ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a historical and prospective narrative on the Company’s financial condition and results of operations. This interim MD&A should be read in conjunction with the MD&A in our 2015 Form 10-K. The various sections of this MD&A contain a number of forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “plans,” “goals,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “should,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in “Risk Factors” in Part I, Item 1A of our 2015 Form 10-K, and as may be updated in our Forms 10-Q. Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of September 30, 2016.
Our MD&A includes the following sections:
·
|
Core Performance Measures
|
·
|
Capital Resources and Liquidity
|
·
|
Critical Accounting Estimates
|
·
|
New Accounting Standards
|
·
|
Forward-Looking Statements
|
OVERVIEW
Strategy and Capital Allocation Framework
In October 2015, Corning announced a new strategy and capital allocation framework that reflects the Company’s financial and operational strengths, as well as its ongoing commitment to increasing shareholder value.
Our probability of success increases as we invest in our world-class capabilities. Over the next four years, Corning will concentrate approximately 80% of its research, development and engineering investment and capital spending on a cohesive set of three core technologies, four manufacturing and engineering platforms, and five market-access platforms. This strategy will allow us to quickly apply our talents and repurpose our assets as needed.
Our financial strength also allows us to increase our return to shareholders. Through 2019, we expect to generate and deploy over $26 billion and return greater than $12.5 billion to shareholders through share repurchases and dividends. We intend to increase our dividend per common share by at least 10% annually through 2019.
© 2016 Corning Incorporated. All Rights Reserved.
Investing in our Future
Corning is one of the world’s leading innovators in materials science. For more than 160 years, Corning has applied its unparalleled expertise in specialty glass, ceramics, and optical physics to develop products that have created new industries and transformed people’s lives. In the third quarter and first three quarters of 2016, our spending on research, development and engineering was $187 million and $569 million, respectively, consistent with the same periods in 2015. We continue to maintain our innovation strategy focusing on growing our existing businesses, developing opportunities adjacent or closely related to our existing technical and manufacturing capabilities, and investing in long-range opportunities in each of our market segments. We continue to make investments aimed at developing new products, including glass substrates for high-performance displays and LCD applications, precision glass for advanced displays, emission control products for cars, trucks and off-road vehicles, products that accelerate drug discovery and manufacturing and the optical fiber, cable and hardware and equipment that enable fiber-to-the-premises, and next generation data centers. In addition, we are focusing on wireless solutions for diverse venue applications, such as distributed antenna systems. We have also focused our research, development and engineering spending to support the advancement of new product attributes for our Corning® Gorilla® Glass suite of products, including Gorilla Glass in automotive and architectural markets. We will continue to focus on adjacent glass opportunities which leverage existing materials or manufacturing processes, including Corning® Willow™ Glass, our ultra-slim flexible glass substrate for use in next-generation consumer electronic and architectural applications.
Summary of results for the three and nine months ending September 30, 2016
Net sales in the third quarter and first three quarters of 2016 were $2.5 billion and $6.9 billion, respectively, compared to $2.3 billion and $6.9 billion in the same periods in 2015. Net sales increased in all of our segments in the third quarter of 2016, led by the Display Technologies and Optical Communications segments, up $145 million and $48 million, respectively. The increase in sales in the first three quarters of 2016 was driven by the Display Technologies segment and the Corning Pharmaceutical Technologies business, which increased by $54 million and $80 million, respectively. Lower sales in the Optical Communications segment due to production issues related to the implementation of new manufacturing software, which limited our ability to fulfill customer orders in the first half of 2016, partially offset the increase in these segments.
In the third quarter of 2016, we generated net income of $284 million or $0.26 per share, compared to net income of $212 million or $0.15 per share for the same period in 2015. The increase in net income was driven by the following items (amounts presented after-tax):
·
|
The decrease in unrealized losses from our foreign currency hedges related to translated earnings in the amount of $50 million;
|
·
|
An increase in net income of $24 million in the Display Technologies, driven by an increase in volume in the low-teens in percentage terms, the positive impact of the change in the contingent consideration fair value adjustment in the amount of $51 million and improvements in manufacturing efficiency, offset somewhat by LCD glass price declines slightly above 10%; and
|
·
|
An increase in net income of $8 million in the Optical Communications segment, driven by an increase in fiber-to-the-home products volume, favorable product mix and improvements in manufacturing efficiency.
|
Partially offsetting these events were the following items:
·
|
A decrease of $20 million in equity earnings as a result of our strategic realignment of our ownership interest in Dow Corning; and
|
·
|
Pension mark-to-market adjustments of $17 million resulting from small settlements in several of our benefit plans.
|
© 2016 Corning Incorporated. All Rights Reserved.
The translation impact of fluctuations in foreign currency exchange rates positively affected Corning’s consolidated net income in the three months ended September 30, 2016 in the amount of $83 million when compared to the same period in 2015, largely due to the strengthening of the Japanese yen. This impact was offset by a decrease of $105 million in the realized gain from our foreign currency translation hedges.
