Business Context and Reporting Period
Corning Incorporated filed its Form 10-K for the fiscal year ended December 31, 2010, filed February 10, 2011. Corning is a global technology and materials company operating in Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. Approximately 60 facilities operated in 14 countries, and 74% of 2010 sales were international.
Display Technologies was the largest business, representing 45% of 2010 sales, followed by Telecommunications at 26%, Environmental Technologies at 12%, Specialty Materials at approximately 9% and Life Sciences at approximately 8%.
Financial Performance and Position
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $6.632 billion | $5.395 billion | Up 23% |
| Gross margin | $3.049 billion; 46% | $2.093 billion; 39% | Up $956 million; margin expanded 7 points |
| Operating income | $1.801 billion | $391 million | Up $1.410 billion |
| Equity earnings | $1.958 billion | $1.435 billion | Up 36% |
| Net income attributable to Corning | $3.558 billion | $2.008 billion | Up 77% |
| Diluted EPS | $2.25 | $1.28 | Up $0.97 |
| Operating cash flow | $3.835 billion | $2.077 billion | Up $1.758 billion |
| Capital expenditures | $1.007 billion | $890 million | Up $117 million |
| Cash, cash equivalents and short-term investments | $6.350 billion | $3.583 billion | Up $2.767 billion |
| Long-term debt | $2.262 billion | $1.930 billion | Up $332 million |
| Debt to total capital | 11% | 11% | Unchanged |
Fourth-quarter 2010 sales were $1.765 billion, gross margin was $767 million, net income was $1.044 billion and diluted EPS was $0.66. Fourth-quarter results included a $324 million pre-tax insurance settlement credit related to 2009 earthquake and power-disruption events.
- Display Technologies sales increased 24% to $3.011 billion; segment net income increased 50% to $2.990 billion, including $1.452 billion of equity earnings.
- Telecommunications sales increased 2% to $1.712 billion, while segment net income increased to $97 million from $19 million.
- Environmental Technologies sales increased 38% to $816 million, and segment net income improved to $42 million from a $42 million loss.
- Specialty Materials sales increased 75% to $578 million, primarily due to Gorilla Glass; the segment remained loss-making, with a $27 million net loss.
- Life Sciences sales increased 39% to $508 million and net income increased 54% to $60 million, supported by acquisitions.
Material Changes Versus the Prior Comparable Period
- Recovery in LCD demand, particularly for televisions outside the United States, drove higher Display Technologies volumes. Wholly owned display volume increased more than 25%, while prices declined 8%.
- Gross margin improved through volume growth, manufacturing efficiency and cost reductions, partly offset by display-glass price declines.
- All operating segments reported improved results, reflecting stronger automotive, truck, enterprise-network, Gorilla Glass and Life Sciences demand.
- Equity earnings benefited from Samsung Corning Precision and Dow Corning. Samsung Corning Precision contributed $1.473 billion of equity earnings, and Dow Corning contributed $444 million.
- Operating cash flow benefited from an almost $900 million special dividend from Samsung Corning Precision, $259 million of insurance proceeds and lower credits applied against customer deposits.
- The 2010 effective tax rate was 7.5%, compared with a 3.8% benefit rate in 2009. A $265 million tax benefit from repatriation of foreign earnings was a significant 2010 item.
- 2010 included a $329 million restructuring, impairment and other credit, primarily the $324 million insurance settlement, compared with $228 million of restructuring and impairment charges in 2009.
- Corning issued $700 million of senior notes, repurchased $226 million principal amount of debt and recognized a $30 million pre-tax loss on debt retirement. The company also amended its revolving facility to a $1.0 billion unsecured commitment through December 2015.
Guidance, Outlook, Risks and Unusual Items
Management expected significant 2011 sales growth, led by Gorilla Glass. The company forecast 2011 capital spending of approximately $2.4 billion to $2.7 billion, including $1.2 billion to $1.5 billion for Display Technologies. A new $800 million LCD-glass facility in China was expected to begin production in 2012.
- Management expected the LCD glass market to increase from approximately 3.15 billion square feet in 2010 to approximately 3.6 billion to 3.8 billion square feet in 2011. Sequential price declines were expected to moderate.
- 2011 earnings were expected to face higher taxes because of the absence of certain 2010 tax benefits, higher income in higher-tax jurisdictions and expiration of tax holidays. Operating cash flow could decline because of lower dividends from equity affiliates and increased investment spending.
- Management expected Telecommunications sales to increase approximately 15%, Environmental Technologies sales to improve approximately 10%, Life Sciences sales to increase approximately 15% and Specialty Materials sales to increase significantly. These forecasts were dependent on customer deployment plans, acquisition benefits and Gorilla Glass demand.
- Customer concentration is material: the ten largest customers represented 55% of consolidated sales. Three Display Technologies customers represented 72% of segment sales, three Environmental Technologies customers represented 86%, and two Life Sciences distributors represented 37%.
- Corning is highly exposed to LCD industry cycles, pricing pressure, excess capacity, foreign exchange movements and demand from Asian customers. A 10% adverse movement in the Japanese yen could affect the fair value of relevant instruments by approximately $272 million and 2010 sales by approximately $308 million based on the company’s sensitivity analysis.
- Equity-method earnings are significant and concentrated. Approximately 98% of 2010 equity earnings came from Dow Corning and Samsung Corning Precision, entities Corning does not control.
- Asbestos liabilities were estimated at $633 million at year-end. The proposed Pittsburgh Corning asbestos plan remained subject to court approval, objections and appeal, and insurance litigation outcomes could not be estimated.
- Corning had approximately $5.630 billion of total commitments and contingencies, including $2.021 billion of debt stated at maturity value, $382 million of capital expenditure obligations, $408 million of purchase obligations and $1.938 billion of estimated interest on long-term debt.
- Environmental cleanup liabilities were approximately $30 million for 20 active hazardous-waste sites. Management considered a materially higher loss to be remote.
Important Facts an Investor Should Verify
- Separate recurring operating performance from the $324 million insurance settlement, the $265 million repatriation tax benefit, foreign-exchange effects and other non-recurring equity-affiliate tax items.
- Assess the sustainability of Samsung Corning Precision and Dow Corning earnings and dividends, which materially support Corning’s profitability and cash flow.
- Monitor LCD glass pricing, industry capacity utilization, customer concentration and the ramp-up of Corning’s planned Asian capacity.
- Reconcile reported operating cash flow with special affiliate dividends, insurance proceeds, customer-deposit credits and pension contributions.
- Review the final resolution, timing and funding sources for the Pittsburgh Corning asbestos plan and related insurance litigation.
- Evaluate the effect of expiring foreign tax holidays and the absence of 2010 tax benefits on future effective tax rates.
- Confirm the company’s ability to fund the projected $2.4 billion to $2.7 billion of 2011 capital spending while maintaining dividends and liquidity.