Corning Incorporated — Q1 2016 Form 10-Q Summary
Business context and reporting period
Corning Incorporated reported unaudited results for the three months ended March 31, 2016, compared with the same period in 2015. The company operates through Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences, and All Other businesses, focused on specialty glass, ceramics, optical communications, display substrates, automotive emissions products, and life-science products.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $2,047 million | $2,265 million | Down 10% |
| Gross margin | $764 million; 37% of sales | $929 million; 41% of sales | Down $165 million |
| Operating income | $177 million | $412 million | Down $235 million |
| Net income attributable to Corning | $(368) million | $407 million | Declined $775 million |
| Diluted earnings per share | $(0.36) | $0.29 | Declined $0.65 |
| Core earnings | $340 million | $484 million | Down 30% |
| Core diluted EPS | $0.28 | $0.35 | Down $0.07 |
| Cash flow from operations | $(83) million | $601 million | Down $684 million |
| Capital expenditures | $270 million | $333 million | Down $63 million |
The GAAP loss was substantially affected by a $894 million net foreign currency hedge loss, including a $950 million unrealized loss on hedges related to translated earnings. The effective tax benefit was $304 million, producing a negative effective tax rate of 45.2%, compared with a $86 million tax provision and a 17.4% rate in Q1 2015.
At March 31, 2016, cash and cash equivalents were $3.540 billion, down from $4.500 billion at December 31, 2015. Working capital was $4.614 billion and the current ratio was 2.8:1. Long-term debt was $3.910 billion, commercial paper outstanding was $500 million, and debt-to-total-capital was 20%. The company had a $2 billion revolving credit facility and stated that it remained in compliance with its leverage covenant and other debt provisions.
Financing cash outflows included $703 million of common-stock repurchases and $173 million of dividends. The quarterly common-stock dividend increased 12.5% to $0.135 per share. Corning repurchased approximately 39.8 million shares for $751 million under its repurchase program during the quarter; total reported issuer purchases were approximately 55.9 million shares, including employee tax-withholding share surrenders.
Material changes versus the prior comparable period
- Display Technologies sales declined 13% to $705 million, reflecting low-single-digit volume declines, LCD price declines slightly above 10%, and lower panel-maker utilization.
- Optical Communications sales declined 13% to $609 million. A manufacturing software implementation constrained production and customer shipments, reducing sales by approximately $100 million and segment income by approximately $40 million.
- Environmental Technologies sales declined 6% to $264 million, primarily because of lower diesel-product demand.
- Specialty Materials sales declined 17% to $227 million, driven by lower Corning Gorilla Glass volume and pricing.
- Life Sciences sales increased 4% to $204 million, supported by volume growth in Europe, North America, and China.
- Equity earnings from affiliated companies declined to $59 million from $94 million, primarily because Q1 2015 included $178 million of pre-tax settlement gains at Dow Corning.
- Restructuring, impairment, and other charges were $80 million, compared with an immaterial amount in the prior-year quarter. The charges included $64 million for disposal of long-lived assets; estimated cash expenditures related to the 2016 activities were $15 million.
- Operating cash flow moved from $601 million provided to $83 million used, reflecting the lower earnings base, higher tax payments, and lower dividends received from equity affiliates.
Guidance, outlook, commentary, and risks
Management expects 2016 Display Technologies glass volume growth in the mid-single-digit percentage range year over year, with continued moderate sequential LCD glass price declines. For Q2, it expected the overall glass market and company volume to increase by a high-single-digit percentage and price declines to be less than in Q1.
Optical Communications sales were expected to increase more than 20% sequentially in Q2 as seasonal demand improved and manufacturing software issues were resolved. Management expected second-half 2016 sales to increase more than 10% year over year, assuming strong demand, normal production, and recovery of a significant portion of missed sales.
Environmental Technologies Q2 sales were expected to be consistent with Q2 2015. Specialty Materials Q2 sales were expected to increase by a low-single-digit percentage, with full-year growth in the mid-to-high single digits. Life Sciences Q2 sales were expected to increase by a low-single-digit percentage.
Corning expected 2016 capital spending of approximately $1.3 billion. Under its 2015 capital allocation framework, management planned to generate and deploy more than $20 billion through 2019, invest $10 billion in its businesses, return more than $10 billion to shareholders, and increase the common dividend by at least 10% annually through 2019.
Material risks include foreign-currency volatility, particularly the Japanese yen; demand and pricing pressure in LCD glass; customer and supply-chain inventory changes; production, information-technology, and cybersecurity disruptions; reliance on major customers and affiliates; litigation and environmental matters; execution of acquisitions, divestitures, and restructuring; and the ability to commercialize research and development projects. A hypothetical 10% adverse movement in the Japanese yen could have produced an unrealized loss of approximately $1.8 billion on unsettled foreign-exchange instruments at March 31, 2016.
The estimated liability for the Pittsburgh Corning Corporation asbestos plan and non-PCC asbestos claims was $677 million at March 31, 2016, including $290 million of fixed payments, $237 million related to the fair value of the PCE interest, and $150 million for non-PCC claims. The PCC plan became effective on April 27, 2016, after the reporting date; Corning expected to contribute its PCC and PCE interests in June 2016 and make the fixed payments over subsequent years. Insurance litigation with certain insurers remained unresolved.
Corning had accrued approximately $36 million for environmental cleanup and related litigation at March 31, 2016. Management stated that the likelihood of a material adverse effect from other litigation was remote. The company also identified potential future impairment risk for precious-metal assets whose carrying value exceeded fair value by $835 million, particularly if demand or profitability in Display Technologies or Specialty Materials deteriorates.
Management stated that liquidity was adequate for foreseeable operating needs, acquisitions, asbestos obligations, capital expenditures, debt repayments, dividends, and share repurchases. Approximately 68% of cash was held outside the United States, but management believed U.S. liquidity and borrowing capacity were sufficient without repatriating foreign cash.
Important facts for investors to verify
- Whether Optical Communications production and customer shipments returned to normal in Q2 and whether missed sales were recovered.
- The sustainability of LCD glass pricing, panel-maker utilization, and Display Technologies volume growth.
- The future cash and accounting effects of the PCC asbestos plan and non-PCC asbestos claims after the litigation stay is lifted.
- The realized and unrealized effects of the expanded foreign-currency hedge portfolio, particularly yen exposure.
- Progress toward the planned Dow Corning strategic realignment, expected to close in Q2 2016, including receipt of approximately $4.8 billion in cash and ownership of approximately 40% of Hemlock Semiconductor Group.
- Execution of the approximately $1.3 billion 2016 capital-spending plan and the planned shareholder-return program.
- Potential impairment of precious-metal assets and the impact of restructuring and asset-disposal charges.
- The effect of adopting new revenue-recognition, lease, and stock-compensation accounting standards; the filing states that adoption timing and impacts were still being assessed.