In the first three quarters of 2016, we generated net income of $2,123 million or $1.81 per share, compared to net income of $1,115 million or $0.82 per share for the same period in 2015. The increase in net income in the first nine months of 2016 was driven by the following items (amounts presented after tax):
·
|
A $2.7 billion non-taxable gain and $105 million positive tax adjustment on the strategic realignment of our ownership interest in Dow Corning completed on May 31, 2016; and
|
·
|
The gain of $25 million on the contribution of our equity interests in PCC and PCE as partial settlement of the asbestos litigation.
|
Partially offsetting these events were the following items:
·
|
The increase in unrealized losses from our foreign currency translation hedges in the amount of $1,257 million;
|
·
|
Lower net income in the Display Technologies segment, down $160 million, or 19%, primarily driven by LCD glass price declines slightly higher than 10% and a decrease of $220 million in net realized gains from our yen and won-denominated currency hedge contracts, offset somewhat by an increase in volume and the positive impact on operations from the strengthening of the Japanese yen versus the U.S. dollar exchange rate;
|
·
|
A decrease in net income of $32 million, or 16%, in the Optical Communications segment, driven by lower sales primarily due to production issues related to the implementation of new manufacturing software, which limited our ability to fulfill customer orders in the first half of 2016; and
|
·
|
The resolution of an investigation by the U.S. Department of Justice and related costs in the total amount of $86 million.
|
The translation impact of fluctuations in foreign currency exchange rates positively affected Corning’s consolidated net income in the nine months ended September 30, 2016 in the amount of $171 million when compared to the same period in 2015, largely due to the strengthening of the Japanese yen versus the U.S. dollar. This impact was offset by a decrease of $215 million in the realized gain from our foreign currency translation hedges.
2016 Corporate Outlook
Corning expects its Display Technologies segment to experience continued moderate sequential LCD glass price declines in the fourth quarter. For the full year we expect the LCD glass market and our LCD glass demand to grow in the mid-single digit percentage year over year. We anticipate that sales in the Optical Communications segment will grow by a high-single digit percentage in the fourth quarter driven by strong fiber-to-the-home demand, resulting in low-single digits growth for the full-year. In the Environmental Technologies segment, we expect fourth quarter sales to be down low-single digits versus the fourth quarter last year driven by continued weakness in the heavy-duty truck markets, resulting in sales being down slightly for the full year. In the Specialty Materials segment we expect high-single digit growth year-over-year in the fourth quarter, resulting in sales being down slightly for the full year. We will continue to execute our strategy and capital allocation framework begun in the fourth quarter of 2015, under which we plan to grow and sustain our leadership position in our markets and return more than $12.5 billion to shareholders through 2019.
© 2016 Corning Incorporated. All Rights Reserved.
RESULTS OF OPERATIONS
Selected highlights for the third quarter follow (dollars in millions):
|
Three months ended
September 30,
|
|
%
change
|
|
Nine months ended
September 30,
|
|
%
change
|
|
2016
|
|
2015
|
|
16 vs. 15
|
|
2016
|
|
2015
|
|
16 vs. 15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
2,507
|
|
$
|
2,272
|
|
10%
|
|
$
|
6,914
|
|
$
|
6,880
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
$
|
1,041
|
|
$
|
892
|
|
17%
|
|
$
|
2,756
|
|
$
|
2,796
|
|
(1%)
|
(gross margin %)
|
|
42%
|
|
|
39%
|
|
|
|
|
40%
|
|
|
41%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
302
|
|
$
|
307
|
|
(2%)
|
|
$
|
1,104
|
|
$
|
960
|
|
15%
|
(as a % of net sales)
|
|
12%
|
|
|
14%
|
|
|
|
|
16%
|
|
|
14%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and engineering expenses
|
$
|
187
|
|
$
|
181
|
|
3%
|
|
$
|
569
|
|
$
|
561
|
|
1%
|
(as a % of net sales)
|
|
7%
|
|
|
8%
|
|
|
|
|
8%
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of affiliated companies
|
$
|
19
|
|
$
|
39
|
|
(51%)
|
|
$
|
119
|
|
$
|
195
|
|
(39%)
|
(as a % of net sales)
|
|
1%
|
|
|
2%
|
|
|
|
|
2%
|
|
|
3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translated earnings contract (loss) gain, net
|
$
|
(237)
|
|
$
|
(149)
|
|
59%
|
|
$
|
(2,295)
|
|
$
|
42
|
|
*
|
(as a % of net sales)
|
|
*
|
|
|
*
|
|
|
|
|
*
|
|
|
1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on realignment of equity investment
|
|
|
|
|
|
|
|
|
$
|
2,676
|
|
|
|
|
*
|
(as a % of net sales)
|
|
|
|
|
|
|
|
|
|
39%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
$
|
257
|
|
$
|
218
|
|
18%
|
|
$
|
1,288
|
|
$
|
1,317
|
|
(2%)
|
(as a % of net sales)
|
|
10%
|
|
|
10%
|
|
|
|
|
19%
|
|
|
19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit (provision) for income taxes
|
$
|
27
|
|
$
|
(6)
|
|
(550%)
|
|
$
|
835
|
|
$
|
(202)
|
|
(513%)
|
(as a % of net sales)
|
|
1%
|
|
|
*
|
|
|
|
|
12%
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Corning Incorporated
|
$
|
284
|
|
$
|
212
|
|
34%
|
|
$
|
2,123
|
|
$
|
1,115
|
|
90%
|
(as a % of net sales)
|
|
11%
|
|
|
9%
|
|
|
|
|
31%
|
|
|
16%
|
|
|
*
|
Percent change not meaningful.
|
© 2016 Corning Incorporated. All Rights Reserved.
