Corning Incorporated — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020, compared with the corresponding 2019 periods. The filing was signed July 30, 2020. Results reflect substantial COVID-19-related disruption and are unaudited.
Business Context
Corning operates through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences, and All Other. Management prioritized preserving financial strength, protecting employees and communities, and fulfilling customer commitments during the pandemic.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $2,561 million | $2,940 million | $4,952 million | $5,752 million |
| Gross margin | $756 million; 30% | $1,065 million; 36% | $1,317 million; 27% | $2,164 million; 38% |
| Operating income/(loss) | $(103) million | $374 million | $(224) million | $794 million |
| Net income/(loss) attributable to Corning | $(71) million | $92 million | $(167) million | $591 million |
| Diluted EPS | $(0.13) | $0.09 | $(0.28) | $0.65 |
| Operating cash flow | Not separately provided | Not separately provided | $798 million | $124 million |
Core results: Core net income was $218 million, or $0.25 core diluted EPS, in Q2 2020, down from $410 million, or $0.45, in Q2 2019. First-half core net income was $395 million, or $0.45 per diluted share, versus $775 million, or $0.86, in the prior-year period.
Liquidity and debt: Cash and cash equivalents were $2.158 billion at June 30, 2020, versus $2.434 billion at December 31, 2019. Long-term debt was $7.797 billion, compared with $7.729 billion at year-end. The company had no commercial paper outstanding, no debt due within the next 12 months, and $3.826 billion of working capital. Debt to total capital was 39%, versus 37% at year-end.
Cash flow and capital allocation: First-half capital expenditures were $833 million, down from $1.094 billion in 2019. Net cash used in investing was $784 million, and net cash used in financing was $272 million. Dividends paid were $383 million. Share repurchases were suspended; $105 million was spent repurchasing shares in the first half, all during the first quarter.
Material Changes Versus the Prior Comparable Period
- Q2 sales declined 13%, and first-half sales declined 14%. The largest segment declines were Optical Communications, Environmental Technologies, and Display Technologies.
- Optical Communications sales fell 19% in Q2 and 22% in the first half because of market weakness and lower capital spending by major customers.
- Environmental Technologies sales fell 38% in Q2 and 25% in the first half as vehicle-manufacturing plants temporarily shut down.
- Display Technologies sales declined 11% in Q2 and 10% in the first half due to lower volumes and display-glass price declines.
- Specialty Materials was a relative strength, with sales up 13% in both Q2 and the first half, supported by premium glass, work-from-home-related IT demand, and semiconductor equipment demand.
- Gross margin declined six percentage points in Q2 and 11 percentage points in the first half, driven by lower volumes, accelerated depreciation, severance, and asset write-offs.
- Research, development and engineering expense increased 73% in Q2 and 39% in the first half, primarily because of a $195 million impairment charge related to reprioritized research and development programs.
- Restructuring, impairment, and other charges totaled $337 million in Q2 and $562 million in the first half, including $135 million of severance, $195 million of asset impairment, and $149 million of capacity realignment charges in the first half.
- First-half revenue included a $105 million cumulative reduction related to a customer exiting LCD-panel production.
- Equity earnings benefited from a $62 million after-tax-equivalent share of a Hemlock Semiconductor Group contract settlement impact, while HSG also recorded a related inventory provision.
Guidance, Outlook, Commentary, and Risks
- Corning withdrew full-year 2020 guidance in the first quarter because of COVID-19 uncertainty.
- Management expects third-quarter sales and profits to increase sequentially, subject to end-market demand and economic activity during August and September.
- The company reduced planned 2020 capital expenditures to approximately $1.4 billion, expects positive full-year free cash flow, plans to maintain dividend payments, and has suspended share repurchases.
- Management implemented workforce reductions, salary reductions, capacity realignment, and other cost-preservation measures. The CEO’s base salary was reduced 40%, other named executive officers’ salaries 30%, and other U.S. salaried employees’ salaries 5% to 30% through December 31, 2020.
- Principal risks include the duration and severity of COVID-19, unpredictable demand, supply-chain and labor disruptions, customer credit and financing conditions, foreign-exchange volatility, pricing and industry capacity, critical-material availability, capital-market disruption, litigation, environmental obligations, cybersecurity, and the ability to sustain dividends.
- Corning had reserves of approximately $97 million for non-Pittsburgh Corning asbestos claims and $47 million for environmental cleanup and related litigation. Management stated that material adverse outcomes were remote based on available information.
- The company expects to contribute $60 million to U.S. pension plans and $53 million to international plans during the second half of 2020.
Most Important Facts to Verify
- Whether COVID-19-related demand weakness, especially in Optical Communications and Environmental Technologies, persists or improves in subsequent quarters.
- Whether the $195 million research-program impairment and $562 million first-half restructuring and related charges represent substantially completed actions or signal additional costs.
- Progress toward the approximately $1.4 billion capital-expenditure plan and management’s expectation of positive full-year free cash flow.
- Cash generation, dividend sustainability, and the timing of any resumption of share repurchases.
- Exposure to the customer exiting LCD-panel production, including the remaining revenue reduction from the commercial benefit asset.
- Foreign-exchange hedge gains and losses, HSG-related earnings, and other unusual items when assessing recurring profitability.
- Potential changes in goodwill, long-lived asset, and precious-metal valuations if demand or segment profitability deteriorates.