Corning Incorporated 2014 Form 10-K Summary
Business context and reporting period
Corning is a specialty glass and ceramics manufacturer serving consumer electronics, optical communications, emissions control, specialty materials, and life sciences markets. The filing covers the fiscal year ended December 31, 2014; the fourth-quarter results were also presented. Reportable segments are Display Technologies, Optical Communications, Environmental Technologies, Specialty Materials, and Life Sciences.
The January 15, 2014 acquisition of the remaining interest in Samsung Corning Precision Materials, renamed Corning Precision Materials, resulted in 100% ownership and consolidation within Display Technologies beginning in the first quarter.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $9,715 million | $7,819 million | 24% |
| Gross margin | $4,052 million; 42% | $3,324 million; 43% | Gross margin dollars up; rate down |
| Operating income | $1,931 million | $1,371 million | 41% |
| Net income attributable to Corning | $2,472 million | $1,961 million | 26% |
| Diluted EPS | $1.73 | $1.34 | 29% |
| Operating cash flow | $4,709 million | $2,787 million | 69% |
| Capital expenditures | $1,076 million | $1,019 million | 6% |
| Cash, cash equivalents and short-term investments | $6,068 million | $5,235 million | 16% |
| Long-term debt | $3,227 million | $3,272 million | Down slightly |
Fourth-quarter 2014 net sales were $2,404 million, gross margin was $996 million, net income attributable to Corning was $988 million, and diluted EPS was $0.70. Fourth-quarter results benefited from significant foreign-exchange hedge gains and equity-affiliate items.
Working capital was $7,914 million, the current ratio was 4.4:1, and debt-to-total-capital was 13%. Corning had no borrowings under its $2 billion unsecured revolving credit facility and no commercial paper outstanding. The company held approximately 68% of cash and short-term investments outside the United States but stated that U.S. liquidity and borrowing capacity were sufficient for foreseeable needs.
Common dividends declared increased to $0.52 per share for the year, including an increase to $0.12 per quarter beginning in the first quarter of 2015. Corning repurchased approximately $2 billion of common stock during 2014 and authorized an additional $1.5 billion program through December 31, 2016.
Segment performance and changes versus the prior period
- Display Technologies: Sales increased 51% to $3,851 million, primarily because of the Corning Precision Materials consolidation, which added approximately $1.8 billion of sales. Volume increased slightly more than 10%, but mid-teens price declines and yen depreciation pressured reported sales and margins. Segment net income increased 8% to $1,369 million.
- Optical Communications: Sales increased 14% to $2,652 million and net income increased 3% to $205 million. Carrier-network sales benefited from growth in North America and Europe, while enterprise-network sales also increased.
- Environmental Technologies: Sales increased 19% to $1,092 million and net income increased 38% to $182 million, driven by heavy-duty diesel demand, regulatory requirements, vehicle production, and manufacturing efficiencies.
- Specialty Materials: Sales increased 3% to $1,205 million, but net income declined 23% to $144 million. Gorilla Glass volume increased 23%, but price declines, product mix, a flat tablet market, and the absence of a prior-year inventory build reduced profitability. Gorilla Glass 4 was introduced in the fourth quarter.
- Life Sciences: Sales were $862 million and net income was $71 million, broadly unchanged from 2013. Higher volume was offset by product mix and operating expenses.
Core, non-GAAP earnings attributable to Corning increased 22% to $2,185 million, and core diluted EPS increased to $1.53 from $1.23. Management’s core measures exclude or adjust for currency effects, hedging gains and losses, acquisition-related items, discrete taxes, restructuring, litigation, pension mark-to-market adjustments, and other unusual items.
Guidance, outlook, risks, and unusual items
- Management expected 2015 sales growth in Optical Communications, Life Sciences, Specialty Materials, and Environmental Technologies. It expected the 2015 LCD retail glass market to grow in the high-single digits and anticipated overall earnings growth from sales increases, process improvements, and cost reductions.
- 2015 capital expenditures were expected to be approximately $1.3 billion to $1.4 billion, including approximately $650 million for Display Technologies.
- First-quarter 2015 outlook called for Optical Communications sales growth of more than 10% year over year, Environmental Technologies and Life Sciences sales broadly consistent with the prior year, Specialty Materials sales up approximately 10%, and Display Technologies volume flat to slightly down sequentially with moderate price declines.
- Foreign-exchange hedging produced $1,406 million of pretax yen-related gains in 2014; these gains materially increased reported earnings but are not representative of recurring operating performance. Yen-denominated hedge notional value was $9.8 billion at year-end, and Korean won collar notional value was $2.3 billion.
- Corning’s 2014 effective tax rate rose to 30.7% from 20.7%, including a $177 million charge related to foreign deferred-tax-asset realizability, other discrete tax items, and a $46 million out-of-period transfer-pricing adjustment.
- Dow Corning recorded a $1.5 billion pretax charge to permanently abandon a polycrystalline-silicon expansion; Corning’s after-tax share was approximately $465 million. This was partly offset by Corning’s $393 million after-tax share of a Dow Corning reduction in its breast-implant liability.
- Corning recorded $71 million of restructuring, impairment, and other charges in 2014, with estimated cash expenditures of $51 million and expected annualized savings of approximately $94 million.
- The estimated liability for Pittsburgh Corning and non-PCC asbestos matters was $681 million at year-end, including $290 million of fixed payments and $150 million for non-PCC asbestos claims. The Amended Pittsburgh Corning plan remained subject to appeal.
- Environmental cleanup reserves increased to approximately $42.5 million from $15 million. Corning also disclosed a U.S. Department of Justice antitrust investigation involving automotive emissions products and could not estimate a potential financial impact.
- Key operating risks include LCD glass pricing and capacity, customer concentration, foreign-exchange volatility, competitive pricing pressure, technology substitution, supply-chain constraints, concentrated Asian manufacturing capacity, litigation, tax uncertainty, environmental regulation, cyber disruption, and the performance of equity affiliates.
Most important facts for an investor to verify
- Separate recurring operating performance from the $1.4 billion of pretax yen-hedging gains and other nonrecurring acquisition, tax, litigation, and affiliate items.
- Assess the sustainability of Display Technologies earnings given mid-teens price declines, customer concentration, LCD capacity, and yen exposure.
- Review the accounting and future dilution implications of the $2.3 billion Series A convertible preferred stock issued to Samsung Display.
- Evaluate the assumptions supporting the $681 million asbestos liability and the potential impact of the pending Pittsburgh Corning appeal and insurer litigation.
- Monitor Corning’s $1.3 billion to $1.4 billion 2015 capital-spending plan against demand and utilization trends.
- Review Dow Corning’s polycrystalline-silicon abandonment, remaining implant-liability assumptions, and potential commercial-creditor exposure.
- Confirm customer concentration, including Samsung Display’s 14% share of consolidated 2014 sales and the high concentration within several segments.
- Consider that the filing is an annual 10-K for fiscal 2014; fourth-quarter figures are included but are not a standalone quarterly filing.