Net Sales
The following table presents net sales by reportable segment (in millions):
|
Three months ended
September 30,
|
|
%
Change
|
|
Nine months ended
September 30,
|
|
%
Change
|
|
2016
|
|
2015
|
|
16 vs. 15
|
|
2016
|
|
2015
|
|
16 vs. 15
|
Display Technologies
|
$
|
902
|
|
$
|
757
|
|
19%
|
|
$
|
2,408
|
|
$
|
2,354
|
|
2%
|
Optical Communications
|
|
795
|
|
|
747
|
|
6%
|
|
|
2,186
|
|
|
2,244
|
|
(3)%
|
Environmental Technologies
|
|
264
|
|
|
257
|
|
3%
|
|
|
787
|
|
|
799
|
|
(2)%
|
Specialty Materials
|
|
295
|
|
|
288
|
|
2%
|
|
|
788
|
|
|
832
|
|
(5)%
|
Life Sciences
|
|
214
|
|
|
211
|
|
1%
|
|
|
633
|
|
|
619
|
|
2%
|
All Other
|
|
37
|
|
|
12
|
|
208%
|
|
|
112
|
|
|
32
|
|
250%
|
Total net sales
|
$
|
2,507
|
|
$
|
2,272
|
|
10%
|
|
$
|
6,914
|
|
$
|
6,880
|
|
-
|
For the three months ended September 30, 2016, net sales increased by $235 million, or 10%, when compared to the same period in 2015. The primary sales drivers by segment were as follows:
·
|
An increase of $145 million in the Display Technologies segment, driven by the positive impact from the strengthening of the Japanese yen in the amount of $138 million and an increase in volume in the low-teens in percentage terms, partially offset by LCD glass price declines slightly higher than 10%;
|
·
|
An increase of $48 million in the Optical Communications segment primarily due to higher sales of fiber-to-the-home products in North America;
|
·
|
An increase of $7 million in the Environmental Technologies segment, driven by record quarterly sales of light-duty substrate products due to market strength in North America, Europe and China;
|
·
|
An increase of $7 million in the Specialty Materials segment;
|
·
|
An increase of $3 million in the Life Sciences segment; and
|
·
|
An increase of $25 million in the All Other segment, driven by the acquisition of a glass tubing business and the formation of the Corning Pharmaceutical Technologies business completed in the fourth quarter of 2015.
|
For the nine months ended September 30, 2016, net sales increased by $34 million when compared to the same period in 2015. The primary sales drivers by segment were as follows:
·
|
An increase of $54 million in the Display Technologies segment, driven by the positive impact from the strengthening of the Japanese yen in the amount of $274 million and a low-single digit percentage volume increase, offset somewhat by LCD glass price declines slightly higher than 10%;
|
·
|
A decrease of $58 million in the Optical Communications segment, driven primarily by production issues related to the implementation of new manufacturing software;
|
·
|
A decrease of $12 million in the Environmental Technologies segment driven by lower sales of heavy-duty diesel products due to the weakening of the North American truck market, offset partially by an increase in sales of light-duty substrates, driven by strength in the North American and European markets;
|
·
|
A decrease of $44 million in the Specialty Materials segment, driven by a decline in volume of Corning Gorilla Glass products;
|
·
|
An increase of $14 million in the Life Sciences segment, driven by volume growth in Europe, North America and China; and
|
·
|
An increase of $80 million in the All Other segment, driven by the acquisition of a glass tubing business and the formation of the Corning Pharmaceutical Technologies business completed in the fourth quarter of 2015.
|
In the three and nine months ended September 30, 2016, the translation impact of fluctuations in foreign currency exchange rates, primarily the Japanese yen, positively impacted Corning’s consolidated net sales by $133 million and $246 million, respectively, when compared to the same periods in 2015.
© 2016 Corning Incorporated. All Rights Reserved.
Cost of Sales
The types of expenses included in the cost of sales line item are: raw materials consumption, including direct and indirect materials; salaries, wages and benefits; depreciation and amortization; production utilities; production-related purchasing; warehousing (including receiving and inspection); repairs and maintenance; inter-location inventory transfer costs; production and warehousing facility property insurance; rent for production facilities; and other production overhead.
Gross Margin
In the three months ended September 30, 2016, gross margin dollars and gross margin as a percentage of net sales increased when compared to the same period last year, up $149 million and 3%, respectively, driven by higher sales, cost reductions and improvements in manufacturing efficiency in the majority of our segments. The Optical Communications segment experienced the largest increase, driven by an increase in volume and favorable product mix.
