Corning Incorporated — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2015, compared with the same periods in 2014. Corning operates through Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences and All Other. The company develops specialty glass, ceramics, optical products and related materials.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $2,343 million | $2,482 million | $4,608 million | $4,771 million |
| Gross margin | $975 million; 42% | $1,032 million; 42% | $1,904 million; 41% | $1,967 million; 41% |
| Operating income | $431 million | $460 million | $843 million | $775 million |
| Net income attributable to Corning | $496 million | $169 million | $903 million | $470 million |
| Diluted EPS | $0.36 | $0.11 | $0.65 | $0.32 |
| Effective tax rate | 18.2% | 50.4% | 17.8% | 42.8% |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $1,148 million | $2,480 million |
Reported sales declined 6% in the quarter and 3% year to date, while reported net income increased 193% and 92%, respectively. Core earnings, a non-GAAP measure, were $522 million, or $0.38 per diluted share, in the quarter and $1,006 million, or $0.73 per diluted share, year to date, up 7% and 11%, respectively.
Segment performance and material changes
- Display Technologies: Sales declined 20% in the quarter and 17% year to date to $789 million and $1,597 million. Volume increased, but was offset by mid-teens price declines and yen depreciation. Segment net income increased 7% in the quarter and 22% year to date.
- Optical Communications: Sales increased 17% in both periods to $800 million in the quarter and $1,497 million year to date. Growth reflected higher carrier and enterprise network demand, North American data-center activity and 2015 acquisitions. Segment net income rose 26% in the quarter and 52% year to date.
- Environmental Technologies: Sales declined 9% in the quarter and 3% year to date, primarily from foreign exchange and lower European light-duty diesel demand. Net income was broadly stable in the quarter and increased 4% year to date.
- Specialty Materials: Sales declined 9% in the quarter and 3% year to date, mainly because of weaker advanced optics demand and a semiconductor industry slowdown. Net income increased 13% and 17%, respectively, due to manufacturing efficiencies and lower operating expenses.
- Life Sciences: Sales declined 5% in the quarter and 6% year to date because of foreign exchange. Net income was broadly stable.
Cash flow, debt and liquidity
- Cash, cash equivalents and short-term investments were $5.473 billion at June 30, 2015, compared with $6.068 billion at December 31, 2014.
- Total debt was approximately $4.012 billion, including $102 million current debt and $3.910 billion long-term debt, versus approximately $3.263 billion at year-end. Debt-to-total-capital increased to 16.0% from 13.1%.
- Corning issued $375 million of 1.50% senior notes due 2018 and $375 million of 2.90% senior notes due 2022. Net proceeds were $745 million.
- First-half investing cash use was $623 million, including $641 million of capital expenditures and $531 million for acquisitions. Management expects 2015 capital spending of approximately $1.3 billion to $1.4 billion, including approximately $650 million for Display Technologies.
- First-half financing cash use was $609 million, including $1.093 billion of common-stock repurchases and $350 million of dividends. Corning repurchased 50.5 million shares for $1.128 billion in the first half and 29.4 million shares for $626 million in the second quarter.
- Corning had no commercial paper outstanding at June 30, 2015 and retained access to a $2.0 billion committed revolving credit facility. Management stated that liquidity was sufficient for operations, acquisitions, asbestos obligations, capital expenditures, dividends and repurchases.
Guidance, outlook, risks and unusual items
- Management described 2015 as another strong year, led by Optical Communications and demand for Gorilla Glass 4. A new $2.0 billion share-repurchase authorization was approved on July 15, 2015.
- Optical Communications third-quarter and full-year sales were expected to increase in the mid-teens percentage range year over year.
- Display Technologies third-quarter LCD glass volume was expected to rise by a low-single-digit percentage sequentially, with moderate price declines. Management expected the 2015 LCD glass retail market to grow approximately 6% to 7%.
- Third-quarter Specialty Materials sales were expected to decline in the upper-single-digit percentage range year over year because of the semiconductor slowdown, although Gorilla Glass volume was expected to increase sequentially by a high-single-digit percentage.
- Third-quarter Environmental Technologies and Life Sciences sales were expected to be down slightly year over year, primarily because of euro-dollar movements.
- Reported earnings benefited materially from foreign-currency hedge gains of $164 million in the quarter and $206 million year to date, compared with losses in 2014. The 2015 tax rate also benefited from the absence of significant 2014 tax charges, including deferred-tax valuation allowances and a $102 million withholding tax item.
- The estimated liability for the Pittsburgh Corning asbestos plan and non-PCC asbestos claims was $685 million at June 30, 2015. The Third Circuit appeal concerning the plan remained pending. Corning also had approximately 9,700 non-PCC asbestos cases, environmental reserves of approximately $41 million and contingent guarantees with a notional value of $174 million.
- Foreign exchange, especially the Japanese yen and euro, customer concentration, LCD capacity and pricing, semiconductor demand, acquisitions, litigation, insurance coverage and execution of cost-reduction and capacity actions remain material risks. Three Display Technologies customers represented approximately 61% of segment sales; three Environmental Technologies customers represented approximately 87%.
Most important facts to verify
- Whether Optical Communications growth and the disclosed acquisitions can offset continued Display Technologies pricing pressure.
- The sustainability of earnings excluding foreign-currency hedge gains and favorable tax items.
- Execution of the $1.3 billion to $1.4 billion 2015 capital-spending plan and its effect on free cash flow.
- Progress and ultimate cost of the Pittsburgh Corning and non-PCC asbestos matters, including the pending appeal and insurance litigation.
- Customer concentration, LCD industry capacity, semiconductor weakness and foreign-exchange sensitivity.
- The final accounting for the four first-quarter acquisitions and any contingent consideration, capped at $28 million for two acquisitions.