Corning Incorporated 2012 Form 10-K Summary
Business context and reporting period
Corning Incorporated filed its annual report for the fiscal year ended December 31, 2012. The company manufactures specialty glass and ceramics for display, telecommunications, emissions control, consumer electronics, and life-sciences applications. Reportable segments are Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences. Corning operated approximately 70 plants in 13 countries and employed approximately 28,700 people at year-end.
Although the request references 2012 Q4, this filing reports the full fiscal year and provides fourth-quarter results. Fourth-quarter 2012 net sales were $2.146 billion and net income attributable to Corning was $283 million.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $8.012 billion | $7.890 billion | 2% increase |
| Gross margin | $3.397 billion; 42% | $3.566 billion; 45% | Margin down 3 percentage points |
| Operating income | $1.321 billion | $1.694 billion | 22% decrease |
| Net income attributable to Corning | $1.728 billion | $2.805 billion | 38% decrease |
| Diluted EPS | $1.15 | $1.77 | 35% decrease |
| Operating cash flow | $3.206 billion | $3.189 billion | Essentially flat |
| Capital expenditures | $1.801 billion | $2.432 billion | 26% decrease |
| Equity earnings of affiliates | $810 million | $1.471 billion | 45% decrease |
| Cash, equivalents and short-term investments | $6.144 billion | $5.825 billion | Increase |
| Long-term debt | $3.382 billion | $2.364 billion | Increase |
Net sales were 77% international. Working capital increased to $7.739 billion from $6.580 billion, and the current ratio improved to 5.0:1 from 4.1:1. Debt-to-total-capital increased to 14% from 10%, but Corning remained in compliance with its debt covenants. The company had access to a $1.0 billion unsecured revolving credit facility and approximately $497 million outstanding under its Chinese RMB facility.
Corning declared $0.32 per share of dividends in 2012, including an increase in the quarterly dividend to $0.09 per share. It repurchased 56 million shares for $720 million during the year and completed its $1.5 billion repurchase program.
Material changes versus the prior comparable period
- Display Technologies sales declined 8% to $2.909 billion, while segment net income declined 32% to $1.602 billion. Excess glass supply, customer share shifts, and significant price declines were the principal causes. Pricing pressure moderated later in the year as supply and demand became better balanced.
- Equity earnings from Samsung Corning Precision Materials fell to $699 million from $1.031 billion. Royalty income from the affiliate declined to $83 million from $219 million after a royalty-rate reduction and lower affiliate sales.
- Dow Corning equity earnings declined to $90 million from $404 million, primarily because of depressed polycrystalline silicon prices and lower volumes at Hemlock Semiconductor.
- Telecommunications sales increased 3% to $2.130 billion, but segment net income declined 21% to $155 million because of restructuring, higher research and project spending, lower premium-fiber sales, and the absence of a 2011 contingent-liability reversal.
- Environmental Technologies sales decreased 3% to $964 million and segment net income decreased 5% to $115 million, mainly due to lower light-duty diesel demand in Europe.
- Specialty Materials sales increased 25% to $1.346 billion and segment net income improved to $142 million from a $36 million loss, driven by strong Gorilla Glass demand and improved manufacturing performance.
- Life Sciences sales increased 10% to $657 million, largely due to the acquisition of most of Becton, Dickinson and Company’s Discovery Labware business. Segment net income declined to $31 million because of acquisition-related operating costs and higher raw-material expenses.
- Research, development and engineering expense increased 11% to $745 million, while selling, general and administrative expense increased 13% to $1.165 billion.
Guidance, outlook, commentary, and unusual items
- Management expected 2013 capital expenditures of approximately $1.3 billion, including approximately $500 million for Display Technologies.
- Management expected 2013 sales growth in Telecommunications, Life Sciences, Specialty Materials, and Environmental Technologies. Display Technologies market share was expected to stabilize and price declines to moderate.
- Management expected the 2013 LCD glass retail market to grow in the mid-to-high single digits from approximately 3.5 billion square feet in 2012. First-quarter Display Technologies volume was expected to increase year over year but decline sequentially by mid-single digits.
- Management expected strong 2013 Telecommunications growth from optical fiber and cable, fiber-to-the-premises deployments in Australia, and enterprise-network products. Life Sciences growth was expected to benefit from Discovery Labware.
- A corporate-wide restructuring plan produced $89 million of pretax charges in 2012, with approximately $49 million of expected cash expenditures and estimated annualized savings of approximately $71 million.
- Corning recorded a $44 million impairment charge for large cover-glass assets after demand shifted toward smaller products and the primary customer exited the large-cover-glass market.
- Dow Corning recorded charges associated with restructuring and abandoned polycrystalline-silicon expansion projects. Corning’s share of related after-tax restructuring and impairment charges was $81 million. Dow Corning’s polycrystalline-silicon asset group had an after-tax carrying value attributable to Corning of approximately $700 million and remained subject to further impairment risk.
- Corning’s asbestos litigation liability was $671 million at December 31, 2012. The proposed Pittsburgh Corning asbestos plan remained subject to court approval, objections, appeal, and insurance-related litigation.
- Corning faced a U.S. Department of Justice antitrust investigation involving automotive emissions-control products. The filing states that the potential financial impact could be material if a violation were found, but the company could not estimate the outcome.
Principal risks and contingencies
- Dependence on LCD glass profitability, customer concentration, industry overcapacity, pricing pressure, and rapidly changing display technologies.
- Concentration among major customers: the ten largest customers represented 50% of consolidated 2012 sales; three Display customers represented 63% of segment sales.
- Exposure to foreign exchange movements, particularly the Japanese yen, Korean won, New Taiwan dollar, and euro. A 10% adverse movement in relevant quoted exchange rates could have produced a $236 million loss in the fair value of exposed instruments at year-end.
- Dependence on equity affiliates, which contributed $810 million of equity earnings in 2012. Affiliate performance, foreign regulations, litigation, and financial controls may affect Corning’s results.
- Potential impairment of goodwill, long-lived assets, precious metals, and equity investments if demand, prices, or projected cash flows deteriorate.
- Environmental, asbestos, product-liability, intellectual-property, antitrust, tax, trade, cybersecurity, supply-chain, and facility-disruption risks.
- Approximately $11.9 billion of foreign earnings were treated as indefinitely reinvested, with the related deferred tax liability not practicable to estimate.
Important facts for investors to verify
- Whether Display Technologies pricing and affiliate earnings stabilized as projected and whether LCD capacity remained aligned with demand.
- The operating performance, cash flows, and impairment risk of Dow Corning’s polycrystalline-silicon business, including the outcome of the MOFCOM investigation.
- The financial contribution and integration costs of the Discovery Labware acquisition.
- The realization of the restructuring plan’s estimated $71 million of annualized savings and the remaining cash payments.
- The status and ultimate cost of Pittsburgh Corning asbestos proceedings, related insurance litigation, and other asbestos claims.
- The outcome and potential financial exposure from the Department of Justice antitrust investigation.
- Future capital spending, debt maturities, foreign-exchange effects, and the company’s ability to sustain dividends and repurchases while maintaining liquidity.