01—Abstract
Summary
Summary of the 10-K filed February 12, 2021. Cited figures are marked; the original filing is the authoritative source.
Corning's 2020 10-K shows a year of sharp earnings pressure and portfolio reshaping.
Net sales fell 2% to $11.3 billiona, while gross margin dropped 12% to $3.5 billion (31% of sales, down from 35%). GAAP net income fell 47% to $512 million, or $0.54 per diluted share, versus $960 million in 2019. The decline was driven by a $211 million R&D asset impairment in 'All Other', $827 million in total restructuring, impairment and other charges, a $105 million cumulative revenue reduction from a customer exiting LCD panel production, and $226 million in translated earnings contract losses.
These were partly offset by a $498 millionb pre-tax gain from consolidating Hemlock Semiconductor Group (HSG) and an $83 million after-tax gain on an IPO-related investment. Core net income, a non-GAAP measure, fell 22% to $1.24 billion, or $1.39 per diluted share. Segment results diverged.
Optical Communications sales fell 12% to $3.56 billionc as carrier and enterprise customers cut capital spending, and segment net income dropped 25%. Display Technologies, Corning's largest profit contributor at $717 million of segment net income, declined 9% on lower first-half volumes and severance-related restructuring. Specialty Materials grew 18% to $1.88 billion, driven by premium cover glass (Gorilla Glass Victus and Ceramic Shield for Apple) and semiconductor demand, and its segment net income rose 40%.
Customer concentration is high: four customers account for 74% of Display sales, and no single customer exceeded 10% of consolidated sales overall. Liquidity and capital allocation remain conservative. Cash and equivalents were $2.7 billiond, total debt to capital was 37% against a 60% covenant, and operating cash flow was $2.2 billion.
Capital expenditures fell to $1.4 billion, with a similar level planned for 2021. Share repurchases were suspended in March 2020, although the quarterly dividend was raised 9% to $0.24 per share. Management guided to Q1 2021 net sales of $3.0 to $3.2 billion and expects year-over-year growth to accelerate.
02—Key points
Key Highlights
- Net sales declined 2% to $11.3 billion, but GAAP net income fell 47% to $512 million ($0.54 per diluted share), while non-GAAP core net income fell 22% to $1.24 billion ($1.39 per share).
- Gross margin contracted to 31% from 35% in 2019, driven by Display severance, lower volumes, and the $105 million cumulative revenue reduction tied to a customer exiting LCD panel production.
- Optical Communications sales fell 12% to $3.56 billion on customer capex cuts, while Specialty Materials grew 18% to $1.88 billion on premium cover glass and semiconductor demand.
- The $498 million pre-tax gain from consolidating Hemlock Semiconductor Group (HSG) on September 9, 2020 boosted reported results. HSG added $194 million of sales to 'All Other' and $1.07 billion of deferred revenue and $264 million of customer deposits to the balance sheet.
- Restructuring, impairment and other charges totaled $827 million, including $148 million of severance and a $217 million impairment of R&D programs in 'All Other'.
- Balance sheet remains strong, with $2.7 billion in cash, total debt to capital of 37% against a 60% covenant, and $2.2 billion of operating cash flow.
- Share buybacks were suspended in March 2020, but the quarterly dividend was raised 9% to $0.24 per share, the tenth increase since October 2011.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, Corning kept $0.05.
- Revenue$11.30B100.0%
- Cost of revenue−$7.77B68.8%
- Gross profit$3.53B31.2%
- Operating costs−$3.02B26.7%
- Operating income$509.0M4.5%
- Interest, other & tax$3.0M0.0%
- Net income$512.0M4.5%
Where FY2020 revenue went
$11.30B- Cost of revenue: $7.77B, 69% of revenue
- SG&A: $1.75B, 15% of revenue
- Operating income: $509.0M, 4.5% of revenue
- R&D: $1.00B, 8.8% of revenue
- Other operating costs: $275.0M, 2.4% of revenue
Kept 4.5% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 12, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $11.30B$11.50B | −1.7% |
| Cost of Revenue | $7.77B$7.47B | +4.1% |
| Gross Profit | $3.53B$4.04B | −12.5% |
| R&D Expenses | $1.00B$800.00M | +25.0% |
| SG&A Expenses | $1.75B$1.58B | +10.2% |
| Operating Income | $509.00M$1.31B | −61.0% |
| Net Income | $512.00M$960.00M | −46.7% |
| EPS (Basic) | $0.54$1.11 | −51.4% |
| EPS (Diluted) | $0.54$1.07 | −49.5% |
| Shares Outstanding (Basic) | 761.00M776.00M | −1.9% |
| Shares Outstanding (Diluted) | 772.00M899.00M | −14.1% |
05—Questions
Frequently Asked Questions
Why did Corning's reported net income fall so sharply in 2020?
Reported net income fell $448 million to $512 million. The main drags were a $226 million after-tax loss on translated earnings contracts, $170 million after tax for an R&D asset impairment, $133 million of higher litigation and environmental reserves, $117 million of higher expenses (mainly Display severance), and a $105 million cumulative revenue reduction. These were partly offset by the $498 million pre-tax HSG consolidation gain and an $83 million after-tax IPO gain.
What is the difference between GAAP and core performance measures for Corning?
Core performance measures exclude items management views as not reflecting ongoing operations, including translated earnings contract gains and losses, restructuring and impairment charges, acquisition costs, litigation, pension mark-to-market adjustments, and one-time gains like the HSG gain. On this basis, 2020 core net income was $1.24 billion ($1.39 per diluted share), versus $1.58 billion ($1.76) in 2019. Investors should weigh these non-GAAP figures alongside GAAP results, since recurring restructuring charges have appeared in several recent years.
How concentrated is Corning's customer base, and what are the risks?
Concentration is high. Four customers account for 74% of Display Technologies sales, three for 65% of Specialty Materials, three for 74% of Environmental Technologies, and two for 39% of Life Sciences. Optical Communications relies on one combined customer group for 11% of segment sales. Losing a key customer, or a customer's insolvency or leverage in contract negotiations, could materially reduce sales and cash flow. The LCD exit by one Display customer already produced the $105 million revenue adjustment.
What does the HSG consolidation mean for Corning's financials going forward?
Corning obtained a 100% interest in Hemlock Semiconductor LLC and 80.5% of Hemlock Semiconductor Operations LLC, and began consolidating HSG on September 9, 2020. HSG contributed $194 million of 2020 sales, reported within 'All Other', and about 4% of total assets and 2% of net sales were excluded from the internal control assessment. The consolidation also created $1.07 billion of deferred revenue from prepaid long-term supply contracts, which will be recognized as revenue as units ship, plus a $264 million customer deposit repayable from 2029 to 2034. These items will shape future reported revenue and cash flow.
What is management's outlook and capital allocation plan for 2021?
Management expects 2021 to be a year of growth, with year-over-year sales growth accelerating in Q1 2021 to roughly $3.0 to $3.2 billion of net sales. Capital expenditures are planned at about $1.4 billion, and the company will prioritize operational excellence, cash generation and prudent capital allocation. Share repurchases were suspended in March 2020 and no buybacks were made for the rest of the year, while the dividend was increased 9% to $0.24 per quarter. Management believes liquidity is sufficient to fund operations, capital spending, debt maturities, dividends and any future buybacks.
06—Continue