Corning Incorporated — Form 10-Q Summary
Business context and reporting period
Corning designs and manufactures specialty glass, ceramics and related components through Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, Life Sciences and other development businesses. This unaudited report covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Change | Six months 2011 | Six months 2010 |
|---|---|---|---|---|---|
| Net sales | $2,005 million | $1,712 million | +17% | $3,928 million | $3,265 million |
| Gross margin | $889 million; 44% | $827 million; 48% | Margin down 4 points | $1,763 million; 45% | $1,558 million; 48% |
| Operating income | $424 million | $430 million | -1% | $884 million | $833 million |
| Equity earnings | $428 million | $474 million | -10% | $826 million | $943 million |
| Net income attributable to Corning | $755 million | $913 million | -17% | $1,503 million | $1,729 million |
| Diluted EPS | $0.47 | $0.58 | -19% | $0.95 | $1.09 |
| Operating cash flow | Not separately provided | Not separately provided | $1,119 million | $1,315 million |
SG&A increased to $284 million in the quarter and $534 million year to date; research, development and engineering expense increased to $172 million and $328 million, respectively. The effective tax rate rose to 14.0% in the quarter and 13.6% year to date, versus 3.3% and 6.9% in the prior-year periods.
At June 30, 2011, cash, cash equivalents and short-term investments totaled $6.4 billion, versus total debt of approximately $2.3 billion. Long-term debt was $2.248 billion, current debt was $26 million, and debt-to-total-capital was 10%, compared with 11% at December 31, 2010. The current ratio was 4.5:1. Working capital increased to $7.246 billion from $6.873 billion.
Capital expenditures were $1.026 billion in the first half, compared with $309 million in the prior-year period. Investing cash outflow was $1.162 billion, financing cash outflow was $129 million, and cash increased by $11 million to $4.609 billion. The company declared dividends of $0.05 per share in the quarter.
Material changes versus the prior comparable period
- Sales increased in every segment except Display Technologies. Specialty Materials sales increased 125% in the quarter and 142% year to date, driven by Corning Gorilla Glass.
- Telecommunications sales increased 24% in the quarter and 27% year to date, while Environmental Technologies sales increased 40% and 38%, respectively.
- Display Technologies sales declined 9% in the quarter and 4% year to date. Second-quarter volume declined 6% and pricing declined 14%; the segment also experienced a temporary Sharp production curtailment and weaker supply-chain replenishment.
- Display Technologies net income decreased 17% in the quarter and 13% year to date. Samsung Corning Precision equity earnings declined because of price reductions and higher Korean taxes.
- Dow Corning equity earnings declined because of higher raw-material costs and costs associated with a manufacturing start-up in China.
- Net income was reduced by the absence of 2010 benefits, including a $47 million asbestos-liability credit, a $21 million share of Dow Corning advanced-energy tax credits, and favorable tax effects from 2010 foreign-earnings repatriation.
- Foreign-exchange movements benefited year-to-date net income by approximately $124 million compared with the prior-year period, partially offsetting operating pressure.
Guidance, outlook and management commentary
- Management expects significant 2011 sales growth, led by Gorilla Glass, but reduced expected 2011 worldwide LCD glass demand to 3.3–3.4 billion square feet from the previous 3.5–3.7 billion estimate; 2010 demand was 3.15 billion square feet.
- Management expects 2011 capital spending at the low end of the $2.4–$2.7 billion range, with approximately $1.3 billion directed to Display Technologies.
- Third-quarter expectations include mid-to-upper-single-digit sequential volume growth at Corning’s wholly owned display business, mid-single-digit volume decline at Samsung Corning Precision, and moderate glass-price declines.
- Third-quarter segment outlook calls for slightly higher Telecommunications sales, comparable Environmental Technologies sales, upper-single-digit Specialty Materials sales growth, and approximately flat Life Sciences sales compared with the second quarter. Equity earnings are expected to decline somewhat because of lower Samsung Corning Precision volume.
- Management expects higher taxes, lower dividends from equity affiliates and increased investment spending to pressure 2011 earnings and operating cash flow. It nevertheless states that liquidity is sufficient for operations, capital expenditures, debt service, dividends and asbestos-related obligations.
- A new RMB 4.0 billion credit facility, approximately $620 million, may fund construction of the Beijing LCD glass facility. Corning also had access to a $1.0 billion unsecured revolving credit facility and was in compliance with its covenants.
Risks, contingencies and unusual items
- The amended Pittsburgh Corning asbestos plan was rejected by the Bankruptcy Court on June 16, 2011. Corning recorded an asbestos liability of $644 million at June 30, 2011, including $150 million for non-PCC claims, and recorded a $10 million year-to-date charge. Reconsideration and possible plan modifications remained pending, while insurance coverage litigation continued with no estimable loss range.
- Corning’s equity affiliate Dow Corning had a breast-implant litigation reserve of $1.6 billion and commercial-creditor claims estimated at $83 million to $274 million. Corning’s equity earnings could be reduced if Dow Corning’s recorded minimum liability proves insufficient.
- Customer and market concentration is significant: four Display Technologies customers represented 75% of segment sales, and three Environmental Technologies customers represented 86% in the quarter.
- Specialized Display Technologies capacity is concentrated in Asia; disruption could have a severe near-term impact. LCD demand, pricing, excess capacity, customer financing and supply-chain inventory remain key risks.
- Foreign-exchange exposure is material, particularly to the Japanese yen, Korean won, New Taiwan dollar and euro. The company reported $17 million of year-to-date foreign-exchange and hedge losses in other income, net, excluding broader translation effects.
- Other matters include environmental liabilities of approximately $30 million, an EU competition investigation relating to LCD glass, a Chinese antidumping determination imposing an approximately 5.4% dumping margin on certain imported optical fiber, and intellectual-property litigation. Management generally assessed material adverse outcomes as remote, but several matters remain unresolved.
- Corning reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower LCD demand and continued price declines further reduce Display Technologies profitability and Samsung Corning Precision equity earnings.
- Whether Gorilla Glass growth and improving Telecommunications and Environmental Technologies results offset display-market weakness.
- The timing and final cost of the Pittsburgh Corning asbestos resolution, including insurance recoveries and plan-approval contingencies.
- Actual 2011 capital spending, construction progress in China and Japan, and the effect on operating cash flow and liquidity.
- The sustainability of the unusually low effective tax rate relative to the U.S. statutory rate, given expiring foreign tax holidays and the absence of 2010 repatriation benefits.
- Customer concentration, foreign-exchange sensitivity and any disruption to specialized Asian manufacturing capacity.