Corning Incorporated — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 10-K rather than a standalone fourth-quarter filing; fourth-quarter information is included where disclosed. Corning is a materials-science company operating through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences, and All Other.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $11.303 billion | $11.503 billion | Down 2% |
| Gross margin | $3.531 billion; 31% | $4.035 billion; 35% | Down $504 million; margin down 4 points |
| Operating income | $509 million | $1.306 billion | Down 61% |
| Income before taxes | $623 million | $1.216 billion | Down 49% |
| Net income attributable to Corning | $512 million | $960 million | Down 47% |
| Diluted EPS | $0.54 | $1.07 | Down 50% |
| Core net income | $1.237 billion; $1.39 core diluted EPS | $1.578 billion; $1.76 core diluted EPS | Down 22% |
| Operating cash flow | $2.180 billion | $2.031 billion | Up $149 million |
| Capital expenditures | $1.377 billion | $1.978 billion | Down $601 million |
| Cash and equivalents | $2.672 billion | $2.434 billion | Up $238 million |
| Total debt | $7.972 billion | $7.740 billion | Up $232 million |
| Working capital | $4.237 billion | $3.942 billion | Up $295 million |
The current ratio remained 2.1:1 and total debt-to-total capital remained 37%. Corning had no commercial paper outstanding and had full availability under its $1.5 billion revolving credit agreement. Management reported compliance with debt covenants and stated that liquidity was sufficient to fund operations, acquisitions, capital expenditures, debt repayments, dividends, and potential share repurchases.
Segment performance
| Segment | 2020 sales | Change versus 2019 | 2020 segment income | Change versus 2019 |
|---|---|---|---|---|
| Display Technologies | $3.172 billion | Down 3% | $717 million | Down 9% |
| Optical Communications | $3.563 billion | Down 12% | $366 million | Down 25% |
| Specialty Materials | $1.884 billion | Up 18% | $423 million | Up 40% |
| Environmental Technologies | $1.370 billion | Down 9% | $197 million | Down 25% |
| Life Sciences | $998 million | Down 2% | $139 million | Down 7% |
| All Other | $465 million | Up 102% | $(214) million | Loss improved by $75 million |
Material changes versus the prior comparable period
- COVID-19 reduced demand, production volumes, customer activity, and supply-chain efficiency, particularly during the first half of 2020.
- Optical Communications sales declined $501 million because of weaker carrier and enterprise demand and reduced capital spending by major customers.
- Environmental Technologies sales declined $129 million following temporary vehicle-production shutdowns.
- Specialty Materials benefited from strong premium cover-glass demand, work-from-home and study-from-home trends, semiconductor-equipment demand, Gorilla Glass Victus, and Ceramic Shield-related launches.
- Gross margin fell primarily because of lower volumes and Display Technologies severance and capacity realignment charges.
- Restructuring, impairment, and other charges increased to $827 million from $439 million, including $148 million of severance, $217 million of research-and-development asset impairment, $304 million of capacity realignment costs, and $158 million of other charges and credits.
- Research, development, and engineering expense increased 12% to $1.154 billion, including the $211 million impairment charge associated with discontinued or reprioritized development programs.
- Corning obtained control of Hemlock Semiconductor Group on September 9, 2020. The transaction generated a $498 million pretax gain on the previously held investment, added $194 million of revenue to All Other, and resulted in $508 million of goodwill and substantial deferred-revenue and customer-deposit liabilities.
- A $105 million cumulative revenue reduction was recorded after a customer announced its exit from LCD-panel production.
- Translated earnings contracts produced a $38 million pretax loss in 2020 versus a $248 million gain in 2019.
- Share repurchases were suspended after the first quarter. Corning repurchased 4.1 million shares for approximately $105 million in 2020, compared with 31.0 million shares for approximately $925 million in 2019.
- Common dividends paid increased to $681 million from $625 million. The board subsequently increased the quarterly dividend 9%, from $0.22 to $0.24 per share, beginning in the first quarter of 2021.
Cash flow, debt, and unusual items
- Operating cash flow increased despite lower earnings, primarily because of favorable working-capital movements and a $101 million South Korean tax-assessment refund. These benefits were partly offset by higher pension contributions, severance payments, asbestos payments, and lower dividends from affiliates.
