01—Abstract
Summary
Summary of the 10-K filed February 10, 2010. Cited figures are marked; the original filing is the authoritative source.
Corning Incorporated's 2009 Form 10-K (filed February 10, 2010) shows a company that absorbed a sharp demand shock in the first half of 2009 and then recovered through the second half, with a headline net income that is far below 2008 only because 2008 included non-recurring items.
Net sales fell 9% to $5.4 billiona, and gross margin contracted from 46% to 39%, driven by 19% price declines in Display Technologies LCD glass and volume losses in Environmental Technologies (automotive) and Telecommunications. Net income attributable to Corning was $2.0 billion, or $1.28 diluted EPS, versus $5.3 billion ($3.32) in 2008. The 2008 comparison is distorted by a $2.4–2.5 billion deferred tax valuation allowance release and a $340 million asbestos credit; 2009 instead carried a $228 million restructuring charge and a $20 million asbestos charge, and the effective tax rate was negative (-3.8%).
The key earnings engine remains equity income: equity in earnings of affiliates rose 6% to $1.4 billionb, about 27% of net sales, with Samsung Corning Precision (50% owned, LCD glass in Korea) contributing $1.1 billion and Dow Corning contributing $287 million. Operating cash flow was stable at $2.1 billion, cash and short-term investments rose to $3.6 billion, and the debt-to-capital ratio held at 11%. Capital spending fell to $890 million from $1.9 billion as the Taichung expansion was halted, and 2010 spending guidance is $600–700 million.
Management guided to higher 2010 sales, expanding gross margin, and continued LCD glass market growth of 14–22%, while warning that telecommunications sales would decline. Investors should weigh several risks: heavy customer concentration (the top ten customers were 52% of sales, and three Display customers were 62% of that segment's sales), reliance on Asian manufacturing with exposure to the yen (a 10% yen move affects net income by roughly $340 millionc), large asbestos liabilities of $682 million tied to the still-unconfirmed Amended PCC Plan, Dow Corning breast-implant exposure, and an ongoing EU antitrust investigation into LCD glass pricing.
02—Key points
Key Highlights
- Net sales declined 9% to $5.395 billion (2008: $5.948 billion), with Display Technologies at 45% of sales, Telecommunications at 31%, and Environmental Technologies at 11%.
- Net income attributable to Corning fell to $2.008 billion ($1.28 diluted EPS) from $5.257 billion ($3.32), mainly because 2008 included a $2.4B+ tax valuation allowance release and a $340M asbestos credit that did not recur.
- Gross margin fell to 39% from 46%, reflecting 19% LCD glass price declines and reduced automotive and telecom volumes, though quarterly margin recovered to roughly 41% in Q2–Q4 2009.
- Equity in earnings of affiliated companies rose 6% to $1.435 billion, led by Samsung Corning Precision ($1.115 billion) and Dow Corning ($287 million); equity affiliates are about 27% of net sales.
- Restructuring charges of $228 million tied to a global workforce reduction, with estimated annual savings of about $224 million and cash costs of about $155 million.
- Operating cash flow held at $2.08 billion, cash and short-term investments reached $3.6 billion, and capital expenditures fell to $890 million from $1.92 billion, with 2010 guidance of $600–700 million.
- Significant legacy exposures remain: $682 million asbestos liability tied to the Amended PCC Plan (not yet approved by the bankruptcy court), a $1.6 billion Dow Corning breast-implant reserve, and an EU Competition DG investigation into worldwide LCD glass production.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Corning kept $0.37.
- Revenue$5.39B100.0%
- Cost of revenue−$3.30B61.2%
- Gross profit$2.09B38.8%
- Operating costs−$1.70B31.5%
- Operating income$391.0M7.2%
- Interest, other & tax$1.62B30.0%
- Net income$2.01B37.2%
Where FY2009 revenue went
$5.39B- Cost of revenue: $3.30B, 61% of revenue
- SG&A: $881.0M, 16% of revenue
- Operating income: $391.0M, 7.2% of revenue
- R&D: $465.0M, 8.6% of revenue
- Other operating costs: $356.0M, 6.6% of revenue
Kept 7.2% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 10, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $5.39B$5.95B | −9.3% |
| Cost of Revenue | $3.30B$3.21B | +2.9% |
| Gross Profit | $2.09B$2.74B | −23.6% |
| R&D Expenses | $465.00M$510.00M | −8.8% |
| SG&A Expenses | $881.00M$901.00M | −2.2% |
| Operating Income | $391.00M$1.52B | −74.3% |
| Net Income | $2.01B$5.26B | −61.8% |
| EPS (Basic) | $1.30$3.37 | −61.4% |
| EPS (Diluted) | $1.28$3.32 | −61.4% |
| Shares Outstanding (Basic) | 1.55B1.56B | −0.6% |
| Shares Outstanding (Diluted) | 1.57B— | — |
05—Questions
Frequently Asked Questions
Why did Corning's net income fall so sharply in 2009?
The comparison is distorted by 2008 non-recurring items. In 2008 Corning released about $2.5 billion of deferred tax valuation allowances and booked a $340 million asbestos credit, producing a 2008 tax benefit of $2.4 billion. In 2009 the tax line was a small $74 million benefit, and asbestos was a $20 million charge. Underlying operating performance also declined: operating income fell to $391 million from $1.52 billion, mainly due to the $228 million restructuring charge and lower LCD pricing and volume.
How important are the equity affiliates to Corning's earnings?
Very important. Equity in earnings of affiliated companies was $1.435 billion in 2009, or roughly 27% of net sales and about 70% of pre-tax income ($1.934 billion). Samsung Corning Precision (50% owned, South Korea) contributed $1.115 billion and Dow Corning (50% owned) contributed $287 million, and together they accounted for about 98% of equity earnings. Corning also received $755 million in dividends from affiliates in 2009, which supports its cash position.
What are the main risks to Corning's outlook?
Key risks include: (1) customer concentration, since the top ten customers were 52% of sales and three display customers were 62% of Display sales; (2) pricing pressure across all segments, which management expects to continue into 2010; (3) currency risk, since a 10% move in the yen-dollar rate could change 2010 net income by about $340 million; (4) asbestos litigation, where the Amended PCC Plan is still subject to court approval, creditor voting, and appeal; and (5) the EU Competition DG investigation into LCD glass. Telecommunications sales are also expected to decline in 2010.
What does management expect for 2010?
Management described its 2010 outlook as favorable. It expects sales to rise above 2009 levels, driven by LCD TV, notebook, and desktop monitor demand, and expects gross margin to expand in the Display and Environmental Technologies segments. It also expects equity earnings to improve. Telecommunications sales are expected to decline, and first-quarter 2010 sales are expected to be down 10% to 15% sequentially in Telecommunications and Specialty Materials. Capital spending is planned at $600–700 million, plus up to $300 million for adjacent opportunities, and voluntary pension contributions are planned at up to $230 million.
Is Corning's balance sheet strong enough to support its obligations?
The balance sheet appears sound. Total debt to total capital was 11% at year-end 2009, long-term debt was $1.93 billion, and cash plus short-term investments was $3.6 billion. Corning has a $1.1 billion committed credit facility expiring in November 2011, and it was in compliance with its leverage and interest coverage covenants (interest coverage was 30.3x). Off-balance-sheet obligations include the asbestos liability ($682 million), Dow Corning credit support, and contractual commitments totaling about $4.2 billion, most of it long-term debt interest and capital leases. Shareholders' equity rose to $15.5 billion.
06—Continue