Corning Incorporated — 2017 First-Quarter Form 10-Q Summary
Business context and reporting period
Corning Incorporated is a materials-science company operating through Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, Life Sciences, and All Other businesses. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Results are presented under U.S. GAAP unless identified as core, non-GAAP measures.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $2,375 million | $2,047 million | 16% |
| Gross margin | $957 million; 40.3% | $764 million; 37.3% | Up $193 million; margin up approximately 3 percentage points |
| Operating income | $424 million | $177 million | Up $247 million |
| Income before taxes | $20 million | $(672) million | Improved by $692 million |
| Net income attributable to Corning | $86 million | $(368) million | Improved by $454 million |
| Diluted EPS | $0.07 | $(0.36) | Improved by $0.43 |
| Operating cash flow | $191 million | $(80) million | Improved by $271 million |
| Capital expenditures | $364 million | $270 million | Up $94 million |
| Cash and cash equivalents | $4,844 million | $5,291 million at Dec. 31, 2016 | Down $447 million |
Core earnings increased 20% to $407 million, or $0.39 core diluted EPS, from $340 million, or $0.28, in the prior-year quarter. Core net sales increased 14% to $2,485 million. Core measures exclude, among other items, foreign-currency hedge effects, acquisition-related costs, restructuring charges, discrete tax items, certain litigation matters, and unusual affiliate items.
Segment sales increased in all major businesses: Display Technologies $736 million, up 4%; Optical Communications $818 million, up 34%; Environmental Technologies $275 million, up 4%; Specialty Materials $300 million, up 32%; and Life Sciences $210 million, up 3%. Optical Communications and Specialty Materials were the principal growth drivers.
The company generated comprehensive income of $566 million, including $480 million of other comprehensive income, primarily from foreign-currency translation adjustments and hedge gains.
At March 31, 2017, working capital was $6.3 billion and the current ratio was 3.6:1. Long-term debt was $3.669 billion, total debt to total capital was approximately 18%, and no commercial paper was outstanding. Corning had $2 billion of available revolving credit capacity and was in compliance with its 50% leverage covenant. Approximately 66% of cash was held outside the United States, but management stated that U.S. liquidity and borrowing capacity were sufficient for foreseeable U.S. needs.
Material changes versus the prior comparable period
- Revenue growth reflected higher Optical Communications carrier and enterprise-network sales, strong North American fiber-to-the-home demand, and the absence of prior-year production issues related to manufacturing software implementation.
- Display Technologies benefited from mid-teens volume growth and manufacturing efficiencies, partly offset by LCD glass price declines slightly above 10%.
- Specialty Materials benefited from higher Gorilla Glass and advanced optics sales.
- Gross margin improved through higher sales, cost reductions, and manufacturing-efficiency gains.
- The translated earnings contract loss declined to $438 million from $857 million, reducing the after-tax adverse effect by approximately $273 million. The company’s related derivative notional value declined to $15.4 billion from $16.7 billion.
- Equity earnings increased to $80 million from $59 million. Q1 2017 included Corning’s share of a $144 million pre-tax HSG settlement gain, approximately $72 million after tax and noncontrolling interests. Q1 2016 included $52 million of after-tax earnings from Dow Corning’s silicones business, which was no longer included after the 2016 strategic realignment.
- Restructuring, impairment, and other charges were $80 million in Q1 2016; the filing does not report a comparable Q1 2017 charge in the consolidated income statement.
- Capital spending increased, while share repurchases declined to approximately $408 million from $703 million. Corning repurchased 15.3 million shares and paid $168 million of dividends.
- Cash used in investing activities increased to $326 million, reflecting higher capital expenditures, a $35 million acquisition, and the absence of $121 million of short-term-investment liquidations recorded in Q1 2016.
Guidance, outlook, commentary, and risks
For full-year 2017, management expected Display Technologies market and glass demand growth in the mid-single digits, with LCD glass price declines of approximately 10% or better; Optical Communications sales growth in the low teens; Environmental Technologies sales flat to slightly higher; Specialty Materials growth dependent on customer deployment of Gorilla Glass 5 and other innovations; and Life Sciences sales growth in the low single digits. The company expected approximately $1.5 billion of 2017 capital expenditures.
For the second quarter, management expected Display Technologies market and volume growth at low single-digit sequential rates with substantially smaller sequential price declines; Optical Communications sales approximately 10% above the prior-year quarter; Environmental Technologies sales consistent with the prior-year quarter; Specialty Materials sales growth in the high teens; and Life Sciences sales growth in the low single digits.
Key risks include foreign-currency volatility, product demand and industry capacity, pricing pressure, customer creditworthiness, dependence on major customers, critical-material availability, technology changes, manufacturing or information-technology disruptions, litigation, environmental matters, regulatory developments, intellectual-property protection, capital-spending execution, and the ability to sustain dividends and repurchases.
Material contingencies include a $70 million current liability payable in the second quarter of 2017 under the Pittsburgh Corning asbestos reorganization plan, $220 million of additional fixed payments due in 2018–2022, and a $149 million reserve for non-PCC asbestos claims. Environmental liabilities were accrued at approximately $42 million for 17 active hazardous-waste sites. Management could not predict the outcome of remaining insurer litigation relating to asbestos claims.
Corning early adopted the simplified goodwill impairment standard on January 1, 2017. It also recorded a $233 million cumulative tax benefit in beginning retained earnings upon adoption of the employee share-based payment accounting standard. The company expected the revenue-recognition standard to have no material impact and planned modified-retrospective adoption in 2018; the potential effects of several other new standards remained under evaluation.
Facts investors should verify
- Whether Optical Communications growth remains durable after the rebound from Q1 2016 manufacturing issues and how much is attributable to fiber-to-the-home demand.
- Whether Display Technologies volume growth and manufacturing efficiencies offset continuing LCD glass price declines.
- The sustainability of Q1 earnings after excluding the $438 million translated-earnings contract loss and the unusual HSG settlement-related equity earnings.
- Actual 2017 capital expenditures relative to the approximately $1.5 billion outlook and the associated capacity expansions.
- Future cash requirements for asbestos payments, non-PCC asbestos claims, environmental matters, dividends, and share repurchases.
- Foreign-currency hedge exposures, derivative fair values, and potential earnings volatility from the $15.4 billion translated-earnings contract notional.
- The effect of the unusually high 330% effective tax benefit rate in Q1 2017 and the tax treatment of foreign earnings, which Corning generally intended to reinvest indefinitely.
- Whether the filing’s reported liquidity remains adequate if operating cash flow, customer demand, or foreign-exchange conditions deteriorate.