- Corning redeemed $100 million of 7.0% debentures due 2024 for $121 million, including a $21 million make-whole premium, resulting in a $22 million loss.
- HSG retained $75 million of a $175 million variable-rate loan after repaying $100 million in December 2020. The $75 million balance was classified as current debt.
- Corning borrowed approximately $243 million under Chinese yuan-denominated facilities for capital projects. An undrawn 25 billion Japanese yen liquidity facility was also established.
- Customer deposits increased to approximately $1.4 billion from $1.0 billion. HSG contributed a $264 million customer-deposit liability and approximately $1.070 billion of deferred revenue at fair value.
- Environmental cleanup reserves increased to $68 million from $41 million. Corning is identified as a potentially responsible party at 15 active hazardous-waste sites, although management considers a materially higher loss to be remote.
- Corning recorded $130 million of asbestos claim payments in 2020. The Pittsburgh Corning plan had no remaining liability at year-end, while the reserve for non-Pittsburgh Corning asbestos claims was $96 million.
Guidance, outlook, and management commentary
- Management described 2021 as a year of growth, with continued emphasis on operational excellence, cash-flow generation, financial strength, and prudent capital allocation.
- First-quarter 2021 net sales were expected to be approximately $3.0 billion to $3.2 billion, with year-over-year sales growth accelerating.
- 2021 capital expenditures were expected to be approximately $1.4 billion.
- Management expects operating cash flow, existing cash, and potential debt issuance to fund operations, acquisitions, capital spending, debt service, dividends, and future share repurchases.
- The outlook is subject to foreign-currency movements and other items that Corning does not forecast; therefore, the company did not provide a GAAP reconciliation for prospective non-GAAP measures.
Principal risks and contingencies
- COVID-19 duration and severity, renewed shutdowns, supply-chain disruption, and reduced customer demand.
- Display-glass pricing pressure, industry overcapacity, customer concentration, and dependence on Display Technologies for a significant portion of profit and cash flow.
- Customer insolvency or loss of key customers; four Display Technologies customers represented 74% of segment sales, and three Environmental Technologies customers represented 74%.
- Manufacturing disruption at specialized or single-site facilities, shortages of sole-sourced materials or equipment, and energy or industrial-water availability.
- Foreign-exchange exposure, particularly to the Japanese yen, Korean won, Chinese yuan, euro, and Taiwan dollar. A hypothetical 10% adverse currency movement would have reduced the fair value of exposed instruments by approximately $1.0 billion, largely offset by hedged exposures.
- Cybersecurity and information-technology disruption, intellectual-property disputes, environmental regulation, litigation, tax audits, tariffs, trade restrictions, and geopolitical risks.
- South Korean tax disputes: Corning reported a $365 million non-current receivable for amounts deposited with the South Korean government while appeals proceed.
- Pension and postretirement obligations remain sensitive to discount rates and asset returns. Defined-benefit pension plans were underfunded by $808 million at year-end 2020, and postretirement plans were underfunded by $734 million.
Most important facts for investors to verify
- Whether the post-pandemic recovery supports sustained growth in Optical Communications, Environmental Technologies, and Life Sciences.
- Display Technologies pricing, volumes, customer concentration, and the effect of customer LCD-panel exits on future revenue.
- The recurring earnings and cash-flow contribution of HSG after its 2020 consolidation, including fulfillment of its long-term supply contracts and deferred-revenue obligations.
- Whether the $827 million of restructuring, impairment, and other charges represents substantially nonrecurring costs or signals continuing capacity and portfolio issues.
- Cash conversion, capital-expenditure discipline, debt maturities, and the company’s ability to resume share repurchases while maintaining the increased dividend.
- Resolution and recoverability of the South Korean tax receivable, environmental reserves, asbestos claims, and other litigation exposures.
- Potential dilution from the Series A convertible preferred stock, which became convertible at the holder’s option on January 16, 2021.
- The filing states that management’s internal control over financial reporting was effective, but HSG, representing approximately 4% of total assets and 2% of net sales, was excluded from the 2020 control assessment and audit.