In the nine months ended September 30, 2016, gross margin dollars and gross margin as a percentage of net sales decreased when compared to the same period last year, down $40 million and 1%, respectively. The decrease was primarily driven by LCD glass price declines in the Display Technologies segment and the impact of a power outage that temporarily halted production at our Tainan, Taiwan manufacturing location in the first half of 2016, resulting in asset write-offs and charges for facility repairs. Additionally, in the first half of 2016, gross margin was negatively impacted by issues with a manufacturing software implementation in the Optical Communications segment which limited our ability to fulfill customer orders. Lower manufacturing costs in the Specialty Materials segment and the stronger Japanese yen and Korean won versus the U.S. dollar exchange rate partially offset the decline in these periods.
Selling, General and Administrative Expenses
When compared to the third quarter of 2015, selling, general and administrative expenses decreased by $5 million in the three months ended September 30, 2016, driven by the positive impact of the change in the contingent consideration fair value adjustment of $61 million, offset somewhat by an increase of $26 million in the mark-to-market of our defined benefit pension plans resulting from small settlements in several of our benefit plans and $25 million in higher variable compensation and benefit expenses.
When compared to the first three quarters of 2015, selling, general and administrative expenses increased by $144 million in the nine months ended September 30, 2016, driven by the following items:
·
|
An increase of $58 million in acquisition-related costs primarily related to the realignment of our equity interest in Dow Corning and an acquisition completed in the second quarter of 2016;
|
·
|
An increase of $60 million in litigation, regulatory and other legal costs related to the resolution of an investigation by the U.S. Department of Justice and an environmental matter, partially offset by the gain on the contribution of our equity interests in PCC and PCE as partial settlement of the asbestos litigation;
|
·
|
An increase of $52 million in the mark-to-market of our defined benefit pension plans; and
|
·
|
Higher operating expenses in the Optical Communications, Environmental Technologies and Specialty Materials segments.
|
The positive impact of the change in the contingent consideration fair value adjustment of $40 million and a decrease of $25 million in post-combination expenses, which were higher in 2015 due to the completion of four acquisitions, partially offset the increases detailed above.
The types of expenses included in the selling, general and administrative expenses line item are: salaries, wages and benefits; stock-based compensation expense; travel; sales commissions; professional fees; and depreciation and amortization, utilities and rent for administrative facilities.
© 2016 Corning Incorporated. All Rights Reserved.
Research, Development and Engineering Expenses
For the three and nine months ended September 30, 2016, research, development and engineering expenses and as a percentage of sales were relatively consistent with the same periods last year.
Equity in Earnings of Affiliated Companies
The following provides a summary of equity in earnings of affiliated companies (in millions):
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Dow Corning Corporation
(1)
|
|
|
|
$
|
36
|
|
$
|
82
|
|
$
|
185
|
Hemlock Semiconductor Group
(2)
|
$
|
22
|
|
|
|
|
|
44
|
|
|
|
All other
|
|
(3)
|
|
|
3
|
|
|
(7)
|
|
|
10
|
Total equity earnings
|
$
|
19
|
|
$
|
39
|
|
$
|
119
|
|
$
|
195
|
(1)
|
Results include equity earnings for Dow Corning, which includes the silicones business and Hemlock Semiconductor business, through May 31, 2016, the date of the realignment of our ownership interest in Dow Corning.
|
(2)
|
Results include equity earnings for Hemlock Semiconductor Group beginning on June 1, 2016.
|
On May 31, 2016, Corning completed the strategic realignment of its equity investment in Dow Corning Corporation (“Dow Corning”) pursuant to the Transaction Agreement announced on December 10, 2015. Under the terms of the Transaction Agreement, Corning exchanged with Dow Corning its 50% stock interest in Dow Corning for 100% of the stock of a newly formed entity, which holds an equity interest in Hemlock Semiconductor Group and approximately $4.8 billion in cash.
The equity in earnings line on our income statement for the nine months ending September 30, 2016 reflects both the equity earnings from the silicones and polysilicones (Hemlock Semiconductor) businesses of Dow Corning from January 1, 2016 through May 31, 2016, the closing date of the Transaction Agreement, and four months of equity earnings from Hemlock Semiconductor Group. Prior to the realignment of Dow Corning, equity earnings from the Hemlock Semiconductor business were reported on the equity in earnings line in Corning’s income statement, net of Dow Corning’s 35% U.S. tax. Additionally, Corning reported its tax on equity earnings from Dow Corning on the tax provision line on its income statement at a U.S. tax provision rate of 7%. As part of the realignment, Hemlock Semiconductor Group was converted to a partnership. Each of the partners is responsible for the taxes on their portion of equity earnings. Therefore, post-realignment, Hemlock Semiconductor Group’s equity earnings is reported before tax on the equity in earnings line and Corning’s tax is reported on the tax provision line.
Refer to Note 9 (Investments) to the consolidated financial statements for additional information.
© 2016 Corning Incorporated. All Rights Reserved.
