Business Context and Reporting Period
Corning Incorporated’s unaudited Form 10-Q covers the three months ended March 31, 2020, with comparison to the same period in 2019. Corning operates through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences, and All Other businesses. Results were materially affected by the COVID-19 pandemic, market weakness, customer capital-spending reductions, vehicle-plant shutdowns, and a major customer’s announced exit from LCD-panel production.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2.391 billion | $2.812 billion | Down 15% |
| Gross margin | $561 million; 23% | $1.099 billion; 39% | Down $538 million |
| Operating income | $(121) million | $420 million | Declined to a loss |
| Income before taxes | $(108) million | $575 million | Declined to a loss |
| Net income attributable to Corning | $(96) million | $499 million | Declined $595 million |
| Diluted EPS | $(0.16) | $0.55 | Down $0.71 |
| Core net income | $177 million | $365 million | Down 52% |
| Core diluted EPS | $0.20 | $0.40 | Down 50% |
| Operating cash flow | $248 million | $(29) million | Improved $277 million |
| Capital expenditures | $545 million | $524 million | Up $21 million |
Cash flow from operations less capital expenditures was approximately $(297) million in Q1 2020, based on reported cash flow figures. Cash and cash equivalents were $2.025 billion at March 31, 2020, compared with $2.434 billion at December 31, 2019.
Long-term debt was $7.815 billion, with only $12 million of current debt and borrowings. Corning had no outstanding commercial paper. Total debt to total capital was 39%, compared with 37% at year-end 2019, and the company reported compliance with its 60% leverage covenant. Working capital was $3.755 billion and the current ratio was 2.2:1.
Material Changes Versus the Prior Comparable Period
- Consolidated sales decreased 15%. Reportable-segment sales declined 11% before foreign-currency effects and a customer-contract adjustment.
- Optical Communications sales fell 26% and segment net income fell 80%, primarily because of lower carrier and enterprise volumes, general market weakness, and reduced spending by major customers.
- Display Technologies sales declined 8% and segment net income declined 27%, reflecting lower volumes and low-single- to mid-single-digit display-glass price declines.
- Environmental Technologies sales declined 12% and segment net income declined 36% as vehicle manufacturers shut production facilities in key markets.
- Specialty Materials sales increased 14%, and Life Sciences sales increased 6%, supported by demand for premium glass, Gorilla Glass innovations, advanced optics, and higher Life Sciences volumes.
- A $105 million cumulative revenue reduction was recorded after a customer announced it would exit LCD-panel production by the end of 2020. The remaining commercial benefit asset will reduce revenue over the remainder of 2020.
- Gross margin declined sharply because of lower volumes, accelerated depreciation, severance, asset write-offs, and capacity-realignment actions. Research, development, and engineering expense increased 5% despite lower sales.
- Q1 included $225 million of severance, accelerated depreciation, asset-disposal losses, and other charges, including $77 million of severance, $59 million of accelerated depreciation, and $60 million of asset-disposal losses.
- Translated earnings contract gains fell to $68 million from $184 million. Foreign-currency translation and hedge losses reduced comprehensive income, which was $(422) million versus $343 million in Q1 2019.
Guidance, Outlook, Risks, and Unusual Items
- Corning withdrew its full-year 2020 guidance because of COVID-19-related economic uncertainty.
- Management is reducing costs and capital spending, targeting 2020 capital expenditures below $1.5 billion. Share repurchases were suspended after approximately $105 million of Q1 repurchases, while management stated that it planned to maintain the dividend.
- Management stated that no debt was due over the next twelve months, expected to maintain a strong cash balance, and expected to generate positive free cash flow for the year. The filing does not provide a formal full-year free-cash-flow forecast.
- COVID-19 may adversely affect demand, operations, labor availability, supply chains, customer payments, capital markets, foreign-exchange rates, inventory valuations, asset impairments, goodwill, hedging effectiveness, and retirement-plan assumptions.
- Corning performed COVID-19-related reviews and reported no long-lived-asset or goodwill impairments as of March 31, 2020. Precious-metal assets had a carrying value $1.9 billion below estimated fair market value, creating potential future impairment exposure if demand or profitability declines materially in Display Technologies or Specialty Materials.
- Customer deposits were approximately $1.1 billion at March 31, 2020, primarily related to long-term Display products supply agreements.
- Remaining Pittsburgh Corning asbestos-plan payments totaled $135 million for 2020 through 2023, including $35 million due in Q2 2020. Reserves for non-PCC asbestos claims were $98 million, and environmental cleanup reserves were approximately $40 million.
- Corning received $101 million of South Korean tax-assessment refunds during Q1 and held a $336 million non-current receivable related to ongoing tax appeals at March 31, 2020.
- Corning established Chinese-yuan loan facilities and drew approximately $200 million during Q1, with five-year maturities, to fund capital projects.
Most Important Facts for Investors to Verify
- Whether COVID-19 demand impacts, particularly in Optical Communications, Environmental Technologies, and Display Technologies, persisted or worsened after March 31, 2020.
- Whether the planned cost reductions and capacity realignment offset lower volumes and pricing pressure without impairing additional assets.
- The timing and full-year effect of the $105 million customer-contract revenue adjustment and the customer’s LCD-production exit.
- Whether management maintained the dividend and continued to suspend share repurchases amid negative Q1 free cash flow on a cash-flow-after-capital-expenditures basis.
- Actual full-year capital expenditures, operating cash flow, free cash flow, and liquidity relative to management’s expectations.
- Changes in customer credit quality, customer deposits, tax receivables, asbestos and environmental liabilities, and access to commercial-paper or other capital markets.