01—Abstract
Summary
Summary of the 10-K filed February 24, 2009. Cited figures are marked; the original filing is the authoritative source.
Corning's 2008 results were a tale of two halves.
Net income reached $5.26 billiona ($3.32 diluted EPS), but this was inflated by non-operating items: a $2.5 billion release of U.S. deferred tax valuation allowances and a $340 million net credit to asbestos litigation expense. Net sales were essentially flat at $5.95 billion (up 2%), with the first half up 21% and the second half down 16% as the LCD glass and consumer electronics markets collapsed. Gross margin fell to 28% in Q4 from above 47% in the first three quarters, reflecting idle capacity and accelerated depreciation.
Operating income before the one-time items was far weaker than headline earnings suggest, so investors should focus on underlying operating trends rather than the reported bottom line. The balance sheet and liquidity remain solid. Corning ended 2008 with $2.8 billionb in cash and short-term investments, $2.1 billion of operating cash flow against $1.9 billion of capex, and a debt-to-capital ratio that improved to 11%.
Equity earnings from affiliates were $1.3 billionc, with roughly 96% coming from Samsung Corning Precision (LCD glass in Korea) and Dow Corning (silicones). These affiliates are a major part of earnings quality and are exposed to Asia-Pacific and bankruptcy-related risks. Management halted further Taiwan expansion, idled more than half of Display Technologies capacity, and announced a restructuring of $115-165 million in Q1 2009 that will cut about 3,500 jobs and target profitability at a $5 billion sales level.
The outlook is cautious. Management expects 2009 sales to be lower, with Display volumes down 20-25% in Q1 2009 versus Q4 2008, and it plans to cut 2009 capex to about $1.1 billiond.
Key risks include concentrated customers (ten largest about 54% of sales, two Display customers at 21% combined), pricing pressure in every core business, the proposed Amended PCC asbestos plan that remains subject to court approval and creditor votes, and the Dow Corning and Samsung-related litigation. The company has resumed dividends and repurchases, but management has stated it does not intend further buybacks until economic conditions improve.
02—Key points
Key Highlights
- Net sales of $5.95B were essentially flat (+2%), but the trajectory reversed sharply: H1 2008 rose 21% year over year while H2 2008 fell 16%.
- Reported net income of $5.26B ($3.32 diluted EPS) was boosted by a $2.5B tax benefit from releasing U.S. deferred tax valuation allowances and a $340M asbestos litigation credit, so headline earnings overstate underlying performance.
- Gross margin fell to 28% in Q4 2008 from above 47% in each of the first three quarters, driven by idle capacity, accelerated depreciation, and lower volumes.
- Equity earnings of $1.3B were heavily concentrated: Samsung Corning Precision ($911M) and Dow Corning ($369M) accounted for about 96% of the total.
- Liquidity remained strong, with $2.8B of cash and short-term investments, $2.1B of operating cash flow, and a debt-to-capital ratio improved to 11% from 14%.
- Management announced a $115-165M Q1 2009 restructuring to cut about 3,500 jobs and idled more than half of Display Technologies manufacturing capacity, with Q1 2009 Display volume guided down 20-25% from Q4 2008.
- Concentrated customers and pricing pressure are key risks: the ten largest customers were about 54% of sales, and management expects pricing pressure to continue in all businesses into 2009 and beyond.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Corning kept $0.88.
- Revenue$5.95B100.0%
- Cost of revenue−$3.21B54.0%
- Gross profit$2.74B46.0%
- Operating costs−$1.22B20.5%
- Operating income$1.52B25.6%
- Interest, other & tax$3.74B62.8%
- Net income$5.26B88.4%
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 24, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $5.95B$5.86B | +1.5% |
| Cost of Revenue | $3.21B$3.11B | +3.2% |
| Gross Profit | $2.74B$2.75B | −0.4% |
| R&D Expenses | $510.00M— | — |
| SG&A Expenses | $901.00M$912.00M | −1.2% |
| Operating Income | $1.52B$1.08B | +40.6% |
| Net Income | $5.26B$2.15B | +144.5% |
| EPS (Basic) | $3.37$1.37 | +146.0% |
| EPS (Diluted) | $3.32$1.34 | +147.8% |
| Shares Outstanding (Basic) | 1.56B— | — |
05—Questions
Frequently Asked Questions
How much of Corning's 2008 net income was driven by one-time, non-operating items?
A large share. Net income of $5.26B included a $2.5B tax benefit from releasing deferred tax valuation allowances ($2.4B in Q2 and $115M in H2 2008) and a $340M credit to asbestos litigation expense. Income before taxes was only $1.52B, and the operating income line was $1.52B after the asbestos credit. Investors should treat these items as non-recurring and assess the business on pre-tax operating results.
Why did results deteriorate so much in the second half of 2008?
Consumer demand for LCD televisions, monitors, and automotive products fell sharply as the global recession took hold. LCD glass volume in the second half fell 27% year over year, with Q4 down about 50%. Telecommunications and Environmental Technologies also weakened, and Q4 gross margin dropped to 28%.
How concentrated is Corning's customer base, and what is the risk?
Highly concentrated. The ten largest customers were about 54% of 2008 sales. AU Optronics (11%) and Chi Mei (10%) each exceeded 10% of consolidated sales. Three Display customers accounted for 65% of segment sales, and three customers accounted for 81% of Environmental Technologies sales. The loss or reduced orders from any of these could materially affect results.
What is the status of the asbestos liability and what could change it?
The liability was about $662M at year-end 2008, down from $1.0B, reflecting a proposed Amended PCC Plan filed January 29, 2009. The plan requires Corning to contribute its PCC and PCE equity interests plus fixed payments of $100M and five payments of $50M. Approval by the Bankruptcy Court, appeals, and a creditor vote are still pending, and several insurers are litigating coverage, so the estimate could change.
What are Corning's 2009 expectations and capital plans?
Management expects 2009 sales and profitability to be negatively affected by the recession. The restructuring is sized for profitability at about $5B of sales, versus a current run rate of about $4B. Capital spending is planned at about $1.1B in 2009, down from $1.9B in 2008, with about $700M for Display Technologies. Management has also stopped further Taiwan expansion and does not plan additional share buybacks until conditions improve.
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