Corning Incorporated — 2016 Form 10-K Summary
Business Context and Reporting Period
Corning is a materials-science company operating through Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences, and All Other. The filing covers the fiscal year ended December 31, 2016; fourth-quarter data are included where disclosed. The company operated 98 facilities in 17 countries and had approximately 40,700 employees.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $9.390 billion | $9.111 billion | Up 3% |
| Gross margin | $3.746 billion; 40% | $3.653 billion; 40% | Margin stable |
| Operating income | $1.391 billion | $1.322 billion | Up 5% |
| Net income attributable to Corning | $3.695 billion | $1.339 billion | Up 176% |
| Diluted EPS | $3.23 | $1.00 | Up $2.23 |
| Core earnings | $1.774 billion; $1.55 per diluted share | $1.882 billion; $1.40 per diluted share | Earnings down 6%; EPS up due to repurchases |
| Operating cash flow | $2.521 billion | $2.809 billion | Down $288 million |
| Capital expenditures | $1.130 billion | $1.250 billion | Down $120 million |
| Cash and equivalents | $5.291 billion | $4.500 billion | Up $791 million |
| Long-term debt | $3.646 billion | $3.890 billion | Down $244 million |
| Working capital | $6.297 billion | $5.455 billion | Up $842 million |
Fourth-quarter 2016 sales were $2.476 billion, gross margin was $990 million, and net income attributable to Corning was $1.572 billion, or $1.47 diluted EPS. Fourth-quarter results included the substantial impact of the Dow Corning transaction and an $832 million income-tax provision.
Segment sales were $3.238 billion in Display Technologies, $3.005 billion in Optical Communications, $1.032 billion in Environmental Technologies, $1.124 billion in Specialty Materials, $839 million in Life Sciences, and $152 million in All Other. Display Technologies and Optical Communications represented approximately 34% and 32% of consolidated sales, respectively.
Liquidity remained strong. Corning reported a 3.3:1 current ratio, debt to total capital of 18%, no commercial paper outstanding at year-end, and access to a $2 billion revolving credit facility expiring in 2019. Credit ratings were BBB+ from Standard & Poor’s and Baa1 from Moody’s, both with stable outlooks.
Material Changes Versus the Prior Comparable Period
- Sales increased 3%, led by Display Technologies, Pharmaceutical Technologies within All Other, and smaller increases in Optical Communications, Specialty Materials, and Life Sciences. Environmental Technologies sales declined 2%.
- Reported net income benefited from a $2.676 billion non-taxable gain on the May 31, 2016 strategic realignment of Corning’s Dow Corning investment and a $105 million related tax benefit. Corning received approximately $4.8 billion in cash and obtained a direct equity interest in Hemlock Semiconductor Group.
- Core sales declined 1% and core earnings declined 6%, indicating weaker underlying performance than reported GAAP results. Display Technologies core sales and core earnings each declined 6% because LCD glass price declines slightly exceeded 10%, partly offset by mid-single-digit volume growth and cost reductions.
- Display Technologies reported net income declined 15%, primarily because of pricing pressure and a $289 million reduction in realized currency-hedge gains. Optical Communications reported net income increased 3%, while Environmental Technologies net income declined 17%.
- Operating cash flow decreased 10%, while investing cash flow turned positive at $3.662 billion, primarily because of the Dow Corning cash receipt. Financing cash use increased to $5.306 billion, including $4.227 billion of common-stock repurchases and $645 million of dividends.
- Corning repurchased approximately 197.1 million shares for $4.2 billion in 2016 and authorized an additional $4 billion repurchase program in December 2016. The quarterly common dividend increased from $0.12 to $0.135 per share during 2016; a further increase to $0.155 was declared for 2017.
Guidance, Outlook, Risks, and Unusual Items
For 2017, management expected mid-single-digit growth in retail markets and glass demand, with LCD glass price declines more moderate than in 2016. Optical Communications sales were expected to increase by a low-teens percentage, Environmental Technologies sales were expected to be flat to slightly higher, Specialty Materials sales were expected to grow depending on adoption of Gorilla Glass 5 and other innovations, and Life Sciences sales were expected to grow at a low-single-digit rate. Management also expected approximately $1.5 billion of 2017 capital expenditures.
- Key operating risks include LCD glass pricing pressure, industry overcapacity, technology changes, concentrated customers, foreign-exchange volatility, and dependence on specialized equipment and raw materials.
- Approximately 72% of sales were generated outside the United States. A 10% adverse currency movement could produce a hypothetical $1.618 billion loss in the fair value of exposed foreign-exchange instruments; management expects these instruments to largely offset the underlying exposures.
- Three Display Technologies customers represented 65% of segment sales, and three Environmental Technologies customers represented 85%. Samsung Display represented 11% of consolidated sales.
- Corning held approximately $16.7 billion of gross notional translated-earnings contracts at year-end and recorded a $448 million net loss from those contracts in 2016, versus an $80 million gain in 2015.
- 2016 included $77 million of restructuring, impairment, and other charges, $86 million of Department of Justice investigation-related costs, and a $56 million gain associated with the Pittsburgh Corning asbestos plan.
- Asbestos-related liabilities totaled approximately $439 million at year-end, including $290 million under the amended Pittsburgh Corning plan and approximately $149 million for non-PCC claims. Environmental cleanup reserves were approximately $43 million.
- Corning had approximately $12.6 billion of accumulated foreign earnings indefinitely reinvested without a recorded U.S. tax provision; the eventual tax cost of repatriation could be material.
- Precious metals had a carrying value approximately $890 million above estimated fair value, although management considered the assets recoverable based on expected cash flows from Display Technologies and Specialty Materials.
Most Important Facts for Investors to Verify
- Whether LCD glass pricing moderates as projected and whether volume growth offsets continuing pricing pressure.
- Whether Optical Communications achieves the projected low-teens 2017 sales growth after 2016 manufacturing-system disruptions.
- The sustainability of core earnings excluding the $2.676 billion Dow Corning gain, currency effects, hedge results, tax items, litigation, restructuring, and other adjustments.
- Cash deployment priorities, including the $4 billion repurchase authorization, dividend growth, approximately $1.5 billion of planned 2017 capital spending, and related effects on leverage.
- Potential changes in asbestos claims, insurance recoveries, environmental liabilities, uncertain tax positions, and the $290 million of contingent consideration expected in 2018.
- Customer concentration, foreign-exchange hedge exposures, and the recoverability of precious metals, goodwill, and other intangible assets.
- The filing reports effective disclosure controls and internal control over financial reporting as of December 31, 2016, with no unresolved SEC staff comments.