Corning Incorporated — Form 10-Q Summary
Business context and reporting period
Corning Incorporated manufactures specialty glass, ceramics and related products across Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. This unaudited report covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | H1 2013 | H1 2012 |
|---|---|---|---|---|
| Net sales | $1,982 million | $1,908 million | $3,796 million | $3,828 million |
| Gross margin | $883 million | $808 million | $1,653 million | $1,632 million |
| Gross margin percentage | 45% | 42% | 44% | 43% |
| Operating income | $424 million | $328 million | $748 million | $689 million |
| Net income attributable to Corning | $638 million | $474 million | $1,132 million | $948 million |
| Diluted EPS | $0.43 | $0.31 | $0.76 | $0.62 |
| Net margin | 32% | 25% | 30% | 25% |
| Operating cash flow | Not separately provided | Not separately provided | $1,018 million | $1,332 million |
Equity earnings from affiliates declined to $166 million in Q2 and $339 million for the first half, from $259 million and $477 million, respectively. The principal declines were at Samsung Corning Precision and Dow Corning.
At June 30, 2013, cash, cash equivalents and short-term investments totaled $5.471 billion, compared with $6.144 billion at December 31, 2012. Total debt was approximately $2.894 billion, including $2.822 billion of long-term debt and $72 million of current debt. Debt to total capital was 12%, versus 14% at year-end 2012. The current ratio was 5.7:1.
Capital expenditures were $438 million in the first half, compared with $853 million in the prior-year period. Management expected approximately $1.3 billion of capital spending for full-year 2013. The quarterly dividend increased 11% to $0.10 per share, and the company authorized up to $2.0 billion of share repurchases through December 31, 2014.
Material changes versus the prior comparable period
- Q2 sales increased 4%, while first-half sales declined 1%. Life Sciences benefited from the Discovery Labware acquisition; Telecommunications sales rose 8%, led by fiber-to-the-premises products; and Specialty Materials sales increased modestly in Q2.
- Display Technologies reported sales declines of 2% in Q2 and 5% year to date. Higher volume was offset by mid-teens percentage price declines and Japanese yen depreciation. Core display sales, adjusted for currency, increased 21% in Q2 and 14% year to date.
- Environmental Technologies sales declined 8% in Q2 and 11% year to date, primarily because of weaker diesel demand.
- Operating expenses declined: SG&A fell 7% in Q2 and 6% year to date, while research, development and engineering expense fell 3% in both periods.
- The company retrospectively changed its pension accounting method to recognize actuarial gains and losses more promptly. The change increased reported Q2 2013 net income by $15 million and first-half 2013 net income by $31 million; prior periods were revised.
- Net income included substantial foreign-exchange hedge gains: $251 million in other income for Q2 and $282 million for the first half, including $227 million and $251 million, respectively, from purchased collars and average-rate forward contracts.
Guidance, outlook and management commentary
- Management expected 2013 sales growth in Telecommunications and Life Sciences, stable Display Technologies market share, and moderate display pricing declines.
- Third-quarter expectations included approximately 20% sequential Telecommunications sales growth, approximately 10% sequential Specialty Materials sales growth, slightly higher Environmental Technologies sales year over year, and Life Sciences sales growth of approximately 40% to 45% year over year.
- Display Technologies volume was expected to be flat to slightly higher sequentially in Q3, with moderate price declines. Management projected mid-to-high single-digit growth in the 2013 LCD glass retail market.
- Management noted that full-year results could be negatively affected by lower Dow Corning equity earnings and foreign-exchange movements, particularly the Japanese yen.
- Core earnings, a non-GAAP measure, increased 21% in Q2 and 17% year to date. Core earnings were $469 million in Q2 and $900 million in the first half, compared with $388 million and $771 million, respectively.
Risks, contingencies and unusual items
- Dow Corning’s polysilicon business faced Chinese provisional anti-dumping duties of 53.3% on future imports from Dow Corning and its consolidated subsidiaries. Dow Corning was evaluating potential impairment; Corning’s share of the related asset-group carrying value was approximately $800 million after tax.
- Corning estimated asbestos litigation liabilities of $680 million at June 30, 2013, including approximately $150 million for non-Pittsburgh Corning claims. The Pittsburgh Corning plan remained subject to a motion for reconsideration and appeal.
- An ongoing U.S. Department of Justice grand-jury investigation concerned possible antitrust violations involving automotive products. The filing states that the potential financial impact cannot currently be estimated and could be material if a violation were found.
- Display Technologies had significant customer and geographic concentration: four customers represented approximately 95% of Q2 segment sales, and substantial specialized capacity was concentrated in Asia.
- Approximately 77% of cash, cash equivalents and short-term investments were held outside the United States and generally indefinitely reinvested. Repatriation could result in significant tax costs.
- The company established a $1 billion commercial-paper program and maintained a $1 billion revolving credit facility expiring in March 2018. Corning was in compliance with the facility’s covenant at quarter-end.
- Other unusual items included a $41 million pretax pension valuation gain, a $54 million first-half tax benefit related to the American Taxpayer Relief Act, and an $11 million after-tax gain from a change in control of an equity investment.
Important facts for investors to verify
- Whether foreign-exchange hedge gains and pension-related gains are recurring; management’s core measures exclude these items.
- The sustainability of Display Technologies pricing, customer concentration, LCD demand and Japanese yen exposure.
- The final outcome and financial impact of Dow Corning’s Chinese trade investigation and potential polysilicon impairment.
- The status and ultimate cost of Pittsburgh Corning asbestos litigation and other asbestos claims.
- The outcome of the Department of Justice antitrust investigation, for which no reliable loss estimate was available.
- Whether operating cash flow recovers from the $1.332 billion prior-year level as inventory and working-capital requirements increase.
- The use of the $2 billion share-repurchase authorization, planned capital spending of approximately $1.3 billion, and the effect of foreign-held cash on liquidity and taxes.