Corning Incorporated: 2019 First-Quarter Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its quarterly report for the three months ended March 31, 2019. The company operates through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences, and All Other. The filing presents unaudited interim results under U.S. GAAP.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $2.812 billion | $2.500 billion | Up 12% |
| Gross margin | $1.099 billion; 39% of sales | $955 million; 38% of sales | Up 15% |
| Operating income | $420 million | $194 million | Up $226 million |
| Income before taxes | $575 million | $(465) million | Improved $1.040 billion |
| Net income attributable to Corning | $499 million | $(589) million | Improved $1.088 billion |
| Diluted earnings per share | $0.55 | $(0.72) | Improved $1.27 |
| Operating cash flow | $(29) million | $320 million | Down $349 million |
| Capital expenditures | $524 million | $655 million | Down $131 million |
| Cash and equivalents at March 31 | $1.456 billion | $3.096 billion at March 31, 2018 | Year-over-year comparison |
Core earnings, a non-GAAP measure, were $365 million, or $0.40 per diluted share, versus $299 million, or $0.31 per share, in the prior-year quarter. Core earnings increased 22%, reflecting higher earnings across all business segments.
Segment sales were: Optical Communications $1.064 billion, Display Technologies $818 million, Environmental Technologies $362 million, Specialty Materials $309 million, Life Sciences $243 million, and All Other $54 million. Optical Communications was the largest contributor to year-over-year sales growth.
At March 31, 2019, total debt was approximately $6.025 billion, consisting of $6.018 billion of long-term debt and $7 million of current debt. Long-term debt excluding the current portion was $6.018 billion, compared with $5.994 billion at December 31, 2018. Debt represented approximately 31% of total capital. Working capital was $3.290 billion and the current ratio was 2.1 to 1.
Material changes versus the prior comparable period
- Sales increased $312 million, led by Optical Communications, which benefited from higher carrier and enterprise network sales and the 2018 acquisition of 3M’s Communication Markets Division.
- Display Technologies sales rose 10%; mid-teens volume growth, including the Gen 10.5 facility ramp in China, more than offset moderate price declines.
- Gross margin improved by approximately one percentage point to 39% of sales.
- Selling, general and administrative expense declined $100 million, primarily because the prior-year period included a $132 million legal charge.
- Results benefited from a $184 million translated earnings contract gain, compared with a $622 million loss in Q1 2018.
- The prior-year period included a $172 million IRS audit-related tax charge and approximately $103 million of after-tax legal-related charges; these items did not recur in Q1 2019.
- Operating cash flow declined to a use of $29 million, primarily due to working-capital movements and $274 million less in customer deposits received.
- Share repurchases declined to $257 million of cash outflow, versus $800 million in Q1 2018. The company repurchased approximately 7.8 million shares for $244 million under its repurchase programs.
Outlook, commentary, risks, and unusual items
Management expects 2019 to be another year of strong growth and investment. It expects Display Technologies’ full-year price declines to improve to the mid-single-digit percentage range, with volume growing faster than the display glass market. Optical Communications sales are expected to increase approximately 10%, including a full year of CMD sales. Environmental Technologies sales are expected to grow approximately 10% or slightly more, while Life Sciences sales are expected to grow at a low- to mid-single-digit rate. Specialty Materials growth will depend on adoption of new products and innovations.
For the second quarter, management expects display glass market volume to grow at a mid-single-digit rate, Optical Communications sales to grow at a high-single-digit rate, Specialty Materials sales to grow at a high-single-digit rate, Environmental Technologies sales to grow approximately 10%, and Life Sciences sales to grow at a low- to mid-single-digit rate.
Management expects 2019 capital expenditures to be slightly more than $2.0 billion. It stated that available cash, operating cash flow, debt capacity, and other resources should be sufficient to fund operations, acquisitions, capital expenditures, scheduled debt repayments, dividends, and share repurchases. Corning had no commercial paper outstanding and no borrowings under its revolving credit agreement at March 31, 2019. It was in compliance with its maximum 60% leverage covenant, with leverage of approximately 31%.
- Foreign-currency exposure remains significant. Translated earnings contracts had a gross notional value of $12.6 billion at March 31, 2019, and generated a material quarterly gain. Future hedge results may be volatile.
- Customer deposits were approximately $1.0 billion, primarily associated with long-term Display Technologies supply agreements. These deposits and related revenue recognition may affect future cash flows and earnings timing.
- Corning adopted the new lease standard on January 1, 2019, recording approximately $449 million of operating lease right-of-use assets and liabilities at adoption.
- An equity affiliate’s adoption of the new revenue standard reduced beginning retained earnings by $186 million and resulted in a $239 million charge, partially offset by $53 million of deferred tax effects.
- Asbestos-related liabilities included $185 million of PCC plan payments due in 2019 through 2023, including $50 million due in Q2 2019, and a $146 million reserve for non-PCC asbestos claims.
- Corning had approximately $28 million accrued for environmental cleanup and related litigation and was identified as a potentially responsible party at 15 active hazardous-waste sites.
- Additional operating leases of approximately $450 million, undiscounted, had not commenced as of March 31, 2019.
- Management identified risks related to global economic conditions, tariffs, currency movements, customer demand and creditworthiness, pricing pressure, critical materials, acquisitions, technology changes, litigation, intellectual property, cybersecurity, regulatory developments, and the ability to align capital spending with demand.
Important facts for investors to verify
- Whether Optical Communications growth, including CMD integration, remains consistent with management’s 2019 and second-quarter outlook.
- Whether Display Technologies volume growth continues to offset glass price declines and supports recovery of the segment’s precious-metal carrying values.
- Whether operating cash flow improves after the first-quarter working-capital and customer-deposit effects.
- The magnitude and timing of future foreign-exchange hedge gains or losses and their effect on GAAP earnings.
- Progress against the expected 2019 capital-expenditure plan of slightly more than $2.0 billion.
- Future cash requirements for debt, dividends, share repurchases, asbestos obligations, environmental matters, and lease commitments.
- The effect of the equity affiliate’s revenue-standard adoption on future reported earnings and cash flows.
- That reported core earnings are non-GAAP measures and should be evaluated alongside GAAP income, cash flow, and segment results.