Corning Incorporated — Q1 2012 Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its unaudited Form 10-Q for the three months ended March 31, 2012. The company operates through Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, Life Sciences, and other development businesses.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $1,920 million | $1,923 million | Flat |
| Gross margin | $814 million; 42% | $874 million; 45% | Down $60 million |
| Operating income | $342 million | $460 million | Down 26% |
| Income before taxes | $573 million | $862 million | Down 34% |
| Net income attributable to Corning | $462 million | $748 million | Down 38% |
| Diluted EPS | $0.30 | $0.47 | Down $0.17 |
| Operating cash flow | $762 million | $573 million | Up $189 million |
| Capital expenditures | $412 million | $532 million | Down $120 million |
| Effective tax rate | 19.4% | 13.2% | Up 6.2 percentage points |
Net profit margin was approximately 24% versus 39% in the prior-year quarter. Research, development, and engineering expense increased 20% to $187 million, while selling, general, and administrative expense increased 12% to $279 million.
At March 31, 2012, cash, cash equivalents, and short-term investments totaled $6.836 billion. Total debt was approximately $3.162 billion, including $3.135 billion of long-term debt and $27 million of current maturities. The debt-to-total-capital ratio was 12.9%, compared with 10% at December 31, 2011. Working capital was $8.020 billion and the current ratio was 5.5:1.
Cash flow from financing activities was $592 million, primarily reflecting $742 million of net proceeds from new debt issuance. Corning paid $114 million of dividends and repurchased 5.4 million shares for $72 million under its repurchase program. The declared quarterly dividend increased to $0.075 per share from $0.050.
Material changes versus the prior comparable period
- Display Technologies sales declined 11% to $705 million, and segment net income declined 34% to $421 million, primarily because of cumulative double-digit LCD glass price declines, excess industry capacity, and lower supply-chain inventories.
- Equity earnings from affiliates declined 45% to $218 million. Samsung Corning Precision earnings fell to $183 million from $299 million, while Dow Corning earnings fell to $35 million from $91 million.
- Specialty Materials sales increased 13% to $288 million and segment net income increased to $21 million from $8 million, driven primarily by demand for Gorilla Glass and the absence of prior-year start-up and tank-conversion costs.
- Telecommunications sales increased 7% to $508 million, but segment net income declined 49% to $21 million because of higher operating, manufacturing, research, development, and fiber-to-the-premises project costs.
- Environmental Technologies sales increased 2% to $263 million and segment net income increased 38% to $40 million, supported by improved diesel manufacturing performance and stronger automotive demand.
- Life Sciences sales increased 8% to $155 million, while segment net income declined 20% to $12 million because of higher raw-material and acquisition-related operating costs.
- The effective tax rate increased because of the expiration of favorable U.S. tax provisions, partial expiration of Taiwan tax holidays, and changes in earnings mix.
Guidance, outlook, risks, and unusual items
- Management expected 2012 sales to remain relatively consistent with 2011, with growth in Telecommunications, Specialty Materials, and Environmental Technologies offset by lower Display Technologies sales.
- Management expected 2012 capital spending of approximately $1.8 billion, including approximately $800 million for Display Technologies.
- For Q2 2012, management expected LCD glass volumes to be stable in Corning’s wholly owned business and slightly higher at Samsung Corning Precision, with more moderate price declines. Q2 equity earnings were expected to be relatively consistent with Q1.
- Q2 outlook by segment included Telecommunications sales growth in the low-to-mid teens, Specialty Materials sales growth of 10% to 15%, Life Sciences sales growth of 5% to 10%, and Environmental Technologies sales approximately consistent with Q1.
- Management cautioned that lower demand and price declines in silicone products and at Hemlock Semiconductor could continue to reduce Dow Corning earnings.
- Corning received a U.S. Department of Justice grand jury subpoena concerning a possible antitrust investigation involving certain automotive products. The company could not estimate the financial impact; an adverse finding could materially affect results in a particular period.
- Estimated asbestos litigation liability was $658 million at March 31, 2012. The quarter included a $1 million asbestos litigation charge.
- Corning remained contingently liable for guarantees with a notional value of $163 million and purchase obligations of $72 million. Environmental liabilities were accrued at approximately $24 million.
- On April 10, 2012, Corning agreed to acquire most of Becton, Dickinson and Company’s Discovery Labware unit for approximately $730 million in cash, subject to customary closing conditions and regulatory approvals.
- Corning stated that it had adequate liquidity, remained in compliance with debt covenants, and had access to a $1.0 billion revolving credit facility and a credit agreement of approximately $635 million when translated from RMB.
Important facts for investors to verify
- Whether LCD glass pricing and excess capacity stabilize as projected and whether Display Technologies margins recover.
- The sustainability of dividends from Samsung Corning Precision and the effect of weaker Dow Corning and Hemlock Semiconductor performance on equity earnings.
- The potential financial and reputational impact of the Department of Justice antitrust investigation.
- The final purchase price, financing, regulatory approvals, and expected contribution from the Discovery Labware acquisition.
- Actual 2012 capital spending relative to the approximately $1.8 billion plan and the company’s continued share-repurchase activity.
- Future asbestos, Dow Corning, environmental, customer-concentration, foreign-exchange, and facility-disruption exposures.