Corning Incorporated 10-Q Summary
Business context and reporting period
Corning Incorporated filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company operates through Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, Life Sciences, and other development activities. Results are presented under U.S. GAAP; 2012 comparative figures were retrospectively adjusted for a change in pension accounting.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $2,067 million | $2,038 million | $5,863 million | $5,866 million |
| Gross margin | $901 million; 44% | $889 million; 44% | $2,554 million; 44% | $2,521 million; 43% |
| Operating income | $439 million | $411 million | $1,187 million | $1,100 million |
| Net income attributable to Corning | $408 million | $533 million | $1,540 million | $1,481 million |
| Diluted EPS | $0.28 | $0.36 | $1.04 | $0.98 |
| Operating cash flow | Not separately provided | Not separately provided | $1,503 million | $1,966 million |
- Q3 net income declined 23%, while nine-month net income increased 4%. The nine-month increase was aided by foreign-exchange hedge gains, a $54 million tax benefit from the American Taxpayer Relief Act, and a $26 million pension-related benefit.
- Equity earnings from affiliates fell to $138 million in Q3 from $240 million and to $477 million for nine months from $717 million, primarily because of lower Samsung Corning Precision earnings.
- Q3 SG&A decreased 8% to $265 million; nine-month SG&A decreased 7% to $790 million. Research, development and engineering spending remained approximately 9% of sales.
- Q3 effective tax rate increased to 25.7% from 15.0%; the nine-month rate increased to 19.2% from 17.4%. Q3 taxes included charges related to deferred tax asset realizability and tax-law changes.
- Cash, cash equivalents, and short-term investments totaled $5.446 billion at September 30, 2013, compared with $6.144 billion at December 31, 2012. Approximately 71% of consolidated cash was held outside the United States and was generally indefinitely reinvested.
- Long-term debt was $2.816 billion, versus $3.382 billion at year-end 2012. Including current debt, reported debt was approximately $2.839 billion. Debt-to-total-capital declined to 12% from 14%.
- Working capital was $7.550 billion, the current ratio was 5.8:1, and inventory increased to $1.275 billion from $1.051 billion. Days sales outstanding increased to 61 from 55, while inventory turns declined to 3.9 from 4.7.
- Capital expenditures were $682 million for the first nine months, compared with $1.275 billion in the prior-year period. Management expected approximately $1.1 billion of 2013 capital spending.
Material changes versus the prior comparable period
- Telecommunications sales increased 24% in Q3 and 8% for nine months, driven by carrier products, fiber-to-the-premises activity, wireless products, enterprise networks, an acquisition, and consolidation of an equity investment.
- Life Sciences sales increased 39% in Q3 and 36% for nine months, primarily from the Discovery Labware acquisition completed in the fourth quarter of 2012.
- Display Technologies reported sales declined 15% in Q3 and 9% for nine months. Higher volumes were more than offset by mid-teens percentage price declines and yen depreciation. Core sales, excluding currency effects, increased 7% in Q3 and 11% for nine months.
- Specialty Materials sales declined 10% in Q3 and 7% for nine months, mainly because of lower Gorilla Glass sales. Environmental Technologies sales declined 3% in Q3 and 9% for nine months, primarily because of weaker diesel demand.
- Reported Q3 other income was affected by a $46 million net loss on purchased collars and average-rate forwards; the corresponding nine-month result was a $206 million net gain. The derivatives had a significant effect on period-to-period earnings.
- Corning changed its pension accounting method in 2013 and applied the change retrospectively. For the first nine months, the change increased reported net income by $46 million in 2013 and by $36 million in revised 2012 figures.
- Corning repurchased 30.3 million shares for $455 million during the first nine months and paid $426 million in dividends. The quarterly dividend was increased from $0.09 to $0.10 per share.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2013 sales growth in Telecommunications and Life Sciences, stable Display Technologies market share, and moderate display-glass price declines. Management expected 2013 LCD glass retail-market growth in the mid-to-high single digits.
- For Q4 2013, Display Technologies volume was expected to decline sequentially in the low single digits, with moderate price declines. Telecommunications sales were expected to decline slightly year over year; Environmental Technologies sales were expected to increase slightly; Specialty Materials sales were expected to remain consistent with Q3; and Life Sciences sales were expected to increase approximately 10% year over year.
- Key risks include LCD market capacity and pricing, concentrated customers, foreign-exchange exposure—especially the Japanese yen—global economic conditions, demand for telecommunications and automotive products, supply-chain changes, manufacturing disruptions, and execution of acquisitions and cost-reduction programs.
- Dow Corning’s polysilicon business faced Chinese provisional antidumping duties of up to 53.3% and countervailing duties of 6.5%. Dow Corning continued to assess recoverability of the related assets; Corning’s share of the carrying value was approximately $800 million after tax, and a future impairment remained reasonably possible.
- Corning recorded an estimated asbestos litigation liability of $684 million at September 30, 2013. The Pittsburgh Corning reorganization plan remained subject to a pending motion for reconsideration.
- An ongoing U.S. Department of Justice grand-jury investigation concerned possible antitrust violations involving automotive products. Corning stated that the potential financial impact could be material but could not be estimated.
- Corning had $150 million of contingent guarantees and $129 million of purchase obligations at September 30, 2013. Management expected most guarantees to expire without funding.
- On October 22, 2013, Corning announced planned transactions with Samsung Display, including full ownership of Samsung Corning Precision, Samsung Display investments with an aggregate face amount of $2.3 billion in convertible preferred shares, a new supply agreement through 2023, and authorization for an additional $2 billion of share repurchases if the transaction closed. Closing was expected in the first quarter of 2014.
Most important facts for investors to verify
- Separate recurring operating performance from yen-related derivative gains and losses, pension accounting effects, tax items, acquisition costs, and other non-GAAP adjustments.
- Track Display Technologies pricing, volumes, customer concentration, LCD capacity, and the effect of the planned Samsung Display transaction.
- Assess the sustainability of affiliate earnings, particularly Samsung Corning Precision and Dow Corning, including polysilicon duties and potential impairment exposure.
- Review liquidity held outside the United States, potential repatriation tax costs, debt maturities, credit-facility covenants, and ongoing share repurchases.
- Monitor asbestos litigation, the antitrust investigation, environmental matters, and the India-to-China optical-fiber antidumping proceeding.
- Confirm the closing terms, financing, dilution, and accounting treatment of the announced Samsung Display transactions.