Corning Incorporated 2009 Form 10-K Summary
Business context and reporting period
Corning is a global technology and materials company operating in Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. Products include LCD glass substrates, optical fiber and cable, emissions-control ceramics, specialty glass and laboratory products. The filing covers the fiscal year ended December 31, 2009; fourth-quarter data are included in the annual filing.
Corning operated approximately 60 facilities in 13 countries and had approximately 23,500 full-time employees at year-end. International sales represented 76% of 2009 net sales. Display Technologies was the largest segment, representing 45% of sales, followed by Telecommunications at 31%.
Financial performance and liquidity
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $5.395 billion | $5.948 billion | Down 9% |
| Gross margin | $2.093 billion; 39% | $2.738 billion; 46% | Down $645 million |
| Operating income | $391 million | $1.520 billion | Down $1.129 billion |
| Equity earnings of affiliates | $1.435 billion | $1.358 billion | Up 6% |
| Net income attributable to Corning | $2.008 billion | $5.257 billion | Down 62% |
| Diluted EPS | $1.28 | $3.32 | Down $2.04 |
| Operating cash flow | $2.077 billion | $2.128 billion | Down $51 million |
| Capital expenditures | $890 million | $1.921 billion | Down $1.031 billion |
Fourth-quarter sales were $1.532 billion, up 41% from the fourth quarter of 2008 and 4% from the third quarter of 2009. Fourth-quarter gross margin was $649 million, or approximately 42%, compared with 28% in the fourth quarter of 2008. Fourth-quarter net income was $740 million, or diluted EPS of $0.47.
- Display Technologies sales were $2.426 billion, down 11% for the year. Price declined 19% and volume declined 2%, partly offset by $228 million of favorable foreign-exchange effects. Fourth-quarter segment sales increased 84% year over year.
- Telecommunications sales were $1.677 billion, down 7%, and segment net income fell to $19 million from $45 million.
- Environmental Technologies sales were $590 million, down 17%, and segment net income declined to a $42 million loss from $33 million of income.
- Specialty Materials sales were $331 million, down 11%, with a $54 million segment loss, partly reflecting Gorilla Glass development and restructuring costs.
- Life Sciences sales increased 12% to $366 million, aided by the Axygen acquisition, while segment income declined to $39 million from $53 million.
Cash, cash equivalents and short-term investments totaled $3.583 billion at year-end, up from $2.816 billion. Working capital was $3.982 billion and the current ratio was 3.6 to 1. Long-term debt was $1.930 billion, total debt-to-capital was 11%, and shareholders’ equity was $15.543 billion. Corning had access to a $1.1 billion committed unsecured credit facility expiring in November 2011 and was in compliance with its covenants.
Material changes versus the prior comparable period
- The recession reduced demand, pricing and volumes in most businesses, particularly LCD glass, automotive emissions products and telecommunications equipment.
- LCD demand recovered progressively after the first quarter. Corning restarted much of its previously idled display capacity, although an earthquake in Japan and a power disruption in Taiwan caused production interruptions and approximately $30 million of accelerated depreciation and asset write-offs.
- Corning recorded $228 million of restructuring, impairment and other charges, primarily for workforce reductions. Expected cash expenditures were approximately $155 million, with most spending expected by 2010; estimated annualized savings were approximately $224 million.
- Net income declined sharply because 2008 included approximately $2.5 billion of deferred-tax valuation allowance releases and a $340 million asbestos-liability credit. These items did not recur in 2009.
- Equity earnings from Samsung Corning Precision increased to $1.115 billion from $927 million, while Dow Corning equity earnings declined to $287 million from $369 million.
- Corning acquired Axygen BioScience for approximately $410 million net of cash received, adding $232 million of preliminary goodwill to Life Sciences.
- Corning issued $350 million of senior unsecured notes in 2009 and made no common-stock repurchases. The prior repurchase program expired after December 31, 2009.
Guidance, outlook, risks and unusual items
Management expected 2010 sales to exceed 2009 levels, with improving gross margin and equity earnings and continued positive operating cash flow. Planned 2010 capital spending was approximately $600 million to $700 million, with up to $300 million of additional spending for adjacent opportunities, possible China capacity and precious metals.
- Management expected the 2010 LCD glass market to grow approximately 14% to 22%, with moderate price declines and first-quarter wholly owned volume growth of 8% to 12% versus the fourth quarter of 2009. Further workforce and capacity-consolidation charges remained possible.
- Telecommunications sales were expected to decline in 2010; first-quarter sales were expected to be down 10% to 15% sequentially.
- Environmental Technologies sales were expected to improve, but diesel demand remained dependent on freight-market recovery and regulatory timing. Specialty Materials growth was expected to come primarily from Gorilla Glass, while Life Sciences growth was expected to benefit from Axygen.
- Customer concentration is substantial: the ten largest customers represented 52% of sales; three Display customers represented 62% of segment sales; three Environmental Technologies customers represented 85%; and two Life Sciences distributors represented 45%.
- Corning’s results remain highly exposed to LCD demand, pricing pressure, excess industry capacity, foreign exchange, customer capital spending, international facility disruptions, raw-material availability and technology substitution.
- Corning recorded a $682 million asbestos litigation liability. The proposed Pittsburgh Corning asbestos plan required a $100 million initial payment and five subsequent $50 million payments, but remained subject to court approval, creditor voting, appeals, insurance funding and other contingencies.
- Corning was involved in LCD-glass antitrust investigations by European and other authorities and disputed a significant Asian customer’s alleged breach of a supply agreement. The filing does not provide a clear estimable loss for these matters.
- Environmental liabilities for 21 active hazardous-waste sites were accrued at approximately $26 million. Management considered a materially higher additional loss remote.
- Approximately $4.1 billion of equity-method investment earnings were undistributed at year-end, and 98% of 2009 equity earnings came from Dow Corning and Samsung Corning Precision. Performance of these uncontrolled affiliates is therefore material to Corning’s results.
Important facts for investors to verify
- Whether the recovery in LCD glass demand, market share and pricing continued after the fourth quarter of 2009.
- The sustainability and cash-conversion quality of the $1.435 billion of equity earnings, particularly from Samsung Corning Precision and Dow Corning.
- Actual 2010 capital spending, restructuring charges, workforce savings and capacity utilization.
- Exposure to customer concentration, foreign-exchange movements and potential supply disruptions in Asia.
- The final outcome and cash timing of the Pittsburgh Corning asbestos plan, insurance litigation and other asbestos claims.
- The collectability and timing of customer deposits, including approximately $80 million of expected 2010 credits.
- Whether deferred-tax assets requiring approximately $8.3 billion of future U.S. profits remain realizable.
- Final purchase-accounting values and strategic performance of the Axygen acquisition.