01—Abstract
Summary
Summary of the 10-K filed February 13, 2013. Cited figures are marked; the original filing is the authoritative source.
Corning Incorporated's 2012 10-K shows a year of record sales but sharply lower profits, driven mainly by price declines in its LCD glass (Display Technologies) business.
Net sales rose slightly to $8.0 billiona (up 2%), but net income attributable to Corning fell 38% to $1.73 billion, or $1.15 diluted EPS, versus $2.8 billion ($1.77) in 2011. Equity earnings from affiliates fell 45% to $810 million, reflecting weaker results at Samsung Corning Precision Materials (LCD glass) and Dow Corning (silicones and polysilicon via Hemlock). Growth came from Specialty Materials (Gorilla Glass sales up 25%, segment net income swinging to $142 million from a loss) and Telecommunications, while Display Technologies sales fell 8% and segment net income fell 32%.
The balance sheet remains strong, with $6.1 billionb in cash and short-term investments, $3.2 billion of operating cash flow, and total debt to capital rising to 14% from 10% after new bond issuances. Corning repurchased $720 million of stock in 2012, completed a $1.5 billion buyback program, and raised its quarterly dividend 20% to $0.09. Capital spending fell to $1.8 billion from $2.4 billion, with $1.3 billion planned for 2013.
Management also recorded a $60 millionc after-tax restructuring charge and guided to moderating LCD price declines and sales growth in four of five segments in 2013. Key risks for investors include concentration in a few LCD panel customers, pricing pressure and excess glass capacity, the Dow Corning and Pittsburgh Corning asbestos and breast-implant liabilities, a pending DOJ antitrust investigation into automotive catalysts and substrates, and sensitivity to the Japanese yen, which is the currency of much of Display Technologies' sales.
02—Key points
Key Highlights
- Record net sales of $8.0 billion (up 2%), but net income fell 38% to $1.73 billion and diluted EPS fell to $1.15 from $1.77, mainly on LCD glass price declines and lower equity earnings
- Equity earnings from affiliates dropped 45% to $810 million: Samsung Corning Precision Materials fell to $699 million and Dow Corning to $90 million after a $81 million after-tax Hemlock charge and polysilicon weakness
- Specialty Materials was the standout segment, with sales up 25% to $1.35 billion on Corning Gorilla Glass demand and segment net income of $142 million versus a loss in 2011
- Display Technologies, 36% of sales, saw sales fall 8% to $2.9 billion and segment net income fall 32% to $1.6 billion; management expects moderating price declines and LCD glass market growth in the mid-to-high single digits in 2013
- Strong liquidity: $6.1 billion in cash and short-term investments and $3.2 billion of operating cash flow, though total debt to capital rose to 14% from 10% after $2.1 billion of new notes issued in 2012
- Shareholder returns: $720 million of buybacks in 2012, completion of the $1.5 billion program, and a 20% dividend increase to $0.09 per quarter, with dividends declared rising to $0.32 per share
- Material legal exposures: about $1.5 billion of asbestos-related liabilities tied to the Pittsburgh Corning plan (liability estimated at $671 million), a Dow Corning breast-implant reserve, and a DOJ grand jury investigation into automotive antitrust matters that Corning says it cannot yet quantify
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Corning kept $0.20.
- Revenue$8.01B100.0%
- Cost of revenue−$4.69B58.6%
- Gross profit$3.32B41.4%
- Operating costs−$2.14B26.7%
- Operating income$1.18B14.7%
- Interest, other & tax$457.0M5.7%
- Net income$1.64B20.4%
Where FY2012 revenue went
$8.01B- Cost of revenue: $4.69B, 59% of revenue
- SG&A: $1.21B, 15% of revenue
- Operating income: $1.18B, 15% of revenue
- R&D: $651.0M, 8.1% of revenue
- Other operating costs: $284.0M, 3.5% of revenue
Kept 15% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 13, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $8.01B$7.89B | +1.5% |
| Cost of Revenue | $4.69B$4.31B | +8.8% |
| Gross Profit | $3.32B$3.58B | −7.2% |
| R&D Expenses | $651.00M$561.00M | +16.0% |
| SG&A Expenses | $1.21B$1.03B | +17.2% |
| Operating Income | $1.18B$1.71B | −31.1% |
| Net Income | $1.64B$2.82B | −41.9% |
| EPS (Basic) | $1.10$1.80 | −38.9% |
| EPS (Diluted) | $1.09$1.78 | −38.8% |
| Shares Outstanding (Basic) | 1.49B1.56B | −4.4% |
| Shares Outstanding (Diluted) | 1.51B1.58B | −4.9% |
05—Questions
Frequently Asked Questions
Why did Corning's net income fall in 2012 even though sales increased?
Net income fell 38% to $1.73 billion despite a slight sales increase because of significant price declines in Display Technologies, which hit both the wholly owned business and the Samsung Corning Precision Materials affiliate. Equity earnings also dropped 45% to $810 million, largely from Dow Corning, where Hemlock Semiconductor's polysilicon prices collapsed. Other headwinds included $60 million after tax of restructuring charges, the absence of a $41 million 2011 tax benefit, and lower royalty income from Samsung after a royalty rate cut in December 2011.
How much cash does Corning have, and is its balance sheet healthy?
Corning ended 2012 with $6.1 billion in cash, cash equivalents and short-term investments, and operating cash flow was steady at $3.2 billion. Total debt rose to $3.4 billion of long-term debt, and the debt-to-capital ratio increased to 14% from 10%, well within the covenant maximum of 50%. Interest coverage was 36 times against a required minimum of 3.5 times. About 75% of the cash is held outside the U.S., and the company maintains a $1.0 billion revolving credit facility. The company says it has sufficient liquidity for the next several years.
What are the biggest risks to Corning's earnings going forward?
The largest risks include dependence on LCD glass, where three customers made up 63% of Display Technologies sales and Samsung Corning Precision Materials is concentrated in two Korean panel makers. Continued price pressure from excess glass capacity could compress margins further. Foreign exchange risk is significant, since about 73% of sales come from outside the U.S. and a 10% move in the yen would change net sales by roughly $460 million. Other risks include the uncertain outcome of the Pittsburgh Corning asbestos plan, Dow Corning's polysilicon exposure and China anti-dumping investigation, and the DOJ antitrust probe, which could be material.
What is management's outlook for 2013?
Management expects sales growth in the Telecommunications, Life Sciences, Specialty Materials and Environmental Technologies segments, with Life Sciences boosted by the Discovery Labware acquisition from Becton Dickinson for about $723 million. It expects LCD price declines to moderate and market share to stabilize in Display Technologies, with the overall LCD glass market growing in the mid-to-high single digits. Net income may be hurt by lower equity earnings from Dow Corning and currency movements. Capital spending is planned at about $1.3 billion, and a $37 million tax expense recorded in 2012 is expected to reverse in the first quarter of 2013.
How is Corning returning capital to shareholders?
In 2012 Corning repurchased 56 million shares for $720 million, completing the $1.5 billion buyback authorized in October 2011, which covered about 111 million shares in total. The quarterly dividend was raised 20% to $0.09 per share in October 2012, following a 50% increase in 2011. Dividends paid in 2012 totaled $472 million. The company had about $63 million remaining under the program when it reported the Q4 repurchase activity, and it has not announced a new buyback in this filing.
06—Continue