Translated earnings contract (loss) gain, net
Included in the line item Translated earnings contract (loss) gain, net, is the impact of foreign currency hedges which hedge our translation exposure arising from movements in the Japanese yen, South Korean won and euro against the U.S. dollar and its impact on our net earnings. The following table provides detailed information on the impact of our translated earnings contract losses and gains:
|
Three months ended
September 30, 2016
|
|
Three months ended
September 30, 2015
|
|
Change
2016 vs. 2015
|
(in millions)
|
Income
before
income
taxes
|
|
Net
income
|
|
Income
before
income
taxes
|
|
Net
income
|
|
Income
before
income
taxes
|
|
Net
income
|
Hedges related to translated earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses), net
|
$
|
2
|
|
$
|
1
|
|
$
|
168
|
|
$
|
106
|
|
$
|
(166)
|
|
$
|
(105)
|
Unrealized (losses) gains, net
|
|
(239)
|
|
|
(150)
|
|
|
(317)
|
|
|
(200)
|
|
|
78
|
|
|
50
|
Total translated earnings contract loss, net
|
$
|
(237)
|
|
$
|
(149)
|
|
$
|
(149)
|
|
$
|
(94)
|
|
$
|
(88)
|
|
$
|
(55)
|
|
Nine months ended
September 30, 2016
|
|
Nine months ended
September 30, 2015
|
|
Change
2016 vs. 2015
|
(in millions)
|
Income
before
income
taxes
|
|
Net
income
|
|
Income
before
income
taxes
|
|
Net
income
|
|
Income
before
income
taxes
|
|
Net
income
|
Hedges related to translated earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains (losses), net
|
$
|
146
|
|
$
|
92
|
|
$
|
489
|
|
$
|
307
|
|
$
|
(343)
|
|
$
|
(215)
|
Unrealized losses, net
|
|
(2,441)
|
|
|
(1,539)
|
|
|
(447)
|
|
|
(282)
|
|
|
(1,994)
|
|
|
(1,257)
|
Total translated earnings contract (loss) gain, net
|
$
|
(2,295)
|
|
$
|
(1,447)
|
|
$
|
42
|
|
$
|
25
|
|
$
|
(2,337)
|
|
$
|
(1,472)
|
The gross notional amount outstanding for our foreign currency hedges related to translated earnings is $17.6 billion, and is comprised of the following: 1) Japanese yen-denominated hedges - $16 billion; 2) South Korean won-denominated hedges - $1.3 billion; and 3) euro-denominated hedges - $0.3 billion.
Income Before Income Taxes
The impact of fluctuations in foreign exchange rates positively impacted Corning’s consolidated income before income taxes in the three and nine months ended September 30, 2016 when compared to the same periods in 2015 in the amounts of $98 million and $215 million, respectively.
Benefit (Provision) for Income Taxes
Our benefit (provision) for income taxes and the related effective income tax rates were as follows (in millions):
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit (provision) for income taxes
|
$
|
27
|
|
$
|
(6)
|
|
$
|
835
|
|
$
|
(202)
|
Effective tax rate
|
|
(10.5%)
|
|
|
2.8%
|
|
|
(64.8%)
|
|
|
15.3%
|
© 2016 Corning Incorporated. All Rights Reserved.
For the three months ended September 30, 2016, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following benefits:
·
|
Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of foreign earnings in U.S. income.
|
For the nine months ended September 30, 2016, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following benefits:
·
|
Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of foreign earnings in U.S. income;
|
·
|
The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax; and
|
·
|
The tax-free nature of the realignment of our equity interest in Dow Corning during the period, as well as the release of the deferred tax liability related to Corning’s tax on Dow Corning’s undistributed earnings as of the date of the transaction.
|
For the three and nine months ended September 30, 2015, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following benefits:
·
|
Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of high-taxed foreign earnings in U.S. income; and
|
·
|
The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax.
|
Refer to Note 5 (Income Taxes) to the consolidated financial statements for additional information.
Net Income Attributable to Corning Incorporated
As a result of the above, our net income and per share data is as follows (in millions, except per share amounts):
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income attributable to Corning Incorporated
|
$
|
284
|
|
$
|
212
|
|
$
|
2,123
|
|
$
|
1,115
|
Net income attributable to Corning Incorporated used in basic earnings per common share calculation
(1)
|
$
|
260
|
|
$
|
188
|
|
$
|
2,050
|
|
$
|
1,042
|
Net income attributable to Corning Incorporated used in diluted earnings per common share calculation
(1)
|
$
|
284
|
|
$
|
188
|
|
$
|
2,123
|
|
$
|
1,115
|
Basic earnings per common share
|
$
|
0.27
|
|
$
|
0.16
|
|
$
|
1.96
|
|
$
|
0.84
|
Diluted earnings per common share
|
$
|
0.26
|
|
$
|
0.15
|
|
$
|
1.81
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
978
|
|
|
1,210
|
|
|
1,046
|
|
|
1,241
|
Weighted-average common shares outstanding - diluted
|
|
1,102
|
|
|
1,218
|
|
|
1,170
|
|
|
1,366
|
(1)
|
Refer to Note 6 (Earnings per Common Share) to the consolidated financial statements for additional information.
|
© 2016 Corning Incorporated. All Rights Reserved.
