Corning Incorporated 10-Q Summary
Business context and reporting period
Corning Incorporated reported unaudited results for the three and six months ended June 30, 2019. Its principal segments are Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, and Life Sciences. The company focuses on glass, ceramics, optical communications, and related material technologies.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,940 million | $2,747 million | $5,752 million | $5,247 million |
| Gross margin | $1,065 million; 36% | $1,072 million; 39% | $2,164 million; 38% | $2,027 million; 39% |
| Operating income | $374 million | $395 million | $794 million | $589 million |
| Net income attributable to Corning | $92 million | $738 million | $591 million | $149 million |
| Diluted EPS | $0.09 | $0.78 | $0.65 | $0.12 |
| Operating cash flow | Not separately provided | Not separately provided | $124 million | $1,035 million |
Reported Q2 net margin was approximately 3%, compared with approximately 27% in the prior-year quarter. Six-month net margin was approximately 10%, compared with approximately 3% in the prior-year period. Core earnings, a non-GAAP measure, increased 14% to $410 million in Q2 and 18% to $775 million for the six-month period; core diluted EPS was $0.45 and $0.86, respectively.
- Q2 segment sales increased across all businesses: Display Technologies $848 million, Optical Communications $1,090 million, Specialty Materials $369 million, Environmental Technologies $366 million, and Life Sciences $260 million.
- Six-month segment sales increased 9% in Display Technologies, 13% in Optical Communications, 9% in Specialty Materials, 14% in Environmental Technologies, and 5% in Life Sciences.
- Cash and cash equivalents were $1,178 million at June 30, 2019, down from $2,355 million at December 31, 2018.
- Total debt was approximately $6,535 million, consisting of $455 million of current debt and $6,080 million of long-term debt, versus approximately $5,998 million at year-end 2018.
- Working capital was $2,895 million and the current ratio was 1.8:1. Total debt to total capital was 33%, compared with 30% at December 31, 2018.
- Capital expenditures were $1,094 million during the first half, and management expected full-year 2019 capital expenditures to be slightly above $2 billion.
Material changes versus the prior comparable periods
- Sales increased 7% in Q2 and 10% for the first half, driven by growth in all operating segments, including hyperscale data-center projects, display-glass volume growth, automotive and diesel products, Gorilla Glass, and Life Sciences products.
- Q2 net income declined $646 million primarily because translated earnings contracts produced an $84 million after-tax loss versus a $410 million gain in the prior-year quarter, discrete tax items reduced earnings by approximately $90 million, yen-denominated debt translation was unfavorable by approximately $57 million, and Display Technologies incurred approximately $33 million of higher costs.
- Six-month net income increased $442 million, benefiting from higher operating-segment earnings, an approximately $181 million improvement in translated earnings contract results, the absence of the $172 million IRS audit settlement charge recorded in the first quarter of 2018, and the absence of approximately $103 million of prior-year legal charges.
- Gross margin declined in Q2 despite higher sales, primarily because of approximately $75 million of increased accelerated depreciation and capacity-expansion costs in Display Technologies. For the first half, gross margin increased $137 million, although it was also reduced by approximately $52 million from these items.
- Operating cash flow fell $911 million year over year, mainly because of fewer customer deposits and incentives received and unfavorable working-capital changes. Investing cash use improved because the prior-year period included the $794 million acquisition of 3M’s Communication Markets Division. Share repurchases fell to $395 million from $1,488 million.
Guidance, outlook, risks, and unusual items
- For full-year 2019, management expected Display Technologies pricing declines to improve to low- to mid-single digits and display-glass volume to grow by high-single digits. Optical Communications sales were expected to increase by low- to mid-single digits, Environmental Technologies sales by low teens, and Life Sciences sales by mid-single digits. Specialty Materials growth was expected to depend on innovation adoption.
- For Q3 2019, management expected Display Technologies market volume to be flat year over year with Corning growing faster than the market; Optical Communications sales to decline by low single digits; Specialty Materials sales to be approximately flat; Environmental Technologies sales to grow by a low-teen percentage; and Life Sciences sales to grow by a mid-single-digit percentage.
- On July 17, 2019, the board authorized an additional $5 billion share-repurchase program with no expiration date. The company repurchased approximately 4.8 million shares for $151 million during Q2.
- Corning adopted the new lease standard on January 1, 2019, adding approximately $449 million of operating lease right-of-use assets and liabilities at adoption. An equity affiliate’s revenue-standard adoption reduced beginning retained earnings by $186 million, with a related $239 million charge and $53 million deferred-tax impact.
- Foreign-exchange exposure remains significant. Translated earnings contracts had a gross notional value of $13.5 billion at June 30, 2019, and their results caused substantial period-to-period earnings volatility.
- Customer deposits were approximately $0.9 billion at June 30, 2019, primarily related to long-term Display Technologies supply agreements. The company also had approximately $450 million of additional operating-lease commitments that had not yet commenced.
- Contingencies include asbestos-related liabilities, indemnification exposure related to legacy Dow Corning matters, environmental claims at 15 active sites, and other litigation. Management stated that a material adverse outcome was remote based on currently available information.
- Management identified risks from global economic and political conditions, tariffs, currency movements, customer demand and financing, competitive pricing, technology changes, supply constraints, litigation, cybersecurity, intellectual property, tax audits, and the ability to pace capital spending with demand.
- Management stated that liquidity was sufficient for operations, acquisitions, capital expenditures, debt repayments, dividends, and share repurchases. The company had $446 million of commercial paper outstanding under a $1.5 billion program and was in compliance with its debt covenants.
Most important facts for investors to verify
- Whether continued sales growth can offset display-glass pricing pressure, accelerated depreciation, and capacity-expansion costs.
- The sustainability and cash-conversion quality of the reported earnings improvement, given first-half operating cash flow of only $124 million.
- The magnitude and timing of foreign-exchange hedge and yen-denominated debt gains or losses.
- Progress against the 2019 capital-expenditure plan, share-repurchase authorization, and the company’s 2020–2023 plan to invest $10 billion to $12 billion and return $8 billion to $10 billion to shareholders.
- Future Display Technologies demand, customer financial condition, and the ramp of the Gen 10.5 facility in Hefei, China.
- Potential changes in asbestos, environmental, Dow Corning indemnification, tax, and other legal liabilities.