Corning Incorporated — 2010 Q2 Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its quarterly report for the three and six months ended June 30, 2010. The company manufactures specialty glass, ceramics, optical fiber and related products through Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. Results benefited from recovery in LCD glass, automotive and diesel markets, stronger equity affiliates, and the 2009 acquisition of Axygen Bioscience.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $1.712 billion, up 23% | $3.265 billion, up 37% |
| Gross margin | $827 million; 48% of sales | $1.558 billion; 48% of sales |
| Operating income | $430 million; approximately 25% margin | $833 million; approximately 26% margin |
| Equity earnings from affiliates | $474 million, up 31% | $943 million, up 70% |
| Net income attributable to Corning | $913 million, up 49% | $1.729 billion, up 177% |
| Diluted EPS | $0.58, versus $0.39 | $1.09, versus $0.40 |
| Operating cash flow | Not separately provided | $1.315 billion, versus $632 million |
- Cash, cash equivalents and short-term investments totaled $4.259 billion at June 30, 2010, versus $3.583 billion at December 31, 2009.
- Total debt was approximately $1.951 billion, including $1.927 billion of long-term debt and $24 million of current debt. Debt-to-capital declined to 10% from 11%.
- The current ratio was 4.4:1, compared with 3.6:1 at year-end 2009. Working capital increased to $5.003 billion from $3.982 billion.
- Capital expenditures were $309 million in the first half of 2010, versus $491 million in the prior-year period. Dividends declared remained $0.05 per common share per quarter.
Material changes versus the prior comparable period
- Display Technologies sales rose 24% in the quarter and 57% year to date, driven by volume growth exceeding 25% in the quarter and 60% in the first half, partially offset by price declines of approximately 6%.
- Environmental Technologies sales increased 39% in the quarter and 55% year to date as automotive and diesel demand recovered.
- Specialty Materials sales increased 77% in the quarter and 69% year to date, led by Gorilla Glass, although the segment remained loss-making because of capacity expansion costs.
- Life Sciences sales increased 54% in the quarter and 55% year to date, primarily reflecting the Axygen acquisition.
- Telecommunications sales were broadly flat in the quarter and declined 2% year to date, while profitability improved through cost reductions and manufacturing efficiencies.
- Equity earnings increased substantially: Samsung Corning Precision contributed $358 million in the quarter and $708 million year to date; Dow Corning contributed $111 million and $223 million, respectively.
- The first half of 2010 included a $2 million restructuring credit, compared with $165 million of restructuring and impairment charges in the first half of 2009. The 2010 period also included a $47 million asbestos-related credit, compared with a $9 million charge in the prior-year period.
- Foreign exchange movements favorably affected net income by approximately $64 million in the quarter and $117 million year to date versus the comparable 2009 periods.
Guidance, outlook, commentary and risks
- Management expected 2010 sales to exceed 2009, gross margin to expand, equity earnings to improve and operating cash flow to remain strong.
- Management increased expected 2010 capital spending to approximately $1.2 billion, $200 million above the original estimate. Approximately $450 million to $550 million was expected to be directed to Display Technologies.
- Corning announced an $800 million LCD glass facility in China, with construction expected to begin in September 2010 and production expected in 2012. Additional capacity investments were planned for Specialty Materials, Environmental Technologies and Life Sciences.
- For the third quarter, management expected LCD glass volume to be flat to slightly down for wholly owned operations and slightly up at Samsung Corning Precision, with price declines similar to the second quarter. Specialty Materials sales were expected to increase approximately 25%, while Telecommunications sales were expected to be flat to slightly down.
- Major risks include dependence on LCD demand and a concentrated customer base, pricing pressure, excess capacity, foreign exchange volatility, economic and political conditions, supply-chain constraints, facility disruption in Asia, technology and product-development execution, and customer financing or credit risk.
- Three Display Technologies customers represented approximately 72% of segment sales. Three Environmental Technologies customers represented approximately 85% of segment sales. Concentration also existed in the other operating segments.
- Corning carried a $636 million estimated asbestos liability at June 30, 2010. The proposed Pittsburgh Corning settlement remained subject to court approval, appeals, objections and insurance-related disputes; the related liability may change.
- Other contingencies included Dow Corning bankruptcy-related claims, environmental liabilities of approximately $32 million, a European LCD glass competition investigation, supply disputes, and a Chinese antidumping investigation involving optical fiber.
- Corning reported adequate liquidity, access to a $1.1 billion revolving credit facility through November 2011, and compliance with its financial covenants. Management stated that it expected sufficient liquidity to fund operations, capital expenditures, litigation, debt service, research and development, and dividends.
Most important facts for investors to verify
- Whether LCD glass demand, volumes and pricing support the planned capacity expansion and the higher $1.2 billion 2010 capital-spending forecast.
- The sustainability and cyclicality of equity earnings from Samsung Corning Precision and Dow Corning, which represented a substantial portion of reported income.
- Customer concentration and the effect of any loss, financing difficulty or inventory adjustment at major LCD, automotive or telecommunications customers.
- Potential changes to the $636 million asbestos liability, the status of the Amended PCC Plan and the outcome of insurance litigation.
- The effect of foreign exchange movements and tax-related benefits, including the planned repatriation of up to $1 billion of current-year foreign earnings.
- Execution costs, timing and returns from the announced China and other manufacturing-capacity investments.