Comprehensive Income
For the three and nine months ended September 30, 2016, comprehensive income increased by $535 million and $2,600 million, respectively, when compared to the same periods in 2015, driven by the following items:
·
|
An increase in net income attributable to Corning Incorporated of $72 million and $1,008 million, respectively;
|
·
|
The positive impact due to the change in foreign currency translation gains and losses of $426 million and $1,346 million, respectively, largely driven by the strengthening of the Japanese yen; and
|
·
|
The change in the amount of unamortized actuarial losses released in the amounts of $11 million and $248 million, respectively. The significant change in the first three quarters of 2016 was driven by the release of Dow Corning’s unamortized actuarial loss in the amount of $260 million, which was included in the gain on the realignment of our ownership interests in Dow Corning.
|
Refer to Note 15 (Shareholders’ Equity) to the consolidated financial statements for additional information.
CORE PERFORMANCE MEASURES
In managing the Company and assessing our financial performance, we supplement certain measures provided by our consolidated financial statements with measures adjusted to exclude certain items, to arrive at core performance measures. We believe reporting core performance measures provides investors greater transparency to the information used by our management team to make financial and operational decisions. Corning has adopted the use of constant currency reporting for the Japanese yen and South Korean won, and uses an internally derived yen-to-dollar management rate of ¥99 and won-to-dollar management rate of ₩1,100.
Net sales, equity in earnings of affiliated companies and net income are adjusted to exclude the impacts of changes in the Japanese yen and the South Korean won, gains and losses on our foreign currency hedges related to translated earnings, acquisition-related costs, discrete tax items, restructuring and restructuring-related charges, certain litigation-related expenses, pension mark-to-market adjustments and other items which do not reflect on-going operating results of the Company or our equity affiliates. Management’s discussion and analysis on our reportable segments has also been adjusted for these items, as appropriate. These measures are not prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”). We believe investors should consider these non-GAAP measures in evaluating our results as they are more indicative of our core operating performance and how management evaluates our operational results and trends. These measures are not, and should not be viewed as a substitute for GAAP reporting measures. With respect to the Company’s outlooks for future periods, it is not able to provide reconciliations for these non-GAAP measures because the Company does not forecast the movement of the Japanese yen and South Korean won against the U.S. dollar, or other items that do not reflect ongoing operations, nor does it forecast items that have not yet occurred or are out of the Company’s control. As a result, the Company is unable to provide outlook information on a GAAP basis.
See “Use of Non-GAAP Financial Measures” for details on core performance measures. For a reconciliation of non-GAAP performance measures to their most directly comparable GAAP financial measure, please see “Reconciliation of Non-GAAP Measures” below.
RESULTS OF OPERATIONS – CORE PERFORMANCE MEASURES
Selected highlights from our continuing operations, excluding certain items, follow (in millions):
|
Three months ended
September 30,
|
|
%
change
|
|
Nine months ended
September 30,
|
|
%
change
|
|
2016
|
|
2015
|
|
16 vs. 15
|
|
2016
|
|
2015
|
|
16 vs. 15
|
Core net sales
|
$
|
2,548
|
|
$
|
2,451
|
|
4%
|
|
$
|
7,159
|
|
$
|
7,398
|
|
(3)%
|
Core equity in earnings of affiliated companies
|
$
|
19
|
|
$
|
58
|
|
(67)%
|
|
$
|
138
|
|
$
|
182
|
|
(24)%
|
Core earnings
|
$
|
466
|
|
$
|
447
|
|
4%
|
|
$
|
1,240
|
|
$
|
1,453
|
|
(15)%
|
© 2016 Corning Incorporated. All Rights Reserved.
Core Net Sales
The following table presents core net sales by reportable segment (in millions):
|
Three months ended
September 30,
|
|
%
change
|
|
Nine months ended
September 30,
|
|
%
change
|
|
2016
|
|
2015
|
|
16 vs. 15
|
|
2016
|
|
2015
|
|
16 vs. 15
|
Display Technologies
|
$
|
943
|
|
$
|
936
|
|
1%
|
|
$
|
2,652
|
|
$
|
2,871
|
|
(8)%
|
Optical Communications
|
|
795
|
|
|
747
|
|
6%
|
|
|
2,186
|
|
|
2,244
|
|
(3)%
|
Environmental Technologies
|
|
264
|
|
|
257
|
|
3%
|
|
|
787
|
|
|
799
|
|
(2)%
|
Specialty Materials
|
|
295
|
|
|
288
|
|
2%
|
|
|
788
|
|
|
832
|
|
(5)%
|
Life Sciences
|
|
214
|
|
|
211
|
|
1%
|
|
|
633
|
|
|
619
|
|
2%
|
All Other
|
|
37
|
|
|
12
|
|
208%
|
|
|
113
|
|
|
33
|
|
242%
|
Total core net sales
|
$
|
2,548
|
|
$
|
2,451
|
|
4%
|
|
$
|
7,159
|
|
$
|
7,398
|
|
(3)%
|
Core net sales increased by $97 million and decreased by $239 million in the three and nine months ended September 30, 2016, respectively, when compared to the same periods in 2015. In all segments except Display Technologies, core net sales are consistent with GAAP net sales. Because a significant portion of revenues in the Display Technologies segment are denominated in Japanese yen, this segment’s net sales are adjusted to remove the impact of translating yen into dollars.
