CORNING INC quarterly report, Q2 FY2018

Corning Incorporated 10-Q Summary

Reporting period: Three and six months ended June 30, 2018, compared with the corresponding 2017 periods. The interim financial statements are unaudited and prepared under U.S. GAAP. Corning operates through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences and All Other.

Financial performance and position

Metric	Q2 2018	Q2 2017	Six months 2018	Six months 2017
Net sales	$2.747 billion	$2.497 billion	$5.247 billion	$4.872 billion
Gross margin	$1.072 billion; 39%	$987 million; 40%	$2.027 billion; 39%	$1.938 billion; 40%
Operating income	$395 million	$385 million	$589 million	$798 million
Net income attributable to Corning	$738 million	$439 million	$149 million	$525 million
Diluted EPS	$0.78	$0.42	$0.12	$0.50
Operating cash flow	Not separately provided	Not separately provided	$1.035 billion	$471 million

Q2 net income included a $458 million translated-earnings-contract gain before tax, compared with a $219 million gain in the prior-year quarter.
Six-month results included a $172 million tax expense related to a preliminary IRS agreement covering the 2013 and 2014 audits and a $132 million legal charge.
Cash and cash equivalents were $2.023 billion at June 30, 2018, down from $4.317 billion at December 31, 2017. Approximately 70% of cash was held outside the United States.
Long-term debt was $5.099 billion, and current debt and short-term borrowings were $252 million. Total debt to total capital was approximately 28%, compared with 25% at year-end 2017.
Corning had no outstanding commercial paper and had access to a $2 billion revolving credit facility. Management stated that liquidity was sufficient for operations, acquisitions, capital spending, debt service, dividends and planned repurchases.
Six-month capital expenditures were $1.177 billion, compared with $761 million in 2017. Full-year 2018 capital expenditures were expected to be slightly above $2 billion.
The company repurchased 51.6 million shares for approximately $1.488 billion during the first half and paid $348 million of dividends. The quarterly common-stock dividend was $0.18 per share.

Material changes versus the prior comparable period

Q2 sales increased 10%, while six-month sales increased 8%. Growth was led by Optical Communications, Environmental Technologies and Life Sciences.
Optical Communications sales increased 16% in Q2 and 12% year to date, supported by carrier-network and enterprise-network demand.
Environmental Technologies sales increased 21% in Q2 and 19% year to date; Life Sciences sales increased 11% in both periods.
Display Technologies sales were essentially flat in Q2 and declined 2% year to date. High-single-digit LCD glass price declines offset volume growth.
Gross margin percentage declined one percentage point in both periods because of LCD glass pricing pressure and spending for capacity expansions.
Q2 GAAP net income rose 68%, but six-month GAAP net income fell 72%. Six-month core earnings declined 15% to $658 million, or $0.69 per core diluted share, from $776 million, or $0.74.
Cash flow benefited from $576 million of customer deposits received during the first half. Investing cash usage increased because of capital spending and the 3M acquisition, while financing cash usage reflected repurchases, debt repayments and dividends.

Acquisition, accounting and unusual items

On June 1, 2018, Corning acquired substantially all of 3M’s Communications Market Division for approximately $794 million. The preliminary allocation included $511 million of intangible assets and $242 million of goodwill allocated to Optical Communications. The acquisition had an insignificant Q2 earnings impact.
Corning issued ¥65.5 billion of Japanese yen-denominated senior unsecured notes with seven-, ten- and twelve-year maturities. Net proceeds were $596 million after offering costs and were converted to U.S. dollars.
Corning adopted the new revenue-recognition standard, ASC Topic 606, using the modified retrospective method. Management stated that the transition impact was immaterial.
Customer deposits were approximately $1.0 billion at June 30, 2018, including $576 million received in the first half. Deposits primarily secure future Display Technologies glass supply under agreements extending up to ten years.
Other non-GAAP core earnings exclude, among other items, currency effects, translated-earnings contracts, acquisition costs, discrete tax items, legal matters and restructuring or other charges. Core measures are not GAAP measures.

Guidance, outlook and risks

Management increased its 2018 segment-sales expectation to approximately $11.3 billion from $11.0 billion.
Management expected Display Technologies pricing declines to reach the mid-single digits year over year in Q3, with Corning’s LCD glass volume growing faster than the market due partly to the Gen 10.5 facility in China.
For Q3, management expected Optical Communications sales to increase approximately 25% year over year, Specialty Materials approximately 10%, Environmental Technologies in the high-teens percentage range and Life Sciences in the mid-single digits. The Optical Communications outlook included the 3M acquisition.
Key risks include currency volatility, tariffs and import duties, product demand and pricing, industry capacity, major-customer financial condition, supply and component costs, acquisitions, technology changes, intellectual-property disputes, litigation, cyber or operational disruption, tax-law changes and the timing of capital spending.
Asbestos-related matters remain material contingencies. The company had a $147 million reserve for non-Pittsburgh Corning asbestos claims, and $185 million of Pittsburgh Corning payments were due from 2019 through 2022. Corning may also have indemnification exposure related to Dow Corning breast-implant and bankruptcy-interest claims.
Corning was identified as a potentially responsible party at 15 active hazardous-waste sites and had approximately $35 million accrued for environmental liabilities.
At June 30, the carrying value of precious metals exceeded fair market value by $663 million. Management considered the assets recoverable, but future impairment could result from substantial declines in Display Technologies or Specialty Materials demand or profitability.

Investor verification checklist

Verify the sustainability of earnings excluding the $458 million Q2 translated-earnings-contract gain and other nonrecurring items.
Assess Display Technologies pricing, volume growth, Gen 10.5 ramp costs and customer financial health.
Confirm the 3M Communications Market Division integration, contribution and purchase-price accounting.
Monitor cash usage from capital expenditures, share repurchases, dividends and debt service relative to operating cash flow.
Review the final IRS audit settlement, remaining Tax Cuts and Jobs Act accounting, GILTI treatment and potential future tax effects.
Track asbestos, insurance litigation, Dow Corning indemnification exposure and other legal contingencies.
Reconcile management’s non-GAAP core measures with GAAP results and evaluate the impact of currency assumptions and hedging.