Corning Incorporated: Fiscal 2011 Form 10-K Summary
Business context and reporting period
Corning Incorporated filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The company operates five reportable segments: Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences. Corning manufactures and processes products at approximately 80 facilities in 13 countries, with approximately 28,800 employees at year-end.
The filing also includes financial statements for Corning’s equity affiliates Dow Corning Corporation and Samsung Corning Precision Materials Co., Ltd. This summary covers full-year 2011 and the fourth quarter where quarterly data is provided.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $7.890 billion | $6.632 billion | Up 19% |
| Gross margin | $3.566 billion; 45% | $3.049 billion; 46% | Margin down 1 point |
| Operating income | $1.694 billion | $1.801 billion | Down 6% |
| Income before taxes | $3.213 billion | $3.845 billion | Down 16% |
| Net income attributable to Corning | $2.805 billion | $3.558 billion | Down 21% |
| Diluted EPS | $1.77 | $2.25 | Down 21% |
| Operating cash flow | $3.189 billion | $3.835 billion | Down 17% |
| Capital expenditures | $2.432 billion | $1.007 billion | Up substantially |
| Equity earnings | $1.471 billion | $1.958 billion | Down 25% |
Fourth-quarter 2011 net sales were $1.887 billion, gross margin was $825 million, net income attributable to Corning was $491 million, and diluted EPS was $0.31. Fourth-quarter results included a $130 million impairment charge related to large cover-glass assets in Japan.
Net income margin was approximately 36% in 2011 versus 54% in 2010. The effective tax rate increased to 12.7% from 7.5%, primarily because 2010 benefited from a $265 million tax benefit related to foreign earnings repatriation and because certain Taiwan tax holidays expired.
Segment performance
| Segment | 2011 sales | 2011 net income or loss | Key change |
|---|---|---|---|
| Display Technologies | $3.145 billion | $2.349 billion | Sales up 4%; net income down 22% as price declines and lower Samsung Corning Precision earnings offset volume and foreign-exchange benefits |
| Telecommunications | $2.072 billion | $195 million | Sales up 21%; net income up 99%, driven by fiber-to-the-premises, optical fiber and cable, and enterprise-network demand |
| Environmental Technologies | $998 million | $121 million | Sales up 22%; net income increased from $43 million, led by diesel products and improved manufacturing performance |
| Specialty Materials | $1.074 billion | $(36) million | Sales up 86%, driven by Gorilla Glass; large-cover-glass impairment contributed to the loss |
| Life Sciences | $595 million | $61 million | Sales up 17%; net income broadly stable, with acquisition and organic growth benefits offset by expansion and input costs |
Liquidity, debt and capital allocation
- Cash, cash equivalents and short-term investments totaled $5.825 billion at December 31, 2011, compared with $6.350 billion at year-end 2010. Approximately 65% was held outside the United States.
- Long-term debt was $2.364 billion, and total debt-to-capital was 10%, compared with 11% in 2010. Less than 1% of consolidated debt was variable rate.
- Corning had a $1.0 billion unsecured revolving credit facility through December 2015 and a Chinese renminbi facility with capacity of approximately $635 million; approximately $120 million was borrowed under the latter in 2011.
- The company remained in compliance with debt covenants. Reported interest coverage was 41.7 times and leverage was 10%, versus covenant limits of 3.5 times and 50%, respectively.
- Corning repurchased approximately 55 million shares for $780 million in the fourth quarter and authorized up to $1.5 billion of repurchases through December 31, 2013.
- The quarterly dividend increased 50%, from $0.05 to $0.075 per share, beginning in the fourth quarter.
- Management expected 2012 capital spending of approximately $1.8 billion, including approximately $800 million for Display Technologies.
Material changes versus the prior comparable period
- Sales growth was broad-based, particularly in Specialty Materials, Telecommunications, Environmental Technologies and Life Sciences.
- Display Technologies faced excess industry capacity and substantial price declines. Corning and Samsung Corning Precision announced plans to reduce worldwide glass capacity by approximately 25%, including delayed tank start-ups and tank shutdowns.
- Equity earnings declined by $487 million, primarily because Samsung Corning Precision earnings fell from $1.473 billion to $1.031 billion and Dow Corning earnings fell from $444 million to $404 million.
- 2011 lacked the $324 million pre-tax insurance settlement credit recorded in 2010 for prior earthquake and power-disruption losses.
- Capital spending increased to $2.432 billion from $1.007 billion, primarily for LCD glass capacity in China, Gorilla Glass capacity in Japan, automotive substrate facilities, and a Life Sciences facility in China.
- Inventories increased to $975 million from $738 million, while working capital declined to $6.580 billion from $6.873 billion.
- Cash flow from operations declined largely because 2010 included a special dividend of nearly $900 million from Samsung Corning Precision and higher insurance-related receipts.
Guidance, outlook, risks and unusual items
Management expected moderate sales growth in 2012, led by Telecommunications and Environmental Technologies. Corning forecast LCD glass demand of approximately 3.6 billion square feet in 2012 versus 3.2 billion in 2011, but expected cumulative double-digit Display Technologies price declines over the two quarters beginning in the fourth quarter of 2011. Management also expected lower Dow Corning equity earnings because of weaker silicone and polycrystalline-silicon demand and pricing.
- Display Technologies faced customer concentration, excess capacity, pricing pressure, foreign-exchange exposure, and possible additional restructuring or capacity-consolidation charges.
- Ten customers represented 51% of consolidated 2011 sales. Four Display customers represented 77% of segment sales, and three Environmental Technologies customers represented 85% of that segment’s sales.
- Approximately 75% of sales were generated outside the United States. A 10% adverse movement in the U.S. dollar-yen exchange rate was estimated to affect 2011 sales by approximately $410 million and net income by approximately $146 million.
- Equity-method earnings were significant: Corning recognized $1.471 billion in 2011, with 98% derived from Dow Corning and Samsung Corning Precision. Performance of these companies is outside Corning’s direct control.
- Corning recorded a $130 million impairment charge for Japanese large-cover-glass assets and a $24 million increase in its asbestos litigation liability.
- The asbestos liability was estimated at $657 million at year-end. The proposed Pittsburgh Corning asbestos plan remained subject to court approval, objections, appeal and insurance-related litigation.
- Environmental liabilities accrued by Corning were approximately $25 million for 18 active hazardous-waste sites. Management considered materially higher additional losses remote.
- Contractual obligations and contingencies totaled approximately $5.374 billion, including debt, interest, capital expenditure commitments, leases, guarantees and other obligations.
Investor verification points
- Verify whether LCD glass pricing, industry capacity utilization and Samsung Corning Precision volumes improved relative to management’s 2012 assumptions.
- Assess the sustainability of Gorilla Glass growth and whether large-cover-glass demand supports recovery of remaining related assets.
- Review the effect of Dow Corning’s silicone and polycrystalline-silicon markets on Corning’s equity earnings.
- Reconcile operating cash flow excluding nonrecurring affiliate dividends, insurance proceeds and other unusual items.
- Monitor customer concentration, foreign-exchange sensitivity and the geographic concentration of Display Technologies manufacturing.
- Track asbestos plan approval, insurance coverage disputes and any changes to the $657 million recorded liability.
- Evaluate whether the planned $1.8 billion of 2012 capital spending remains aligned with actual demand and capacity requirements.
- Confirm dividend and share-repurchase execution against available cash, foreign cash restrictions and future capital needs.