01—Abstract
Summary
Summary of the 10-K filed February 18, 2020. Cited figures are marked; the original filing is the authoritative source.
Corning's FY2019 10-K shows a year of mixed results: net sales rose 2% to $11.5 billiona, but net income fell 10% to $960 million ($1.07 diluted EPS) as gross margin dropped to 35% from 40%.
Growth came from Environmental Technologies (gasoline particulate filters, +16%), Specialty Materials (Gorilla Glass, +8%) and Life Sciences (+7%). Display Technologies (-1%) and Optical Communications (-3%) weakened in the second half of 2019 as lower volumes hurt factory utilization, and Optical Communications is guided down 5-10% for 2020. Equity earnings collapsed to $17 millionb from $390 million, mainly because Hemlock Semiconductor Group took a $369 million pre-tax share of an impairment on its solar business.
On a non-GAAP basis, core net income fell 6% to $1.58 billionc ($1.76 core diluted EPS). Cash generation was softer, with operating cash flow down to $2.03 billion from $2.92 billion, mainly due to lower customer deposits. Capex fell to $1.98 billion, and the company returned cash through $742 million in dividends and $940 million in buybacks, while raising about $1.5 billion of new U.S. dollar notes, including $1.1 billion of 60-year bonds.
Management also raised the quarterly dividend 10% to $0.22d and announced a 2020-2023 plan to invest $10-12 billion in growth and return $8-10 billion to shareholders. The filing flags several risks: heavy customer concentration (Display Technologies' top four customers are 72% of segment sales), exposure to South Korea, and a yen hedge book with $12.2 billion of notional translated-earnings contracts.
It also discloses an early COVID-19 (coronavirus) risk tied to Wuhan operations, which the 2020 outlook excludes. The auditor's critical audit matters centre on a $415 million South Korean tax deposit receivable and the HSG impairment.
02—Key points
Key Highlights
- Net sales rose 2% to $11.5 billion, but gross margin fell 5 points to 35% as volumes dropped in Display and Optical Communications.
- GAAP net income declined 10% to $960 million ($1.07 diluted EPS); core net income fell 6% to $1.58 billion ($1.76 core diluted EPS).
- Equity earnings fell to $17 million from $390 million, driven by a $369 million pre-tax share of Hemlock Semiconductor's solar impairment.
- Operating cash flow dropped to $2.03 billion from $2.92 billion, mainly due to lower customer deposits; capex was $1.98 billion.
- Environmental Technologies (+16%) and Specialty Materials (+8%) grew strongly, while Optical Communications (-3%) and Display (-1%) declined.
- Dividend raised 10% to $0.22 per quarter; the 2020-2023 Strategy & Growth Framework targets $10-12 billion of growth investment and $8-10 billion of shareholder returns.
- 2020 outlook: Optical Communications sales down 5-10%, display glass volume up mid-single digits, and most other segments growing; the outlook excludes any coronavirus impact.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Corning kept $0.08.
- Revenue$11.50B100.0%
- Cost of revenue−$7.47B64.9%
- Gross profit$4.04B35.1%
- Operating costs−$2.73B23.7%
- Operating income$1.31B11.4%
- Interest, other & tax−$346.0M3.0%
- Net income$960.0M8.3%
Where FY2019 revenue went
$11.50B- Cost of revenue: $7.47B, 65% of revenue
- SG&A: $1.58B, 14% of revenue
- Net income: $960.0M, 8.3% of revenue
- R&D: $800.0M, 7.0% of revenue
- Other operating costs: $344.0M, 3.0% of revenue
- Interest, other & tax: $346.0M, 3.0% of revenue
Kept 8.3% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 18, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $11.50B$11.29B | +1.9% |
| Cost of Revenue | $7.47B$6.83B | +9.4% |
| Gross Profit | $4.04B$4.46B | −9.5% |
| R&D Expenses | $800.00M$807.00M | −0.9% |
| SG&A Expenses | $1.58B$1.80B | −11.9% |
| Operating Income | $1.31B$1.57B | −17.1% |
| Net Income | $960.00M$1.07B | −9.9% |
| EPS (Basic) | $1.11$1.19 | −6.7% |
| EPS (Diluted) | $1.07$1.13 | −5.3% |
| Shares Outstanding (Basic) | 776.00M816.00M | −4.9% |
| Shares Outstanding (Diluted) | 899.00M941.00M | −4.5% |
05—Questions
Frequently Asked Questions
Why did Corning's earnings decline in 2019 despite higher sales?
Sales rose 2%, but gross margin fell to 35% from 40% because of accelerated depreciation, asset write-offs and lower factory utilization in Display and Optical Communications. Equity earnings also dropped sharply after Hemlock Semiconductor's solar impairment, and SG&A included a 2018 legal charge that did not recur, which only partly offset these pressures.
How concentrated is Corning's customer base?
Concentration is high. In Display Technologies, four combined customers account for 72% of segment sales, and in Environmental Technologies, three account for 74%. No single customer reached 10% of consolidated net sales, but the loss or insolvency of a key display customer could materially reduce revenue.
What is the company's outlook for 2020?
Corning expects display glass volume to grow mid-single digits, with moderate price declines. It expects Optical Communications sales to fall 5-10%, mid-single-digit growth in Environmental Technologies and Life Sciences, and high-single-digit growth in Specialty Materials. The outlook does not include any potential coronavirus impact.
How is Corning managing its capital and balance sheet?
In 2019 Corning issued about $1.5 billion of U.S. dollar notes, including $1.1 billion of 60-year bonds, plus roughly $349 million of yen debt. It repurchased 31.0 million shares for about $0.9 billion and paid $742 million in dividends. Total debt to capital rose to 37% from 30%, within the 60% covenant maximum, and it held $2.4 billion of cash at year end.
What are the main risks flagged in the filing?
Key risks include dependence on display glass profitability, customer concentration, single-site manufacturing, exposure to South Korea, currency movements (especially the Japanese yen), and counterparty risk on its derivatives. The filing also notes uncertain South Korean tax disputes, with a $415 million deposit recorded as a receivable, and environmental and legal liabilities.
06—Continue