Corning Incorporated — Q3 2015 Form 10-Q Summary
Business Context and Reporting Period
Corning Incorporated filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. The company operates across Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences, and other emerging businesses. Management cited macroeconomic weakness, particularly in China, and the strengthening U.S. dollar as significant headwinds.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $2,272 million | $2,540 million | $6,880 million | $7,311 million |
| Gross margin | $892 million | $1,089 million | $2,796 million | $3,056 million |
| Gross margin percentage | 39% | 43% | 41% | 42% |
| Operating income | $392 million | $620 million | $1,235 million | $1,395 million |
| Net income attributable to Corning | $212 million | $1,014 million | $1,115 million | $1,484 million |
| Diluted EPS | $0.15 | $0.72 | $0.82 | $1.03 |
| Effective tax rate | 2.8% | 28.0% | 15.3% | 33.5% |
| Operating cash flow | Not separately provided | Not separately provided | $1,845 million | $3,597 million |
- Q3 net sales declined 11%; nine-month sales declined 6%.
- Q3 net income declined 79%; nine-month net income declined 25%.
- Foreign currency hedge results were a major earnings swing factor: a $154 million net loss in Q3 2015 versus a $765 million gain in Q3 2014, and a $52 million gain for the first nine months versus $622 million in 2014.
- Core earnings, a non-GAAP measure, were $447 million in Q3 and $1,453 million for the first nine months. Nine-month core earnings increased 1% despite lower reported earnings.
Liquidity, Debt, and Capital Allocation
- Cash, cash equivalents, and short-term investments were $5.013 billion at September 30, 2015, versus $6.068 billion at December 31, 2014.
- Total debt was $4.016 billion, consisting of $101 million of current debt and $3.915 billion of long-term debt, compared with $3.263 billion at year-end 2014.
- Debt-to-total-capital increased to 16.7% from 13.1%.
- Corning issued $750 million of senior unsecured notes in the second quarter, with net proceeds of $745 million, for general corporate purposes.
- The company had no borrowings under its $2 billion revolving credit facility and no commercial paper outstanding at September 30, 2015. It was in compliance with debt covenants.
- Capital expenditures were $939 million in the first nine months, and full-year 2015 capital spending was expected to be approximately $1.3 billion, including approximately $600 million for Display Technologies.
- Corning repurchased 97.0 million shares for $1.955 billion during the first nine months and 46.5 million shares for $827 million in the third quarter. On October 26, 2015, the board authorized an additional $4 billion repurchase program and management planned a $1.25 billion accelerated share repurchase in Q4.
Material Changes Versus the Prior Comparable Period
- Display Technologies: Sales fell 25% in Q3 and 20% for the first nine months, primarily due to Japanese yen depreciation and low-teens percentage price declines. The segment also experienced a temporary share loss related to a customer contract dispute, which management stated had been resolved.
- Optical Communications: Sales increased 7% in Q3 and 14% for the first nine months, supported by acquisitions, North American data-center demand, and fiber-to-the-home products.
- Environmental Technologies: Sales declined 9% in Q3 and 5% for the first nine months, reflecting weaker European diesel demand, China weakness, and currency effects.
- Specialty Materials: Sales declined 12% in Q3 and 6% year to date, primarily because of weakness in advanced optics; Gorilla Glass demand remained supportive.
- Equity earnings: Equity in earnings of affiliated companies decreased 59% in Q3 and 20% year to date, primarily due to lower Dow Corning earnings, unfavorable currency effects, and derivative losses.
- Cash flow: Operating cash flow decreased by $1.752 billion year to date, largely because the prior-year period included a $1.574 billion special dividend from Samsung Corning Precision Materials. Excluding that dividend, the decline was $178 million.
- Acquisitions: Four acquisitions were completed in the first quarter for preliminary total consideration of $534 million, generating approximately $213 million of goodwill, primarily in Optical Communications. Additional contingent consideration is capped at $28 million.
Guidance, Outlook, and Management Commentary
- Management expected 2015 sales to decline in all segments except Optical Communications.
- Fourth-quarter Display Technologies LCD glass volume was expected to decline slightly sequentially, while price declines were expected to be less severe than in Q3.
- Fourth-quarter Optical Communications sales were expected to increase at a low- to mid-single-digit percentage rate year over year.
- Fourth-quarter Environmental Technologies sales were expected to decline at a mid-single-digit percentage rate; Specialty Materials sales at a low-teens rate; and Life Sciences sales at a mid-single-digit rate.
- Management remained focused on innovation, acquisitions, productivity, and adjacent glass and materials applications.
- Key risks include global economic weakness, LCD industry capacity and demand, customer concentration, pricing pressure, currency volatility, acquisition execution, capital spending requirements, changes in technology, supply-chain disruption, litigation, and regulatory developments.
Unusual Items, Contingencies, and Other Risks
- The estimated liability for the PCC reorganization plan and non-PCC asbestos claims was $687 million at September 30, 2015. The liability included $290 million of fixed payments, $247 million related to the fair value of Pittsburgh Corning Europe, and $150 million for non-PCC asbestos litigation.
- The PCC plan remained subject to appellate proceedings. Insurance coverage for non-PCC asbestos claims had covered claims to date, but insurance litigation with certain insurers remained unresolved.
- Corning was a potentially responsible party at 18 active hazardous waste sites and had accrued approximately $38 million for environmental cleanup and related litigation.
- Precious-metal assets had a carrying value exceeding fair market value by $780 million. Management considered the assets recoverable based on expected cash flows, but identified potential future impairment risk if Display Technologies or Specialty Materials experienced materially lower demand or profitability.
- Approximately 60% of cash, cash equivalents, and short-term investments were held outside the United States. Management stated that U.S. liquidity and borrowing capacity were sufficient for foreseeable U.S. needs without repatriating foreign cash.
- Corning was assessing the adoption timing and potential impact of the new revenue recognition standard, ASC 606. The filing did not provide a quantified impact.
Most Important Facts for Investors to Verify
- Whether Display Technologies pricing, volume, customer share, and LCD industry demand stabilize as projected.
- The sustainability of Optical Communications growth and the returns generated by the 2015 acquisitions.
- The effect of currency movements and the mark-to-market volatility of foreign currency hedges on reported earnings and cash flow.
- Progress on the PCC bankruptcy plan, asbestos claims, insurance litigation, and related liability estimates.
- Execution of the approximately $1.3 billion capital-spending plan and the additional $4 billion share-repurchase authorization.
- Whether the company’s cash balance, debt levels, covenant compliance, and foreign cash location continue to support planned dividends, repurchases, acquisitions, capital spending, and litigation obligations.