When compared to the third quarter of 2015, core net sales in the Display Technologies segment increased by $7 million, or 1%, in the third quarter of 2016, driven by an increase in volume in the low-teens in percentage terms, offset somewhat by LCD glass price declines slightly higher than 10%.
When compared to the first three quarters of 2015, core net sales in the Display Technologies segment decreased by $219 million, or 8%, in the first three quarters of 2016, driven by LCD glass price declines slightly higher than 10%.
Core Equity in Earnings of Affiliated Companies
The following provides a summary of core equity in earnings of affiliated companies (in millions):
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Dow Corning Corporation
(1)
|
|
|
|
$
|
53
|
|
$
|
98
|
|
$
|
167
|
Hemlock Semiconductor Group
(2)
|
$
|
22
|
|
|
|
|
|
44
|
|
|
|
All other
|
|
(3)
|
|
|
5
|
|
|
(4)
|
|
|
15
|
Total core equity earnings
|
$
|
19
|
|
$
|
58
|
|
$
|
138
|
|
$
|
182
|
(1)
|
Results include equity earnings for Dow Corning, which includes the silicones business and Hemlock Semiconductor business, through May 31, 2016, the date of the realignment of our ownership interest in Dow Corning.
|
(2)
|
Results include equity earnings for Hemlock Semiconductor Group beginning on June 1, 2016.
|
Core Earnings
In the three and nine months ended September 30, 2016, we generated core earnings of $466 million or $0.42 per share and $1,240 million, or $1.06 per share, respectively, compared to $447 million or $0.34 per share and $1,453 million or $1.06 per share, respectively, in the same periods in 2015. The increase of $19 million in the third quarter of 2016 was primarily due to an increase in core earnings of $27 million in the Optical Communications segment, driven by an increase in fiber-to-the-home products volume, favorable product mix and improvements in manufacturing efficiency. Display Technologies core earnings also increased, up $13 million, driven by an increase in volume in the low-teens in percentage terms and improvements in manufacturing efficiency, offset somewhat by the LCD glass price declines slightly above 10%. The decrease of $213 million in the nine months ended September 30, 2016 was driven by lower core earnings in the Display Technologies segment, down $111 million, driven by LCD glass price declines slightly higher than 10%.
© 2016 Corning Incorporated. All Rights Reserved.
Included in core earnings for the three and nine months ended September 30, 2016 is net periodic pension expense in the amounts of $13 million and $38 million, respectively, and for the same periods in 2015, $16 million and $48 million, respectively. Refer to Note 11 (Employee Retirement Plans) to the Consolidated Financial Statements for additional information.
Core Earnings per Common Share
The following table sets forth the computation of core basic and core diluted earnings per common share (in millions, except per share amounts):
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Core earnings attributable to Corning Incorporated
|
$
|
466
|
|
$
|
447
|
|
$
|
1,240
|
|
$
|
1,453
|
Less: Series A convertible preferred stock dividend
|
|
24
|
|
|
24
|
|
|
73
|
|
|
73
|
Core earnings available to common stockholders - basic
|
|
442
|
|
|
423
|
|
|
1,167
|
|
|
1,380
|
Add: Series A convertible preferred stock dividend
|
|
24
|
|
|
24
|
|
|
73
|
|
|
73
|
Core earnings available to common stockholders - diluted
|
$
|
466
|
|
$
|
447
|
|
$
|
1,240
|
|
$
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
|
978
|
|
|
1,210
|
|
|
1,046
|
|
|
1,241
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other dilutive securities
|
|
9
|
|
|
8
|
|
|
9
|
|
|
10
|
Series A convertible preferred stock
|
|
115
|
|
|
115
|
|
|
115
|
|
|
115
|
Weighted-average common shares outstanding - diluted
|
|
1,102
|
|
|
1,333
|
|
|
1,170
|
|
|
1,366
|
Core basic earnings per common share
|
$
|
0.45
|
|
$
|
0.35
|
|
$
|
1.12
|
|
$
|
1.11
|
Core diluted earnings per common share
|
$
|
0.42
|
|
$
|
0.34
|
|
$
|
1.06
|
|
$
|
1.06
|
Reconciliation of Non-GAAP Measures
We utilize certain financial measures and key performance indicators that are not calculated in accordance with GAAP to assess our financial and operating performance. A non-GAAP financial measure is defined as a numerical measure of a company’s financial performance that (i) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of income or statement of cash flows, or (ii) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure as calculated and presented in accordance with GAAP in the statement of income or statement of cash flows.
Core net sales, core equity in earnings of affiliated companies and core earnings are non-GAAP financial measures utilized by our management to analyze financial performance without the impact of items that are driven by general economic conditions and events that do not reflect the underlying fundamentals and trends in the Company’s operations.
© 2016 Corning Incorporated. All Rights Reserved.
