Corning Incorporated: Q1 2021 Form 10-Q Summary
Business context and reporting period
Corning Incorporated is a materials science and technology company operating through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences, and All Other. The filing covers the unaudited three months ended March 31, 2021, compared with March 31, 2020. Results include the consolidation of Hemlock Semiconductor Group (HSG) in All Other beginning September 9, 2020.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $3.290 billion | $2.391 billion | Up 38% |
| Gross margin | $1.156 billion; 35% | $561 million; 23% | Up 12 percentage points |
| Operating income (loss) | $502 million | $(121) million | Improved $623 million |
| Net income (loss attributable to Corning) | $599 million | $(96) million | Improved $695 million |
| Diluted EPS | $0.67 | $(0.16) | Improved $0.83 |
| Core net income | $402 million | $177 million | Up 127% |
| Core diluted EPS | $0.45 | $0.20 | Up $0.25 |
| Cash flow from operations | $723 million | $248 million | Up $475 million |
| Capital expenditures | $289 million | $545 million | Down $256 million |
Operating expenses were $654 million, compared with $682 million in the prior-year quarter. Interest expense increased to $77 million from $64 million. The effective tax rate was 27.4%, compared with 11.1% in Q1 2020.
Cash and cash equivalents were $2.868 billion at March 31, 2021, compared with $2.672 billion at December 31, 2020. Working capital was $4.590 billion and the current ratio was 2.3:1. Total debt was $7.804 billion, including $154 million of current debt and $7.650 billion of long-term debt. Debt represented 37% of total capital. Corning had no outstanding commercial paper and had full availability under its $1.5 billion revolving credit agreement.
Financing cash outflows were $190 million, including $208 million of dividends paid and $25 million of debt repayments. Cash increased by $196 million during the quarter to $2.868 billion.
Material changes versus the prior comparable period
- Sales increased in every segment. Reportable-segment sales rose 29% to $3.263 billion, while consolidated sales also benefited from foreign-currency effects and the absence of a $105 million customer-contract revenue reduction recorded in Q1 2020.
- Display Technologies sales rose 15% to $863 million, primarily on mid-teens volume growth, partly offset by low-single-digit price declines.
- Optical Communications sales rose 18% to $937 million, driven by carrier and enterprise demand associated with data-center builds, network expansion, and fiber-to-the-home projects.
- Specialty Materials sales rose 28% to $451 million, supported by premium cover materials, information-technology demand, and semiconductor-related optical glass.
- Environmental Technologies sales rose 38% to $441 million, reflecting improving automotive markets, increased content, and strong heavy-duty diesel demand.
- Life Sciences sales rose 16% to $300 million, supported by bioproduction, diagnostic consumables, and recovery in research laboratories.
- All Other sales increased to $271 million from $57 million, primarily because HSG was consolidated for the full quarter. All Other’s net loss narrowed to $24 million from $69 million.
- Gross margin benefited from higher sales, cost controls, and the absence of $161 million of prior-year restructuring and capacity-realignment charges. These benefits were partly offset by approximately $50 million of higher freight and logistics costs and supply-chain disruptions.
- Q1 2020 included $225 million of restructuring, impairment, and other charges, including $77 million of severance and $148 million of capacity-realignment costs. No material restructuring, impairment, and other charges were recorded in Q1 2021.
- Translated earnings contract gains increased to $272 million from $68 million, and the translation gain on Japanese yen-denominated debt increased to $118 million from a $14 million loss. These items materially benefited reported GAAP earnings but are excluded from core performance measures.
Guidance, outlook, management commentary, and unusual items
Management expects Q2 2021 core net sales of approximately $3.3 billion to $3.5 billion and anticipates another quarter of year-over-year sales growth. Management stated that Corning expects strong operating cash flow and sufficient liquidity to fund operations, acquisitions, capital expenditures, scheduled debt repayments, and dividends.
Management’s stated priorities remain preserving financial health, protecting employees and communities, and delivering customer commitments amid the COVID-19 pandemic. The company identified elevated freight, logistics, and global supply-chain costs as ongoing pressures.
HSG’s 2020 change in control resulted in consolidation of the business, recognition of goodwill, and additional liabilities. HSG had $50 million of remaining third-party debt classified as current at March 31, 2021.
On April 5, 2021, after quarter-end, Corning and Samsung Display entered into an agreement related to conversion of Corning’s Series A preferred stock into 115 million common shares. Corning agreed to repurchase 35 million shares for approximately $1.5 billion, payable in three installments of approximately $507 million. Corning may also repurchase up to 22 million additional shares during 2024 through 2027, and 58 million shares are subject to a seven-year lock-up.
Corning early adopted ASU 2020-06 for convertible instruments in Q1 2021 without a one-time transition impact. The company’s disclosure controls and procedures were deemed effective, and management reported no material change in internal control over financial reporting.
Risks and contingencies
- COVID-19 could continue to affect demand, operations, employee safety, and global supply chains.
- Foreign-currency volatility, particularly involving the Japanese yen, South Korean won, Chinese yuan, euro, and new Taiwan dollar, can affect sales and earnings despite hedging programs.
- Customer concentration and the financial condition of major customers, especially in Display Technologies, could affect receivables, demand, and manufacturing expansion plans.
- Supply-chain disruption, freight costs, availability and pricing of critical materials, tariffs, and changing industry capacity remain operational risks.
- Corning had approximately $1.3 billion of customer deposits and approximately $1 billion of HSG-related deferred revenue at March 31, 2021, largely tied to long-term supply agreements.
- The company had a $96 million asbestos reserve, approximately $64 million of environmental reserves, and exposure to potential indemnity obligations related to former Dow Corning matters. Management assessed the likelihood of a material adverse outcome as remote.
- Corning is appealing certain South Korean tax assessments and refund claims and had recorded non-current receivables of $358 million related to the appeals.
- Corning was identified as a potentially responsible party at 15 active hazardous-waste sites. Management believes losses materially exceeding recorded environmental reserves are unlikely based on information available.
Important facts for investors to verify
- Whether the Q2 core-sales outlook of $3.3 billion to $3.5 billion was achieved and whether supply-chain and freight pressures persisted.
- The recurring operating performance of each segment after excluding currency gains, restructuring effects, HSG consolidation effects, and other non-GAAP adjustments.
- The cash-flow and balance-sheet impact of the approximately $1.5 billion Samsung share repurchase and related preferred-stock conversion.
- The maturity and repayment requirements of HSG’s remaining debt and Corning’s broader debt obligations.
- Progress and ultimate outcomes of the South Korean tax appeals, environmental matters, asbestos claims, and other indemnity contingencies.
- Whether customer deposits and deferred revenue convert into revenue at expected shipment volumes under the applicable long-term supply agreements.