Corning Incorporated — Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The company operates in Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences. Results include significant equity-method contributions from Samsung Corning Precision Materials and Dow Corning.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $1.602 billion | $1.479 billion | $4.867 billion | $3.863 billion |
| Gross margin | $724 million; 45% | $599 million; 41% | $2.282 billion; 47% | $1.444 billion; 37% |
| Operating income | $319 million | $230 million | $1.152 billion | $191 million |
| Equity earnings of affiliates | $504 million | $418 million | $1.447 billion | $974 million |
| Net income attributable to Corning | $785 million | $643 million | $2.514 billion | $1.268 billion |
| Diluted EPS | $0.50 | $0.41 | $1.59 | $0.81 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.743 billion | $1.164 billion |
- Third-quarter sales increased 8%, net income increased 22%, and diluted EPS increased 22% year over year. Nine-month sales increased 26% and net income increased 98%.
- Net income margins were approximately 49% in Q3 and 52% for the first nine months, compared with 43% and 33%, respectively, in the prior-year periods. These unusually high consolidated margins reflect substantial equity earnings from affiliates.
- Samsung Corning Precision contributed $394 million of Q3 equity earnings and $1.102 billion for the nine months. Dow Corning contributed $97 million and $320 million, respectively.
- At September 30, 2010, cash, cash equivalents, and short-term investments totaled $5.029 billion, compared with $3.583 billion at December 31, 2009. Total debt was approximately $2.415 billion, including $25 million current debt and $2.390 billion long-term debt.
- Working capital was $5.669 billion, the current ratio was 4.3:1, and debt to total capital was 12%, compared with 11% at year-end 2009. The company had a $1.1 billion committed revolving credit facility through November 2011 and was in compliance with its covenants.
- Nine-month investing cash outflow was $1.209 billion, including $534 million of capital expenditures and $682 million of net short-term investment purchases. Financing cash flow was positive $173 million, including $689 million of net long-term debt issuance and $235 million of dividends paid.
Material changes versus the prior comparable period
- Gross margin improved from 41% to 45% in Q3 and from 37% to 47% for the nine months, driven by higher volumes, cost reduction, and manufacturing improvements.
- Restructuring, impairment, and other charges declined from $175 million in the first nine months of 2009 to a $3 million credit in 2010. The 2009 charges related primarily to company-wide workforce reductions.
- Research, development, and engineering expense increased 13% in Q3 and 5% for the nine months, reflecting continued investment in LCD glass, emissions products, telecommunications, Gorilla Glass, and other technologies.
- Display Technologies Q3 sales declined 5% because of a 5% volume decrease and 8% price declines amid an LCD supply-chain inventory correction. Nine-month sales nevertheless rose 32%, and segment net income increased 8% in Q3 and 53% for the nine months.
- Telecommunications sales rose 3% in Q3 while nine-month sales were flat; segment net income increased 95% in Q3 and 108% for the nine months.
- Environmental Technologies sales increased 25% in Q3 and 43% for the nine months, with the segment moving from a $57 million nine-month loss to $27 million of income.
- Specialty Materials sales increased 77% in Q3 and 72% for the nine months, primarily from Gorilla Glass and display and semiconductor components. The segment remained loss-making, but its loss narrowed.
- Life Sciences sales increased 36% in Q3 and 48% for the nine months, primarily due to the Axygen acquisition completed in September 2009.
- Foreign exchange movements favorably affected nine-month net income by approximately $161 million versus 2009 and increased Q3 net income by approximately $42 million.
Guidance, outlook, commentary, and unusual items
- Management expected 2010 capital spending of approximately $1 billion, $200 million below its prior estimate, with approximately $400 million to $500 million allocated to Display Technologies.
- Corning began construction of an $800 million LCD glass substrate facility in China in September 2010, with production expected to begin in 2012. Additional capacity investments were planned for Gorilla Glass, automotive substrates, and Life Sciences facilities in China and Europe.
- For Q4 2010, management expected LCD glass market demand to be flat to slightly down sequentially, with mid-single-digit price declines and equity earnings slightly below Q3.
- Q4 segment expectations included Telecommunications sales down approximately 10% sequentially, Environmental Technologies sales roughly flat, Specialty Materials sales up approximately 10% to 20%, and Life Sciences sales up approximately 5% due to an acquisition completed October 1, 2010.
- Corning issued $700 million of senior unsecured notes in Q3 and repurchased $226 million of existing notes. The transactions produced a $30 million pretax early-retirement loss.
- The company recorded a $41 million net asbestos litigation credit for the first nine months, including a $54 million credit from modified proposed settlement terms, partially offset by $13 million of subsequent-period asbestos expense. The recorded asbestos liability was $642 million at September 30, 2010.
- Management planned to repatriate approximately $1.1 billion of current-year foreign earnings in Q4 2010. Tax benefits from excess foreign tax credits reduced the 2010 tax provision by $62 million in Q3 and $204 million for the nine months.
- Subsequent to quarter-end, Corning discontinued development and commercialization of synthetic green laser technologies.
Key risks and contingencies
- LCD glass demand, pricing, customer inventory levels, excess industry capacity, and dependence on a concentrated customer base remain significant risks. Three Display Technologies customers represented approximately 72% of segment sales in Q3.
- Specialized manufacturing capacity is concentrated in Asia; disruption at a facility could have a severe near-term effect because replacement capacity may not be available quickly.
- The proposed Pittsburgh Corning asbestos plan remained subject to bankruptcy court approval, objections, appeal, and insurance-related litigation. Corning could be required to revise its liability estimate.
- Dow Corning-related commercial creditor and insurance disputes could reduce Corning’s equity earnings, although the ultimate exposure is uncertain.
- Corning faced foreign-exchange exposure, particularly to the Japanese yen, Korean won, New Taiwan dollar, and euro. Q3 included $32 million of foreign currency and hedge losses in other income.
- Other matters included environmental liabilities at 21 Superfund sites, with a $34 million reserve; a European Commission LCD glass competition investigation; a Chinese antidumping investigation concerning optical fiber; and potential supply constraints in Environmental Technologies.
- Customer and segment concentration is significant: three Environmental Technologies customers represented 86% of segment sales, and two LCD panel makers represented 94% of Samsung Corning Precision’s sales.
Facts investors should verify
- Whether the LCD supply-chain correction and mid-single-digit Q4 price declines developed as management expected.
- Whether the planned $1 billion 2010 capital budget and $800 million China LCD facility remained on schedule and within budget.
- The sustainability of affiliate earnings, particularly Samsung Corning Precision and Dow Corning, which represented a substantial portion of consolidated profitability.
- The final outcome, timing, and cash funding requirements of the Pittsburgh Corning asbestos plan and related insurance litigation.
- The effect of currency movements, customer concentration, potential antidumping duties, and supply constraints on future sales and margins.
- The impact of the planned foreign earnings repatriation, associated tax benefits, and the company’s future cash deployment and leverage.