Corning Incorporated — Q3 2017 Form 10-Q Summary
Business context and reporting period
Corning reported unaudited results for the three and nine months ended September 30, 2017, compared with the same periods in 2016. Its principal businesses are Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences, and emerging businesses classified as All Other.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $2.607 billion | $2.507 billion | $7.479 billion | $6.914 billion |
| Gross margin | $1.056 billion; 41% | $1.041 billion; 42% | $2.998 billion; 40% | $2.756 billion; 40% |
| Operating income | $453 million | $535 million | $1.258 billion | $959 million |
| Net income attributable to Corning | $390 million | $284 million | $915 million | $2.123 billion |
| Diluted EPS | $0.39 | $0.26 | $0.89 | $1.81 |
| Operating cash flow | Not separately provided | Not separately provided | $1.116 billion | $1.109 billion |
| Capital expenditures | Not separately provided | Not separately provided | $1.247 billion | $815 million |
Core earnings, a non-GAAP measure, were $433 million, or $0.43 per diluted share, in Q3 2017, versus $466 million, or $0.42 per share, in Q3 2016. For the first nine months, core earnings were $1.271 billion, or $1.23 per diluted share, versus $1.240 billion, or $1.06 per share.
- Cash and cash equivalents were $3.865 billion at September 30, 2017, down from $5.291 billion at December 31, 2016.
- Total debt was approximately $4.625 billion, consisting of $631 million of current debt and $3.994 billion of long-term debt, compared with approximately $3.902 billion at year-end 2016.
- Working capital was $5.189 billion, compared with $6.297 billion at December 31, 2016; the current ratio declined to 2.7:1 from 3.3:1.
- Total debt to total capital was 21%, compared with 18% at year-end 2016. Corning reported compliance with its debt covenants and had no commercial paper outstanding.
- Common dividends declared increased to $0.155 per share from $0.135 per share. The company repurchased approximately $2.064 billion of common stock during the first nine months.
Material changes versus the prior comparable period
- Sales increased 4% in Q3 and 8% for the first nine months, led by Optical Communications and Specialty Materials.
- Optical Communications sales increased 15% in Q3 and 20% year to date, reflecting higher carrier and enterprise network product sales. Nine-month segment net income increased $107 million.
- Specialty Materials sales increased 26% in Q3 and 28% year to date, driven by Gorilla Glass and advanced optics. Nine-month segment net income increased $70 million.
- Display Technologies sales declined 15% in Q3 and 6% year to date. LCD glass price declines of approximately 10%, foreign exchange effects, and the absence of prior-year contingent-consideration gains pressured results.
- Operating income declined in Q3 despite higher sales, primarily because of higher selling, general and administrative expenses, including the absence of a prior-year contingent-consideration gain. Year-to-date operating income improved because 2016 included restructuring and other charges.
- Q3 net income increased 37%, partly because translated-earnings contract losses improved by $135 million after tax and because the prior-year pension settlement charge did not recur.
- Year-to-date net income fell 57%, primarily because 2016 included a $2.676 billion non-taxable gain and a $105 million tax benefit from the Dow Corning equity realignment, as well as a prior-year asbestos-related gain.
- Investing cash flow changed from $3.956 billion provided in the first nine months of 2016 to $1.218 billion used in 2017, reflecting the absence of the $4.8 billion Dow Corning cash receipt and higher capital spending.
Guidance, outlook, risks, contingencies, and unusual items
- For full-year 2017, management expected Display Technologies market growth and glass demand growth in the mid-single digits, with LCD glass price declines of approximately 10% or less.
- Management expected 2017 sales growth of more than 15% in Optical Communications, mid-single-digit growth in Environmental Technologies, more than 20% growth in Specialty Materials, and low-single-digit growth in Life Sciences.
- Fourth-quarter outlook called for moderate sequential Display glass price declines; high-single-digit year-over-year sales growth in Optical Communications; low-teens growth in Environmental Technologies; low-to-mid-teens growth in Specialty Materials; and mid-single-digit growth in Life Sciences.
- 2017 capital expenditures were expected to exceed $1.5 billion, primarily for Display Technologies, Environmental Technologies, Optical Communications, and Specialty Materials capacity expansion.
- Corning issued approximately $700 million of Japanese yen-denominated senior unsecured notes with seven-, ten-, and twenty-year maturities. The debt creates additional foreign-exchange exposure.
- Translated-earnings contracts had gross notional value of approximately $15.2 billion at September 30, 2017. Currency gains and losses may materially affect reported earnings.
- PCC asbestos reorganization obligations totaled $220 million payable during 2018–2022, including a $35 million payment due in the second quarter of 2018. The reserve for non-PCC asbestos claims was $148 million.
- Corning had contingent guarantees with a notional value of $317 million and purchase obligations of $230 million. Environmental liabilities were accrued at approximately $40 million for 16 active hazardous-waste sites.
- Management identified risks from LCD pricing and customer health, demand and industry capacity, foreign exchange, tariffs, competition, critical materials, technology changes, capital-spending execution, litigation, regulation, cybersecurity, operational disruptions, and major-customer concentration.
- The carrying value of precious metals exceeded fair market value by $815 million. Management considered the assets recoverable, but noted that a significant decline in Display Technologies or Specialty Materials cash flows could lead to impairment.
- Corning adopted employee share-based payment accounting guidance in 2017 and early-adopted the simplified goodwill impairment standard. The company expected no material impact from revenue recognition adoption in 2018; the potential impact of lease and other pending standards was still being evaluated.
Important facts for investors to verify
- Reconcile GAAP results with management’s core, non-GAAP measures, particularly the effects of currency hedges, constant-currency adjustments, acquisitions, tax items, and affiliate results.
- Assess the sustainability of Optical Communications and Specialty Materials growth against Display Technologies pricing pressure and planned capacity investments.
- Monitor cash deployment, including approximately $2.064 billion of year-to-date repurchases, increased capital expenditures, dividends, and the new yen-denominated debt.
- Review exposure to Japanese yen and other currencies, including the $15.2 billion translated-earnings hedge portfolio and related mark-to-market volatility.
- Evaluate asbestos, environmental, guarantee, purchase-obligation, and contingent-consideration exposures, including the $220 million PCC payment schedule.
- Confirm fourth-quarter and full-year guidance against actual segment sales, pricing, demand, and margin performance.