Corning Incorporated — Q1 2011 Form 10-Q Summary
Business context and reporting period
Corning reported results for the three months ended March 31, 2011, compared with the first quarter of 2010. The company operates in Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, Life Sciences and other development activities. Growth was led by Gorilla Glass, telecommunications products and automotive and diesel emissions products.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $1,923 million | $1,553 million | +24% |
| Gross margin | $874 million; 45% of sales | $731 million; 47% of sales | Margin decreased |
| Operating income | $460 million | $403 million | +14% |
| Equity earnings of affiliates | $398 million | $469 million | -15% |
| Income before taxes | $862 million | $913 million | -6% |
| Effective tax rate | 13.2% | 10.6% | Higher |
| Net income attributable to Corning | $748 million | $816 million | -8% |
| Diluted EPS | $0.47 | $0.52 | -10% |
| Operating cash flow | $573 million | $643 million | -11% |
| Capital expenditures | $532 million | $173 million | +207% |
Net income margin was approximately 39% in Q1 2011 versus 53% in Q1 2010. The company declared a quarterly dividend of $0.05 per common share.
Liquidity, balance sheet and debt
- Cash, cash equivalents and short-term investments totaled $6.3 billion at March 31, 2011, compared with $6.35 billion at December 31, 2010.
- Total debt was approximately $2.3 billion, including $2.245 billion of long-term debt. Debt-to-total-capital declined to 10% from 11% at year-end.
- Working capital was $7.143 billion, the current ratio was 4.8:1, and total assets were $26.660 billion.
- Corning had access to a $1.0 billion unsecured committed revolving credit facility through December 2015 and was in compliance with its financial covenants.
- Management stated that liquidity was adequate to fund operations, capital spending, research and development, asbestos matters, debt repayments and dividends.
Material changes versus the prior comparable period
- Sales increased in every operating segment. Specialty Materials sales rose 165% to $254 million, Telecommunications rose 30% to $474 million, Environmental Technologies rose 35% to $259 million, and Life Sciences rose 22% to $144 million. Display Technologies increased 1% to $790 million.
- Specialty Materials benefited from strong demand for Gorilla Glass used in handheld devices, tablets, notebooks and televisions. Its net income improved to $8 million from a $7 million loss.
- Telecommunications net income increased to $41 million from $8 million, reflecting higher fiber-to-the-premises, optical fiber, cable and enterprise network sales and cost reductions.
- Display Technologies sales benefited from a 7% volume increase and foreign exchange, but price declines of 14% largely offset those gains. Segment equity earnings declined 15% to $294 million.
- Equity earnings from Samsung Corning Precision declined to $299 million from $350 million due to price declines, lower volume and higher taxes. Dow Corning equity earnings declined to $91 million from $112 million, partly because a $21 million U.S. advanced-energy tax credit recorded in 2010 did not recur.
- The effective tax rate increased because 2010 benefits from foreign earnings repatriation were absent and certain tax holidays expired. Q1 2010 also included a $56 million charge related to reversal of a retiree medical subsidy deferred tax asset.
- Asbestos litigation expense was $5 million versus a $52 million credit in Q1 2010, creating a significant unfavorable year-over-year comparison.
Guidance, outlook, risks and unusual items
- Management expected significant 2011 sales growth, led by Gorilla Glass, and projected 2011 capital spending of approximately $2.4 billion to $2.7 billion, including $1.2 billion to $1.5 billion for Display Technologies.
- Management expected 2011 LCD glass demand of approximately 3.5 billion to 3.7 billion square feet, versus 3.15 billion square feet in 2010.
- For Q2 2011, management expected Telecommunications sales to increase approximately 20% sequentially, Specialty Materials sales to increase approximately 20%, Environmental Technologies sales to decline slightly, and Life Sciences sales to increase slightly. Display Technologies wholly owned volume was expected to decline in the low-to-mid teen range sequentially, while Samsung Corning Precision volume was expected to increase in a similar range.
- The March 2011 Japanese earthquake did not damage Corning’s Japanese facilities or disrupt production, but caused short-term supply-chain disruption and temporary customer production curtailments. Corning continued operating Japanese glass facilities at full production to rebuild inventory and serve other regions.
- Corning’s asbestos liability was estimated at $638 million at March 31, 2011. The proposed Pittsburgh Corning settlement remained subject to bankruptcy-court approval, objections and appeal; related insurance litigation had an outcome and potential loss range that management could not estimate.
- Other risks include LCD industry overcapacity, customer concentration, pricing pressure, foreign exchange movements, raw-material costs, facility start-up costs, acquisition integration, regulatory and antitrust investigations, environmental matters and potential loss of significant customers.
- Corning had $230 million of contingent guarantees, $404 million of purchase obligations and a $29 million environmental reserve at March 31, 2011. Management considered a materially adverse outcome from these matters remote, except that asbestos and insurance proceedings remain inherently uncertain.
Most important facts for investors to verify
- Whether Gorilla Glass and other Specialty Materials growth can offset pricing pressure and potential demand volatility in LCD glass.
- Whether the planned $2.4 billion to $2.7 billion of 2011 capital spending converts into sufficient volume and margin growth.
- The sustainability of equity earnings and dividends from Samsung Corning Precision and Dow Corning, which were significant contributors to earnings and cash flow.
- The effect of higher tax rates, expiring tax holidays and the absence of 2010 repatriation-related benefits.
- Developments in the Pittsburgh Corning asbestos plan, related insurance litigation and the potential for future liability adjustments.
- Customer concentration, particularly in Display Technologies and Environmental Technologies, and the impact of Japanese supply-chain disruptions.