01—Abstract
Summary
Summary of the 10-K filed February 6, 2017. Cited figures are marked; the original filing is the authoritative source.
Corning's fiscal 2016 results (10-K filed February 6, 2017) were dominated by a one-time, non-taxable $2.7 billiona gain from the May 31, 2016 realignment of its Dow Corning stake, which lifted reported net income to $3.7 billion, or $3.23 diluted EPS, versus $1.3 billion ($1.00) in 2015.
Excluding that gain and other non-operating items, the business is the better guide to run-rate earnings. Core net sales fell 1% to $9.71 billion and core diluted EPS declined to $1.55b from $1.40 on a per-share basis (core earnings fell 6% to $1.77 billion, though share count reduction helped EPS), with the Display Technologies segment under pressure from LCD glass price declines slightly above 10%. Reported GAAP sales rose 3% to $9.39 billion, aided by a 10%+ yen tailwind.
Capital allocation remained shareholder-focused. Corning repurchased about 197 million shares for $4.2 billionc in 2016, and the Board authorized a new $4 billion buyback in December 2016 and raised the quarterly dividend 12.5% in 2016 and another 14.8% (to $0.155) in February 2017. Operating cash flow fell to $2.5 billion from $2.8 billion, and year-end cash was $5.3 billion against $3.6 billion of long-term debt, with total debt-to-capital of 18%.
Management guided to 2017 capex of about $1.5 billiond, with growth in Optical Communications (low-teens sales growth) and Environmental Technologies (flat to up slightly), while the Display segment expects a more moderate price decline. Key risks for investors include customer concentration (three customers drove 65% of Display sales and Samsung Display was 11% of consolidated sales), exposure to the Japanese yen through roughly $16.7 billion of translated-earnings hedges, a $2.4 billion goodwill and intangible base, unresolved non-PCC asbestos claims, and $12.6 billion of unremitted foreign earnings that could carry material tax cost if repatriated.
02—Key points
Key Highlights
- Reported net income of $3.7 billion ($3.23 diluted EPS) was inflated by a $2.7 billion non-taxable gain on the Dow Corning realignment; 2015 reported EPS was $1.00.
- Core net sales declined 1% to $9.71 billion; core diluted EPS rose to $1.55 from $1.40, helped by a lower share count, while core earnings fell 6% to $1.77 billion.
- Display Technologies is the profit engine but weakened: segment net income fell 15% to $935 million on LCD glass price declines slightly above 10%.
- Optical Communications grew 1% in reported sales to $3.0 billion, with 2017 guidance for low-teens growth supported by strong customer commitments.
- Returned substantial capital: $4.2 billion of buybacks in 2016, a new $4 billion authorization, and a 14.8% dividend increase to $0.155 per quarter.
- Operating cash flow fell to $2.5 billion from $2.8 billion; year-end cash of $5.3 billion versus $3.6 billion of long-term debt; debt-to-capital of 18%.
- Material risks include concentrated customers (Samsung Display 11% of sales), yen-hedge counterparty and currency exposure, and about $12.6 billion of unremitted foreign earnings with potentially material repatriation tax.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Corning kept $0.39.
- Revenue$9.39B100.0%
- Cost of revenue−$5.63B59.9%
- Gross profit$3.76B40.1%
- Operating costs−$2.34B24.9%
- Operating income$1.42B15.2%
- Interest, other & tax$2.27B24.2%
- Net income$3.69B39.4%
Where FY2016 revenue went
$9.39B- Cost of revenue: $5.63B, 60% of revenue
- SG&A: $1.46B, 16% of revenue
- Operating income: $1.42B, 15% of revenue
- R&D: $637.0M, 6.8% of revenue
- Other operating costs: $240.0M, 2.6% of revenue
Kept 15% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 6, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $9.39B$9.11B | +3.1% |
| Cost of Revenue | $5.63B$5.46B | +3.1% |
| Gross Profit | $3.76B$3.65B | +3.0% |
| R&D Expenses | $637.00M$638.00M | −0.2% |
| SG&A Expenses | $1.46B$1.51B | −3.1% |
| Operating Income | $1.42B$1.32B | +7.7% |
| Net Income | $3.69B$1.34B | +176.0% |
| EPS (Basic) | $3.53$1.02 | +246.1% |
| EPS (Diluted) | $3.23$1.00 | +223.0% |
| Shares Outstanding (Basic) | 1.02B1.22B | −16.3% |
| Shares Outstanding (Diluted) | 1.14B1.34B | −14.8% |
05—Questions
Frequently Asked Questions
How much of the 2016 net income increase was from one-time items?
Most of it. The $2.7 billion non-taxable gain on the Dow Corning realignment, plus a $105 million tax adjustment, accounts for the bulk of the $2.4 billion rise in net income. Core earnings actually declined 6% to $1.77 billion.
Why did Display Technologies earnings decline?
LCD glass prices fell slightly more than 10% and the company recorded a $289 million decrease in realized gains on its yen and won currency hedges. Volume grew in the mid-single digits, partially offsetting these pressures.
What is the outlook for 2017?
Management expects Optical Communications sales to grow in the low-teens, Environmental Technologies to be flat to slightly up, and Life Sciences to grow low-single digits. Display glass demand is expected to grow in the mid-single digits, with a more moderate LCD price decline than in 2016. Capex is planned at about $1.5 billion.
How concentrated is Corning's customer base?
Highly concentrated. Three customers accounted for 65% of Display Technologies sales and 56% of Specialty Materials sales, and three accounted for 85% of Environmental Technologies sales. Samsung Display alone was 11% of consolidated 2016 sales.
How is shareholder capital being returned?
In 2016 Corning repurchased 197.1 million shares for about $4.2 billion and paid $645 million in dividends. A new $4 billion buyback was approved in December 2016, and the quarterly dividend was raised to $0.155 in February 2017 after a 12.5% increase in 2016.
06—Continue