Corning Incorporated: Q1 2013 Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its unaudited Form 10-Q for the three months ended March 31, 2013. The company operates through Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, Life Sciences, and other development activities. Results are compared with the first quarter of 2012 and reflect a retrospective change in pension accounting.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,814 million | $1,920 million | Down 6% |
| Gross margin | $770 million; 42% | $824 million; 43% | Down 7% |
| Operating income | $324 million | $361 million | Down 10% |
| Equity earnings of affiliates | $173 million | $218 million | Down 21% |
| Income before taxes | $528 million | $592 million | Down 11% |
| Net income attributable to Corning | $494 million | $474 million | Up 4% |
| Diluted EPS | $0.33 | $0.31 | Up $0.02 |
| Operating cash flow | $623 million | $762 million | Down 18% |
| Capital expenditures | $194 million | $412 million | Down 53% |
Net income benefited from a $54 million tax benefit related to the American Taxpayer Relief Act, lower operating expenses, improved Telecommunications and Specialty Materials results, and gains on foreign-exchange purchased collars. The effective tax rate was 6.4%, compared with 19.9% in the prior-year period. Net income as a percentage of sales was approximately 27%, compared with 25% in Q1 2012.
At March 31, 2013, cash, cash equivalents, and short-term investments totaled $5.8 billion, compared with $6.1 billion at December 31, 2012. Total debt was approximately $2.9 billion, including $74 million of current debt and $2.855 billion of long-term debt. Debt-to-capital declined to 12% from 14% at year-end 2012. Corning had a $1.0 billion unsecured revolving credit facility expiring in March 2018 and was in compliance with its covenant.
Working capital was $7.474 billion and the current ratio was 5.2:1. Approximately 79% of cash and short-term investments were held outside the United States and were generally indefinitely reinvested, subject to potentially significant tax consequences upon repatriation.
Material changes versus the prior comparable period
- Sales declined in all segments except Life Sciences. Display Technologies sales were reduced by approximately $100 million by the weaker Japanese yen, although constant-yen volume increased at a double-digit rate.
- Display Technologies net sales decreased 8% as reported, while core sales increased 7%; segment net income decreased 17% as reported but increased 2% on a core basis.
- Telecommunications sales decreased 7%, but segment net income increased 67% because manufacturing improvements, product mix, and cost controls more than offset lower volume.
- Environmental Technologies sales declined 13% and net income declined 34%, primarily because of weaker light-duty and heavy-duty diesel demand and automotive pricing pressure.
- Specialty Materials sales declined 10%, while net income increased 77%, driven principally by improved Gorilla Glass manufacturing efficiency.
- Life Sciences sales increased 34% because of the October 2012 Discovery Labware acquisition; reported net income was flat because of acquisition-related amortization and other costs, while core earnings doubled.
- Equity earnings from Samsung Corning Precision declined to $133 million from $183 million. Dow Corning equity earnings were unchanged at $35 million.
- Operating cash flow declined primarily because of lower dividends received from affiliates and restructuring payments. Investing cash use declined due to lower capital spending and short-term investment activity.
- Corning repaid approximately $500 million outstanding under a Chinese renminbi credit facility, which was then terminated. Long-term debt declined by $527 million from December 31, 2012.
Accounting change and unusual items
Corning retrospectively changed its method of recognizing actuarial gains and losses for defined benefit pension plans. For Q1 2013, the change increased reported operating income by $24 million and net income by $15 million compared with the former method. Q1 2012 amounts were also revised, increasing prior-year net income by $12 million. The change reduced retained earnings and increased accumulated other comprehensive income by $643 million at March 31, 2013.
Other notable items included a $24 million net gain on purchased collars, a $54 million discrete tax benefit, $2 million of asbestos litigation expense, and approximately $18 million of acquisition-related costs and amortization excluded from core performance measures. Management reported core earnings of $445 million, up 12% from $397 million, but these non-GAAP measures are not substitutes for GAAP results.
Guidance, outlook, and risks
- Management expected 2013 capital spending of approximately $1.3 billion, including approximately $457 million for Display Technologies.
- Management expected sales growth in Telecommunications, Life Sciences, Specialty Materials, and Environmental Technologies, with stable Display Technologies market share and moderate price declines.
- The 2013 LCD glass retail market was expected to grow in the mid-to-high single digits. For Q2, Display Technologies volume was expected to remain consistent with Q1, with price declines of approximately 2% to 3%.
- Telecommunications sales were expected to improve approximately 20% sequentially in Q2; Environmental Technologies sales were expected to increase slightly; Specialty Materials sales were expected to improve 15% to 20%; and Life Sciences sales were expected to rise at least 35% to 40% year over year due to Discovery Labware.
- Management cautioned that lower Dow Corning equity earnings and foreign-exchange movements could reduce net income. Key risks include LCD industry overcapacity, customer concentration, pricing pressure, global economic conditions, currency volatility, facility disruptions, supply-chain issues, technology changes, and dependence on equity affiliates.
- Corning recorded a $673 million estimated asbestos litigation liability at March 31, 2013. It also disclosed an unresolved Department of Justice antitrust investigation involving certain automotive products; the potential financial impact could be material to a particular period but could not be estimated.
- Dow Corning faced breast-implant litigation and commercial-creditor claims, as well as Chinese antidumping and countervailing-duty investigations involving solar-grade polysilicon. Corning could be affected through its 50% equity interest.
- Environmental cleanup liabilities were accrued at approximately $18 million for 17 Superfund or similar sites. Management considered a materially higher additional loss remote.
- After quarter-end, the board increased the quarterly dividend from $0.09 to $0.10 per share and authorized up to $2 billion of share repurchases through December 31, 2014.
Important facts for investors to verify
- Reconcile reported GAAP earnings with core earnings and separately assess the $54 million tax benefit, pension-accounting change, foreign-exchange gains, and acquisition-related costs.
- Monitor Japanese yen exposure, the $5.2 billion net notional purchased-collar portfolio, and the effect of currency movements on Display Technologies.
- Evaluate Display Technologies pricing, customer concentration, capacity utilization, and the expected 2013 capital program.
- Track the sustainability of cash generation after lower affiliate dividends, planned capital spending, dividends, potential repurchases, acquisitions, and asbestos obligations.
- Review developments in the Department of Justice antitrust investigation, Pittsburgh Corning asbestos proceedings, Dow Corning litigation, and the Chinese polysilicon trade investigations.
- Confirm the timing and financial effect of the Discovery Labware integration and the expected Life Sciences growth.
- Assess the concentration of cash outside the United States and the potential tax cost of repatriation.