Corning Incorporated: Q3 2009 Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its unaudited Form 10-Q for the three and nine months ended September 30, 2009. Its principal businesses were Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences. Results reflected the global recession, lower demand and pricing in several markets, an earthquake-related disruption at a Japanese LCD-glass facility, and favorable foreign-exchange movements.
Financial performance and position
| Metric | Three months ended Sept. 30, 2009 | Three months ended Sept. 30, 2008 | Nine months ended Sept. 30, 2009 | Nine months ended Sept. 30, 2008 |
|---|---|---|---|---|
| Net sales | $1,479 million | $1,555 million | $3,863 million | $4,864 million |
| Gross margin | $599 million; 41% | $735 million; 47% | $1,444 million; 37% | $2,431 million; 50% |
| Operating income | $230 million | $349 million | $191 million | $1,543 million |
| Net income attributable to Corning | $643 million | $768 million | $1,268 million | $5,008 million |
| Diluted EPS | $0.41 | $0.49 | $0.81 | $3.15 |
| Operating cash flow | Not separately provided | Not separately provided | $1,164 million | $1,748 million |
- Third-quarter sales declined 5%, gross margin declined six percentage points, and net income declined 16% year over year. Nine-month sales declined 21%, while net income declined 75%, largely because 2008 included a $2.4 billion deferred-tax valuation allowance release and a $312 million asbestos-related credit.
- Equity earnings from affiliates were $418 million in the third quarter and $974 million year to date. Samsung Corning Precision contributed $316 million and $797 million, respectively; Dow Corning contributed $92 million and $154 million.
- At September 30, 2009, cash, cash equivalents, and short-term investments totaled $2.930 billion. Total debt was approximately $2.020 billion, consisting of $75 million of current debt and $1.945 billion of long-term debt. Debt-to-total-capital was 12%.
- Working capital was $3.327 billion, the current ratio was 3.2:1, and shareholders’ equity was $14.967 billion. Cash and cash equivalents ended at $1.962 billion.
- Investing cash outflows were $1.139 billion, including $727 million of capital expenditures and $410 million for the Axygen acquisition. Financing cash flow was positive $47 million, primarily because of $350 million of senior-note issuance, partly offset by dividends.
- Dividends declared were $0.05 per share for the quarter and $0.15 per share year to date. No repurchases were made under the company’s announced programs during the first nine months of 2009.
Material changes versus the prior comparable period
- Display Technologies sales declined 2% in the quarter and 27% year to date. Third-quarter pricing fell 18%, partially offset by 3% volume growth and favorable foreign exchange. The segment incurred approximately $20 million of earthquake-related costs.
- Telecommunications sales declined 9% in both the quarter and year-to-date periods, while Environmental Technologies sales declined 6% and 30%, respectively, reflecting weak telecommunications, automotive, and freight markets.
- Specialty Materials sales declined 11% in the quarter and 23% year to date; the segment reported losses of $11 million and $48 million, respectively. Life Sciences sales increased 11% in the quarter, partly due to Axygen, but declined 1% year to date.
- Research, development, and engineering expense declined 18% in the quarter and 12% year to date. SG&A expense was essentially flat in the quarter and declined 12% year to date.
- Corning recorded $175 million of restructuring, impairment, and other charges year to date, including a $165 million first-quarter workforce-reduction charge and a $10 million third-quarter charge. Expected cash expenditures were approximately $110 million, with most spending expected by early 2010; management estimated annualized savings of approximately $200 million.
- On September 15, 2009, Corning acquired Axygen Bioscience for $410 million net of cash received. Preliminary goodwill was $232 million, allocated to Life Sciences.
Guidance, outlook, risks, and unusual items
- Management expected 2009 capital spending of approximately $1.0 billion, including approximately $600 million for Display Technologies.
- Before a mid-October power disruption in Taichung, Corning expected fourth-quarter wholly owned Display Technologies volume to increase 5% sequentially; it revised that expectation to flat to slightly down. Samsung Corning Precision volume was expected to be flat sequentially and pricing broadly consistent.
- Fourth-quarter guidance included Telecommunications sales down approximately 15% sequentially, Environmental Technologies sales down 10% to 15%, Specialty Materials sales flat to down 5%, and Life Sciences sales up approximately 25% because of Axygen. Dow Corning equity earnings were expected to increase 10% to 15% sequentially.
- Key risks included global economic weakness, customer concentration, LCD-glass pricing and capacity, foreign-exchange volatility, facility disruptions, loss of major customers, access to capital, technology and commercialization risk, and possible additional restructuring or capacity-consolidation charges.
- Corning’s estimated asbestos liability was $677 million at September 30, 2009. The proposed Pittsburgh Corning settlement remained subject to bankruptcy-court approval, creditor voting, appeal, insurance-related disputes, and other conditions. Insurer litigation had an indeterminate potential loss.
- Corning’s equity affiliate Dow Corning had significant breast-implant and commercial-creditor contingencies. Corning’s share of potential additional commercial-creditor exposure could reduce future equity earnings, while other insurer claims could not be reasonably estimated.
- A European Commission investigation concerned alleged anticompetitive conduct in worldwide LCD-glass production. A significant Asian LCD-glass customer also alleged a supply-agreement breach; unresolved claims could lead to arbitration, damages, or termination of the agreement.
- Management stated that liquidity was adequate, supported by $2.9 billion of cash and short-term investments and a $1.1 billion committed revolving credit facility. Corning was in compliance with its leverage and interest-coverage covenants.
- Disclosure controls and procedures were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether LCD-glass pricing, demand, customer concentration, and the Taichung and Japanese facility disruptions materially change fourth-quarter results.
- Whether the expected restructuring savings are achieved and whether further workforce reductions, plant closures, impairment, or capacity-consolidation charges occur.
- The timing and final terms of the Pittsburgh Corning asbestos plan, insurance recoveries, and the potential impact of related litigation.
- Whether Axygen produces the expected growth and how acquired-inventory margins affect Life Sciences profitability.
- The performance and liquidity of Samsung Corning Precision and Dow Corning, including their litigation and restructuring contingencies.
- Corning’s ability to sustain operating cash flow while funding capital expenditures, dividends, debt service, acquisitions, and asbestos obligations.