Business Context and Reporting Period
Corning Incorporated filed its Form 10-K for the fiscal year ended December 31, 2013, including unaudited fourth-quarter results. Corning manufactures specialty glass and ceramics through five reportable segments: Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, and Life Sciences. The company operated approximately 70 facilities in 15 countries and employed approximately 30,400 people.
Key Financial Metrics
<>| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $7,819 million | $8,012 million | Down 2% |
| Gross margin | $3,324 million; 43% | $3,319 million; 41% | Margin improved |
| Operating income | $1,371 million | $1,179 million | Up 16% |
| Net income attributable to Corning | $1,961 million | $1,636 million | Up 20% |
| Diluted EPS | $1.34 | $1.09 | Up 23% |
| Operating cash flow | $2,787 million | $3,206 million | Down 13% |
| Capital expenditures | $1,019 million | $1,801 million | Down 43% |
| Cash, equivalents and short-term investments | $5,235 million | $6,144 million | Down 15% |
| Long-term debt | $3,272 million | $3,382 million | Down 3% |
| Debt to total capital | 13% | 14% | Improved |
Fourth-quarter 2013 net sales were $1,956 million, gross margin was $770 million, and net income attributable to Corning was $421 million, or $0.30 diluted EPS. Fourth-quarter results included $67 million of restructuring, impairment and other charges and $6 million of asbestos litigation charges.
Other income, net increased to $667 million from $83 million, primarily because of a $435 million pretax gain on Japanese yen purchased collars and average-rate forward contracts. The effective tax rate increased to 20.7% from 17.2%.
Segment Performance and Changes Versus Prior Period
- Display Technologies: Reported sales declined 13% to $2,545 million and reported segment net income declined 20% to $1,267 million. Yen depreciation and mid-teens price declines offset mid-twenties volume growth. Core sales increased 7%.
- Optical Communications: Sales increased 9% to $2,326 million and segment net income increased 36% to $199 million, supported by carrier-network growth, fiber-to-the-premises deployments, wireless products, and data-center demand.
- Environmental Technologies: Sales declined 5% to $919 million, primarily from lower diesel demand, while segment net income increased 18% to $132 million due to manufacturing improvements and lower expenses.
- Specialty Materials: Sales declined 13% to $1,170 million, driven by a 17% decline in Gorilla Glass sales. Segment net income increased to $187 million from $137 million because of cost controls and manufacturing efficiencies.
- Life Sciences: Sales increased 30% to $851 million and segment net income increased to $71 million from $28 million, primarily reflecting the Discovery Labware acquisition completed in late 2012.
- Equity affiliates: Equity earnings declined 32% to $547 million. Samsung Corning Precision Materials contributed $320 million versus $699 million in 2012, while Dow Corning contributed $196 million versus $90 million.
Liquidity, Capital Allocation and Debt
- Operating cash flow was $2.8 billion. Cash declined primarily because of approximately $500 million used to repay a Chinese credit facility, $506 million paid for additional Samsung Corning Precision Materials interests, and approximately $1.5 billion of share repurchases.
- Corning maintained a $1.0 billion unsecured revolving credit facility expiring in March 2018 and had no commercial paper outstanding at year-end. The company was in compliance with its debt covenant.
- Corning issued $250 million of 3.70% senior notes due 2023 and recorded an approximately $230 million financing obligation for a new LCD glass facility in China.
- The company paid $566 million of dividends and repurchased $1.516 billion of common stock in 2013. The quarterly dividend was increased 11% to $0.10 per share.
- Working capital was $7,145 million and the current ratio was 5.1:1. Inventory increased to $1,270 million from $1,051 million, while inventory turns declined to 3.6 from 4.7.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2014 capital expenditures of approximately $1.5 billion, including approximately $600 million for Display Technologies.
- Management expected growth in Optical Communications, Life Sciences, Specialty Materials and Environmental Technologies, stabilization of Display Technologies market share, and more moderate display-glass price declines after the first quarter.
- For the first quarter of 2014, management expected Optical Communications sales growth in the mid-teens, Environmental Technologies sales growth in the mid-single digits, Specialty Materials sales to decline in the mid-single digits, and Life Sciences sales to remain relatively consistent year over year.
- On January 15, 2014, Corning acquired the remaining interest in Samsung Corning Precision Materials, obtaining 100% ownership. The entity will be consolidated beginning in the first quarter of 2014. Corning issued $1.9 billion of preferred stock to Samsung Display, received an additional $400 million preferred-stock investment, and extended the LCD glass supply agreement through 2023.
- Corning recorded $67 million of 2013 restructuring, impairment and other charges, with expected cash expenditures of approximately $40 million and estimated annualized savings of approximately $40 million.
- The company’s results were materially affected by the $435 million pretax yen-hedging gain, a $91 million tax benefit related to the American Taxpayer Relief Act, and the retrospective change in pension accounting methodology.
- Material risks include LCD glass pricing and excess capacity, dependence on major customers, foreign-exchange volatility, concentrated Asian manufacturing capacity, supplier constraints, technology substitution, litigation, environmental obligations, tax uncertainty, and the performance of Dow Corning and other equity affiliates.
- Corning recorded a $690 million estimated liability for the Pittsburgh Corning asbestos plan and non-PCC asbestos claims. The plan remained subject to appeals and other contingencies.
- Dow Corning’s polysilicon assets remained exposed to further impairment. Corning’s share of the relevant asset carrying value was approximately $1.0 billion, and Chinese antidumping duties remained a risk.
Most Important Facts to Verify
- Whether the January 2014 Samsung Corning Precision Materials transaction produces the expected earnings, cash-flow and balance-sheet benefits after consolidation.
- The sustainability of 2013 earnings excluding the $435 million yen-hedging gain and other discrete items; reported diluted EPS was $1.34 versus core EPS of $1.23.
- Display Technologies pricing, volume growth, customer concentration and the effect of the extended Samsung supply agreement.
- Progress against the approximately $1.5 billion 2014 capital-spending plan and the return expected from the China LCD facility.
- Future Dow Corning equity earnings, polysilicon pricing, Chinese trade duties and potential impairment of polysilicon assets.
- The ultimate cost and timing of asbestos-related obligations, including appeals of the Pittsburgh Corning plan and insurance litigation.
- Foreign-exchange sensitivity: management estimated that a 10% adverse yen movement could affect the fair value of relevant instruments by approximately $398 million and 2013 net sales by approximately $265 million.