01—Abstract
Summary
Summary of the 10-K filed February 13, 2015. Cited figures are marked; the original filing is the authoritative source.
Corning's 2014 10-K shows a year transformed by the January 2014 acquisition of full ownership of Samsung Corning Precision Materials (now Corning Precision Materials).
Net sales rose 24% to $9,715 milliona from $7,819 million, and net income attributable to Corning rose 26% to $2,472 million, or $1.73 per diluted share. Much of that headline growth is non-operating or acquisition-driven: $1,406 million of pre-tax gains on yen hedging programs, a $249 million contingent-consideration fair value adjustment, and consolidation of the Samsung entity added $1.8 billion of sales. Management's core performance measures, which strip out these items, show core net sales of $10,217 million (up 29%) and core diluted EPS of $1.53 (up 24% from $1.23), a more modest picture of operating momentum.
The Display Technologies segment, now 40% of sales and reliant on a few customers (three accounted for 61% of segment sales), is the core earnings engine but faces mid-teens percentage price declines that outpaced roughly 10% volume growth. Optical Communications (27% of sales) and Environmental Technologies (11%) grew strongly. Balance sheet and cash generation are solid: $6.1 billionb in cash and short-term investments against $3.3 billion of debt, a 13% debt-to-capital ratio, and operating cash flow of $4.7 billion (boosted by a roughly $1.6 billion dividend from the consolidated Samsung entity).
Corning returned heavily to shareholders, repurchasing about $2.5 billionc of stock in 2014 and raising the quarterly dividend 20% to $0.12. Key risks for investors include the Dow Corning equity affiliate (about 95% of 2014 equity earnings, $266 million total), the Pittsburgh Corning/non-PCC asbestos liability of $681 million, pending Department of Justice antitrust investigation of automotive substrates with no estimate of impact, and currency exposure, since roughly 73% of sales are outside the U.S. and about 40% of Display sales are yen-denominated.
02—Key points
Key Highlights
- Net sales grew 24% to $9.7 billion, driven mainly by consolidating Corning Precision Materials (+$1.8 billion) and strong Optical Communications (+14%) and Environmental Technologies (+19%) growth.
- GAAP diluted EPS of $1.73 (up 29% from $1.34) was inflated by $1.4 billion of pre-tax yen hedge gains; core diluted EPS was $1.53, up 24% from $1.23.
- Display Technologies (40% of sales) saw volume up slightly more than 10% but mid-teens percentage price declines, and three customers accounted for 61% of segment sales.
- Strong liquidity: $6.1 billion cash and short-term investments versus $3.3 billion long-term debt; debt-to-capital of 13%; operating cash flow of $4.7 billion.
- Aggressive capital return: about $2.5 billion of share repurchases in 2014, a $1.5 billion new authorization, and a 20% quarterly dividend increase to $0.12.
- Dow Corning (50% equity affiliate) contributed $252 million equity earnings, including a $465 million after-tax polysilicon abandonment charge offset by a $393 million implant-liability gain.
- Ongoing legal exposures include a $681 million asbestos liability tied to the Pittsburgh Corning plan and an open DOJ antitrust grand jury investigation with no estimable financial impact.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Corning kept $0.25.
- Revenue$9.71B100.0%
- Cost of revenue−$5.66B58.3%
- Gross profit$4.05B41.7%
- Operating costs−$2.12B21.8%
- Operating income$1.93B19.9%
- Interest, other & tax$541.0M5.6%
- Net income$2.47B25.4%
Where FY2014 revenue went
$9.71B- Cost of revenue: $5.66B, 58% of revenue
- Operating income: $1.93B, 20% of revenue
- SG&A: $1.20B, 12% of revenue
- R&D: $701.0M, 7.2% of revenue
- Other operating costs: $218.0M, 2.2% of revenue
Kept 20% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 13, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $9.71B$7.82B | +24.2% |
| Cost of Revenue | $5.66B$4.50B | +26.0% |
| Gross Profit | $4.05B$3.32B | +21.9% |
| R&D Expenses | $701.00M$613.00M | +14.4% |
| SG&A Expenses | $1.20B$1.13B | +6.7% |
| Operating Income | $1.93B$1.37B | +40.8% |
| Net Income | $2.47B$1.96B | +26.1% |
| EPS (Basic) | $1.82$1.35 | +34.8% |
| EPS (Diluted) | $1.73$1.34 | +29.1% |
| Shares Outstanding (Basic) | 1.30B1.45B | −10.1% |
| Shares Outstanding (Diluted) | 1.43B1.46B | −2.4% |
05—Questions
Frequently Asked Questions
How much of Corning's 2014 earnings growth was operational versus non-recurring or accounting-driven?
A significant share was not operational. GAAP net income rose 26%, but the increase was driven by roughly $560 million after-tax from yen-denominated hedge gains, a $194 million after-tax contingent consideration fair value gain, and consolidation effects. Core earnings, which exclude these items, rose 22% to $2,185 million, still strong but less dramatic. Investors should weigh the core figures when assessing sustainable profitability.
What is the main risk to Corning's Display Technologies business?
Display is the largest and most profitable segment, yet it faces persistent mid-teens percentage price declines, customer concentration (three customers were 61% of segment sales), and yen exposure. The 10-K also notes that LCD glass capacity may exceed demand at times, and that a disruption at one of the few specialized overseas plants could have a severe near-term impact on the company.
How exposed is Corning to the Japanese yen and other currencies?
Highly exposed. About 73% of net sales come from outside the U.S., and a 10% move in the yen-dollar rate would change 2014 net sales by about $384 million and net income by about $238 million. Corning uses purchased collars and average rate forwards to hedge translation exposure, with $9.8 billion of notional outstanding at year-end 2014, but those hedges have also produced large volatile gains and losses in other income.
What are the largest contingent liabilities investors should watch?
Asbestos remains the largest: an estimated $681 million liability covering the Amended Pittsburgh Corning plan and non-PCC asbestos claims, with the plan still subject to a Third Circuit appeal. Other items include a $99 million to $324 million range of Dow Corning bankruptcy-related commercial creditor claims (Corning bears 50% of any excess over $99 million), environmental reserves of $42.5 million, and an open Department of Justice antitrust investigation into automotive substrates with no estimate of financial impact.
What did the Samsung Display transaction change for Corning?
Corning acquired the remaining 42.5% of Samsung Corning Precision Materials from Samsung Display on January 15, 2014, for consideration including $2.3 billion of Series A convertible preferred stock (4.25% dividend, convertible into common stock at a fixed rate) and cash. The entity became fully consolidated, which boosted sales and reduced reported equity earnings from affiliates (down to $266 million from $547 million). It also extended the LCD glass supply agreement with Samsung Display through 2023.
06—Continue