01—Abstract
Summary
Summary of the 10-K filed February 15, 2008. Cited figures are marked; the original filing is the authoritative source.
Corning Incorporated's 2007 Form 10-K shows a company at a strong inflection point, with record results driven overwhelmingly by its Display Technologies segment.
Net sales rose 13% to $5.86 billiona, gross margin expanded to 47% from 44%, and net income climbed 16% to $2.15 billion ($1.34 diluted EPS). Display Technologies accounted for 45% of sales and about $1.99 billion of segment net income, and Samsung Corning Precision (50% owned) contributed $582 million of equity earnings. Operating cash flow of $2.1 billion comfortably exceeded $1.3 billion of capital spending, and cash, equivalents and short-term investments reached $3.5 billion.
Management guided to 2008 capital spending of $1.5 to $1.7 billionb, with roughly $800 million to $1.0 billion directed to LCD glass. Investors should weigh several concentration and balance-sheet risks against these results. AU Optronics alone was 12% of consolidated sales, and the ten largest customers represented about half of sales.
Net income depends heavily on equity affiliates, which contributed $942 millionc, most of it from Samsung Corning Precision and Dow Corning. The company maintains a full valuation allowance against its U.S. deferred tax assets, so its effective tax rate is only 6.2%. Litigation is also material: the PCC asbestos settlement is accrued at about $1.0 billion in total, a $185 million settlement charge hit 2007 earnings, and Dow Corning faces a $1.7 billion breast implant reserve and pending commercial creditor interest claims.
Pricing pressure is expected to continue into 2008, particularly in LCD glass and telecom products. Overall, the filing presents a company with strong cash generation, improved credit ratings (BBB+ / Baa1), a newly initiated dividend of $0.05d per quarter, and a $500 million buyback program (of which $250 million had been used by year-end). Its near-term trajectory depends on LCD glass demand, the pace of its capacity expansion relative to customer demand, and the resolution of asbestos and Dow Corning-related liabilities.
02—Key points
Key Highlights
- Record 2007 results: net sales up 13% to $5.86 billion, net income up 16% to $2.15 billion, and diluted EPS of $1.34 versus $1.16 in 2006.
- Gross margin expanded to 47% from 44%, driven by strong Display Technologies volumes (up 38%) and cost reductions, though LCD glass prices fell about 11%.
- Equity affiliates contributed $942 million of earnings, primarily Samsung Corning Precision ($582 million) and Dow Corning ($345 million), making the company highly dependent on these investments.
- Strong liquidity: operating cash flow of $2.1 billion, $3.5 billion in cash and short-term investments, and debt-to-capital reduced to 14% from 19%; all three rating agencies upgraded debt to BBB+ or equivalent.
- Capital returns began: quarterly dividends of $0.05 per share initiated in Q3 2007, and 10.5 million shares repurchased for $250 million under a $500 million program.
- Significant asbestos exposure: the PCC settlement remains unconfirmed, with about $1.0 billion of cumulative charges recorded, and a $185 million settlement expense in 2007 driven by Corning's stock price movement.
- Customer concentration: AU Optronics represented 12% of consolidated sales, and the ten largest customers accounted for about 50%; full U.S. deferred tax asset valuation allowance persists, keeping the effective tax rate at 6.2%.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, Corning kept $0.37.
- Revenue$5.86B100.0%
- Cost of revenue−$3.11B53.1%
- Gross profit$2.75B46.9%
- Operating costs−$1.67B28.5%
- Operating income$1.08B18.4%
- Interest, other & tax$1.07B18.2%
- Net income$2.15B36.7%
Where FY2007 revenue went
$5.86B- Cost of revenue: $3.11B, 53% of revenue
- Operating income: $1.08B, 18% of revenue
- SG&A: $912.0M, 16% of revenue
- Other operating costs: $756.0M, 13% of revenue
Kept 18% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 15, 200805—Questions
Frequently Asked Questions
What drove Corning's earnings growth in 2007?
Earnings growth came mainly from the Display Technologies segment, where sales rose 23% to $2.61 billion on strong LCD glass volume growth, partly offset by price declines. Higher equity earnings from Samsung Corning Precision and Dow Corning, along with improved Telecommunications and Environmental Technologies results, also contributed. These gains were partly offset by a $185 million asbestos settlement charge.
How exposed is Corning to a few large customers and to Asia?
Exposure is significant. AU Optronics accounted for 12% of consolidated sales, three Display Technologies customers made up 62% of segment sales, and all Display customers are in the Asia-Pacific region. About 72% of 2007 net sales were to international markets, and the company faces yen, won, and Taiwan dollar currency risk. A 10% adverse yen move could change 2008 net income by roughly $220 million.
What is the status of the asbestos and Dow Corning liabilities?
The PCC asbestos settlement plan was denied confirmation by the bankruptcy court in December 2006, and the parties have pursued an amended plan, so the outcome remains uncertain. Corning has recorded about $1.0 billion in total charges and holds an $833 million current liability tied to the 25 million shares and Pittsburgh Corning Europe interest, which fluctuates with Corning's stock price. For Dow Corning, a $1.7 billion breast implant reserve exists, and Corning's equity earnings could fall if commercial creditor interest claims exceed the $71 million minimum recorded.
What does the 2008 outlook look like?
Management expects LCD glass volume growth of 25% to 30% in 2008 absent an economic slowdown, with Corning's volume growing at the lower end of that range. Telecommunications and Environmental Technologies sales and earnings are expected to rise, and Dow Corning sales are projected to grow 10% to 12%. Capital spending is expected at $1.5 to $1.7 billion, and pricing pressure is expected to continue across products, with management cautious about the U.S. economy and consumer demand.
Why is the effective tax rate so low, and what could change it?
The 6.2% effective tax rate reflects the release of valuation allowances against foreign deferred tax assets, tax holidays in China, South Africa and Taiwan, and the absence of recorded U.S. tax expense because U.S. deferred tax assets are fully reserved. Corning would need about $8.3 billion of future U.S. profits to realize those assets. If the company concludes it is more likely than not to be profitable in the U.S., it could release part of the valuation allowance, producing a significant one-time benefit to earnings. Conversely, a shift in assumed royalties from Display Technologies to the U.S. could delay that release.
06—Continue