01—Abstract
Summary
Summary of the 10-K filed February 12, 2019. Cited figures are marked; the original filing is the authoritative source.
Corning's 2018 10-K shows a year of strong top-line growth and a sharp rebound in reported earnings.
Net sales rose 12% to $11.29 billiona, led by Optical Communications (up 18%, including the $841 million acquisition of 3M's Communication Markets Division) and Environmental Technologies (up 17%). Net income attributable to Corning was $1.07 billion, or $1.13 diluted EPS, versus a net loss of $0.5 billion in 2017, which had been depressed by about $1.5 billion of one-time tax reform charges. Core diluted EPS, a non-GAAP measure management emphasizes, rose to $1.78 from $1.60, and core earnings grew 2% to $1.67 billion.
The quality of the improvement is mixed. Display Technologies, historically the profit engine, saw segment net income fall 6% to $835 millionb as Gen 10.5 ramp-up costs and display glass price declines weighed on results, even though pricing stabilized in the second half. Operating cash flow improved to $2.92 billion, but capital spending rose to $2.24 billion, and net cash fell during the year.
Customer deposits climbed to $1.0 billionc, which boosted operating cash flow but represents liabilities tied to future glass supply rather than earned revenue. Legal expenses also rose $105 million, and the company faces concentration risk, with a few customers driving most segment sales, including two South Korean display customers. Capital allocation remained shareholder-friendly.
Corning repurchased 74.8 million shares for about $2.2 billiond, paid $685 million in dividends, and raised the quarterly dividend 16% to $0.18 for 2018 and again to $0.20 in 2019. Total debt rose to about $6.0 billion, and debt-to-capital was 30%, comfortably below the 60% covenant limit. Management's 2019 outlook calls for low-teens Optical Communications growth, high-single-digit Environmental Technologies growth, and a narrowing of display price declines to mid-single digits.
02—Key points
Key Highlights
- Net sales grew 12% to $11.29 billion, with all five reportable segments posting increases; Optical Communications led at $4.19 billion (+18%).
- Diluted EPS of $1.13 compared with a $0.66 loss in 2017, which absorbed roughly $1.5 billion of one-time Tax Cuts and Jobs Act charges; core diluted EPS rose 11% to $1.78.
- Display Technologies, the largest profit contributor, saw segment net income fall 6% to $835 million due to Gen 10.5 ramp costs and display glass pricing, though 2018 was described as the best pricing environment in over a decade.
- Operating cash flow rose to $2.92 billion, aided by a $600 million increase in customer deposits, which reached $1.0 billion.
- Corning returned cash aggressively: $2.2 billion in buybacks (74.8 million shares) and $685 million in dividends, with the quarterly dividend increased 11.1% to $0.20 for 2019.
- Leverage remains moderate, with total debt rising to $5.99 billion long-term and debt-to-total-capital at 30% against a 60% covenant limit; the company issued new yen and dollar notes, including 50-year debt.
- Customer concentration is high: four customers account for 70% of Display sales and three for 78% of Environmental Technologies sales, and the company faces an unresolved $172 million IRS settlement and asbestos-related liabilities.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Corning kept $0.09.
- Revenue$11.29B100.0%
- Cost of revenue−$6.83B60.5%
- Gross profit$4.46B39.5%
- Operating costs−$2.89B25.6%
- Operating income$1.57B14.0%
- Interest, other & tax−$509.0M4.5%
- Net income$1.07B9.4%
Where FY2018 revenue went
$11.29B- Cost of revenue: $6.83B, 60% of revenue
- SG&A: $1.80B, 16% of revenue
- Net income: $1.07B, 9.4% of revenue
- R&D: $807.0M, 7.1% of revenue
- Other operating costs: $280.0M, 2.5% of revenue
- Interest, other & tax: $509.0M, 4.5% of revenue
Kept 9.4% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 12, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $11.29B$10.12B | +11.6% |
| Cost of Revenue | $6.83B$6.10B | +12.0% |
| Gross Profit | $4.46B$4.02B | +11.0% |
| R&D Expenses | $807.00M$689.00M | +17.1% |
| SG&A Expenses | $1.80B$1.47B | +22.1% |
| Operating Income | $1.57B$1.61B | −2.1% |
| Net Income | $1.07B-$497.00M | +314.5% |
| EPS (Basic) | $1.19$-0.66 | +280.3% |
| EPS (Diluted) | $1.13$-0.66 | +271.2% |
| Shares Outstanding (Basic) | 816.00M895.00M | −8.8% |
| Shares Outstanding (Diluted) | 941.00M895.00M | +5.1% |
05—Questions
Frequently Asked Questions
Why did Corning swing from a net loss in 2017 to a profit in 2018?
The 2017 loss of $497 million was driven by roughly $1.5 billion of one-time charges under the 2017 Tax Act, including a $1.1 billion toll charge on unrepatriated foreign earnings and a $347 million remeasurement of U.S. deferred tax assets. In 2018 those charges were absent, and operating income grew modestly, so net income rose to $1.07 billion.
What is driving growth in the Optical Communications segment?
Sales rose 18% to $4.19 billion on higher carrier and enterprise network demand, as telecom networks migrate from copper to optical fiber. The acquisition of 3M's Communication Markets Division contributed about $200 million of 2018 sales, and management expects a full year of CMD sales to drive low-teens growth in 2019.
Is the display glass business still a concern for investors?
It remains a key risk. Display Technologies still generates a large share of profit and cash flow, but segment net income fell 6% in 2018 as Gen 10.5 capacity costs weighed on margins. Management expects 2019 price declines to narrow to mid-single digits and volume to grow faster than the market, but results depend heavily on pricing and a few large customers.
How much is Corning returning to shareholders, and can it sustain that pace?
In 2018 Corning spent about $2.2 billion on share repurchases and $685 million on dividends, funded largely by operating cash flow and new debt issuance. Since the 2015 framework it has distributed $11.8 billion. Capital spending of roughly $2.0 billion planned for 2019 and rising debt could constrain future buybacks if earnings or cash flow weaken.
What are the main risks highlighted in the filing?
Key risks include concentrated customers, with a small number of buyers accounting for most segment sales; single-site and South Korea manufacturing exposure; significant foreign currency hedging, including about $13.6 billion of notional yen and other translated earnings contracts; a pending IRS audit settlement; and ongoing asbestos and Dow Corning-related indemnity obligations.
06—Continue