark-to-market adjustments based on Corning's stock price until the settlement trust is funded.
- Tax Assets: The company expects to maintain full valuation allowances on U.S. deferred tax assets until at least the end of 2008, meaning no net U.S. tax expense is expected until 2009.
Investor Verification Checklist
- Asbestos Settlement Impact: Verify the sensitivity of future earnings to Corning's stock price fluctuations regarding the $76M Q2 charge and the ongoing liability.
- Non-GAAP Reconciliation: Review the reconciliation of GAAP to Non-GAAP EPS ($0.30 vs $0.34) to understand the magnitude of the asbestos charge and divestiture gain.
- Dividend Sustainability: Confirm that the newly declared dividend and $500M buyback are supported by the projected free cash flow, given the historical accumulated deficit.
- Telecom Recovery: Monitor the Q3 sequential growth in the Telecommunications segment to validate the expected 10% recovery excluding the divested submarine business.
- Tax Rate Volatility: Track the realization of the 14-15% ongoing tax rate and the potential impact of the German deferred tax adjustment on future quarters.