01—Abstract
Summary
Summary of the 10-K filed February 12, 2016. Cited figures are marked; the original filing is the authoritative source.
Corning's 2015 10-K shows a year of contraction after a strong 2014.
Net sales fell 6% to $9.1 billiona, driven by a 20% decline in Display Technologies (LCD glass), which was hit by a roughly 11% depreciation of the yen and price declines in the low teens. Net income attributable to Corning fell 46% to $1.3 billion ($1.00 diluted EPS) from $2.5 billion, largely because 2014 included a large foreign currency hedge gain. On a non-GAAP 'core' basis, which strips out hedge gains, currency effects and pension mark-to-market items, earnings were $1.9 billion ($1.40 per share), down 7%.
Optical Communications (+12%b) and Specialty Materials were the bright spots, with Gorilla Glass volume growth offset by declining advanced optics sales. Management's strategic response is a new capital allocation framework announced in October 2015. It targets roughly 80% of R&D and capex on three core technologies, four manufacturing platforms and five market-access platforms.
Corning plans to generate more than $20 billionc in cash and return over $10 billion to shareholders through 2019, and to raise the dividend by at least 10% annually. During 2015 it repurchased about 151 million shares for roughly $3.2 billion, and in January 2016 it raised the quarterly dividend 12.5% to $0.135. The most significant pending event is the exchange of Corning's 50% stake in Dow Corning for a new entity holding about 40% of Hemlock Semiconductor and roughly $4.8 billion in cash, expected to close in the first half of 2016.
Dow Corning contributed $281 milliond of Corning's $299 million in equity earnings. Investors should also watch the asbestos exposure tied to the PCC plan (about $678 million liability, with the non-PCC stay expected to lift in 2H 2016), the pending Gen 10.5 LCD investment in China backed by a $400 million customer deposit, and the risk that LCD glass pricing pressure persists. Balance sheet leverage remains moderate, with debt-to-capital at 19% and cash and short-term investments of $4.6 billion.
02—Key points
Key Highlights
- Net sales fell 6% to $9.1 billion; Display Technologies sales dropped 20% to $3.1 billion on yen depreciation and low-teens percentage price declines, while Optical Communications grew 12% to $3.0 billion.
- GAAP net income fell 46% to $1.34 billion ($1.00 diluted EPS) from $2.47 billion ($1.73), mainly because 2014 included a $1.4 billion foreign currency hedge gain versus $85 million in 2015.
- Core earnings (non-GAAP) declined 7% to $1.88 billion ($1.40 per share) from $2.02 billion ($1.42), a clearer view of underlying operating performance.
- New strategy and capital allocation framework (Oct 2015): more than $20 billion of cash generated and over $10 billion returned to shareholders through 2019, with dividends rising at least 10% annually.
- Share repurchases of about $3.2 billion in 2015 (151 million shares); the quarterly dividend was raised 12.5% to $0.135 in February 2016.
- Pending exchange of the 50% Dow Corning stake for ~40% of Hemlock Semiconductor plus ~$4.8 billion in cash, expected to close in 1H 2016; Dow Corning produced $281 million of equity earnings in 2015.
- Balance sheet remains solid: $4.6 billion cash and short-term investments, debt-to-capital of 19%, and BBB+/Baa1 ratings with stable outlooks; a $2 billion revolver is undrawn.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Corning kept $0.15.
- Revenue$9.11B100.0%
- Cost of revenue−$5.46B59.9%
- Gross profit$3.65B40.1%
- Operating costs−$2.33B25.6%
- Operating income$1.32B14.5%
- Interest, other & tax$17.0M0.2%
- Net income$1.34B14.7%
Where FY2015 revenue went
$9.11B- Cost of revenue: $5.46B, 60% of revenue
- SG&A: $1.51B, 17% of revenue
- Operating income: $1.32B, 15% of revenue
- R&D: $638.0M, 7.0% of revenue
- Other operating costs: $185.0M, 2.0% of revenue
Kept 15% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 12, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $9.11B$9.71B | −6.2% |
| Cost of Revenue | $5.46B$5.66B | −3.6% |
| Gross Profit | $3.65B$4.05B | −9.8% |
| R&D Expenses | $638.00M$701.00M | −9.0% |
| SG&A Expenses | $1.51B$1.20B | +25.5% |
| Operating Income | $1.32B$1.93B | −31.5% |
| Net Income | $1.34B$2.47B | −45.8% |
| EPS (Basic) | $1.02$1.82 | −44.0% |
| EPS (Diluted) | $1.00$1.73 | −42.2% |
| Shares Outstanding (Basic) | 1.22B1.30B | −6.6% |
| Shares Outstanding (Diluted) | 1.34B1.43B | −5.9% |
05—Questions
Frequently Asked Questions
Why did GAAP net income drop so much in 2015?
The largest driver was the swing in foreign currency hedge results. Corning recorded an $85 million hedge gain in 2015 versus $1.41 billion in 2014, a roughly $1.05 billion after-tax swing. Lower Display Technologies profit, the absence of a 2014 contingent consideration gain, and a higher pension mark-to-market loss also contributed. Core earnings, which exclude these items, fell only 7%.
How exposed is Corning to the Japanese yen and the Display business?
Very exposed. About 34% of 2015 sales came from Display Technologies, and a significant portion of its revenue is denominated in yen. A 10% move in the yen-dollar rate changes 2015 net sales by roughly $309 million and net income by about $188 million. Corning hedges translated earnings with a notional value of $11.9 billion, and it extended hedges through 2022 in January 2016.
What is the financial risk from asbestos and the Dow Corning and PCC matters?
Corning carries about $678 million in estimated liability for the Amended PCC Plan and non-PCC asbestos claims. This includes a $290 million fixed payment stream, $238 million tied to the fair value of PCE, and $150 million for non-PCC claims. The PCC plan is expected to become effective in April 2016, with funding in June 2016. The non-PCC stay is expected to lift in 2H 2016, which could expose Corning to claims not previously covered by the estimate. Dow Corning separately faces breast implant and commercial creditor claims that could affect equity earnings.
Is the dividend and buyback capacity sustainable?
Management expects to generate over $20 billion in cash through 2019 and return more than $10 billion to shareholders, so buybacks and dividends are planned to continue. In 2015 Corning paid $679 million in dividends and $3.2 billion in buybacks against $2.8 billion of operating cash flow, funding the gap with cash on hand and debt. Investors should note that the 2015 operating cash flow decline (from $4.7 billion to $2.8 billion) was partly due to the absence of a one-time $1.57 billion dividend from Samsung Corning Precision Materials in 2014.
What is the outlook for the Display business in 2016?
Corning expects moderate sequential LCD glass price declines and mid-single-digit volume growth for the full year in line with glass demand. Q1 2016 is expected to see a mid-to-high single-digit sequential decline in volume as panel makers reduce inventory. Longer term, Corning is investing in Gen 10.5 capacity in Hefei, China, supported by a long-term supply agreement with BOE and a $400 million customer deposit over 10 years, with mass production targeted for 3Q 2018.
06—Continue