The following tables reconcile our non-GAAP financial measures to their most directly comparable GAAP financial measure (amounts in millions except percentages and per share amounts):
|
Three months ended September 30, 2016
|
|
Net
sales
|
|
Equity
earnings
|
|
Income
before
income
taxes
|
|
Net
income
|
|
Effective
tax
rate
|
|
Per
share
|
As reported - GAAP
|
$
|
2,507
|
|
$
|
19
|
|
$
|
257
|
|
$
|
284
|
|
(10.5)%
|
|
0.26
|
Constant-yen
(1)
|
|
40
|
|
|
|
|
|
47
|
|
|
30
|
|
|
|
0.03
|
Constant-won
(1)
|
|
1
|
|
|
|
|
|
(4)
|
|
|
(3)
|
|
|
|
|
Foreign currency hedges related to translated earnings
(2)
|
|
|
|
|
|
|
|
237
|
|
|
149
|
|
|
|
0.14
|
Acquisition-related costs
(3)
|
|
|
|
|
|
|
|
15
|
|
|
11
|
|
|
|
0.01
|
Discrete tax items and other tax-related adjustments
(4)
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
0.01
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
11
|
|
|
9
|
|
|
|
0.01
|
Impacts from the acquisition of Samsung Corning Precision Materials
(8)
|
|
|
|
|
|
|
|
(49)
|
|
|
(41)
|
|
|
|
(0.04)
|
Pension mark-to-market
(10)
|
|
|
|
|
|
|
|
26
|
|
|
17
|
|
|
|
0.02
|
Taiwan power outage
(12)
|
|
|
|
|
|
|
|
5
|
|
|
4
|
|
|
|
|
Core performance measures
|
$
|
2,548
|
|
$
|
19
|
|
$
|
545
|
|
$
|
466
|
|
14.5%
|
|
0.42
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2016 Corning Incorporated. All Rights Reserved.
|
Three months ended September 30, 2015
|
|
Net
sales
|
|
Equity
earnings
|
|
Income
before
income
taxes
|
|
Net
income
|
|
Effective
tax
rate
|
|
Per
share
|
As reported - GAAP
|
$
|
2,272
|
|
$
|
39
|
|
$
|
218
|
|
$
|
212
|
|
2.8%
|
|
0.15
|
Constant-yen
(1)
|
|
178
|
|
|
2
|
|
|
144
|
|
|
111
|
|
|
|
0.08
|
Constant-won
(1)
|
|
1
|
|
|
(1)
|
|
|
(14)
|
|
|
(10)
|
|
|
|
(0.01)
|
Foreign currency hedges related to translated earnings
(2)
|
|
|
|
|
|
|
|
149
|
|
|
94
|
|
|
|
0.07
|
Acquisition-related costs
(3)
|
|
|
|
|
|
|
|
9
|
|
|
5
|
|
|
|
|
Discrete tax items and other tax-related adjustments
(4)
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
0.01
|
Litigation, regulatory and other legal matters
(5)
|
|
|
|
|
|
|
|
(9)
|
|
|
(6)
|
|
|
|
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
1
|
|
|
1
|
|
|
|
|
Equity in earnings of affiliated companies
(7)
|
|
|
|
|
18
|
|
|
18
|
|
|
16
|
|
|
|
0.01
|
Impacts from the acquisition of Samsung Corning Precision Materials
(8)
|
|
|
|
|
|
|
|
13
|
|
|
10
|
|
|
|
0.01
|
Core performance measures
|
$
|
2,451
|
|
$
|
58
|
|
$
|
529
|
|
$
|
447
|
|
15.5%
|
|
0.34
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2016 Corning Incorporated. All Rights Reserved.
|
Nine months ended September 30, 2016
|
|
Net
sales
|
|
Equity
earnings
|
|
Income
before
income
taxes
|
|
Net
income
|
|
Effective
tax
rate
|
|
Per
share
|
As reported – GAAP
|
$
|
6,914
|
|
$
|
119
|
|
$
|
1,288
|
|
$
|
2,123
|
|
(64.8)%
|
|
1.81
|
Constant-yen
(1)
|
|
242
|
|
|
4
|
|
|
232
|
|
|
164
|
|
|
|
0.14
|
Constant-won
(1)
|
|
3
|
|
|
(1)
|
|
|
(36)
|
|
|
(26)
|
|
|
|
(0.02)
|
Foreign currency hedges related to translated earnings
(2)
|
|
|
|
|
|
|
|
2,295
|
|
|
1,447
|
|
|
|
1.24
|
Acquisition-related costs
(3)
|
|
|
|
|
|
|
|
109
|
|
|
95
|
|
|
|
0.08
|
Discrete tax items and other tax-related adjustments
(4)
|
|
|
|
|
|
|
|
|
|
|
(83)
|
|
|
|
(0.07)
|
Litigation, regulatory and other legal matters
(5)
|
|
|
|
|
|
|
|
55
|
|
|
70
|
|
|
|
0.06
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
131
|
|
|
91
|
|
|
|
0.08
|
Equity in earnings of affiliated companies
(7)
|
|
|
|
|
16
|
|
|
16
|
|
|
15
|
|
|
|
0.01
|
Impacts from the acquisition of Samsung Corning Precision Materials
(8)
|
|
|
|
|
|
|
|
(45)
|
|
|
(38)
|
|
|
|
(0.03)
|
Pension mark-to-market
(10)
|
|
|
|
|
|
|
|
60
|
|
|
39
|
|
|
|
0.03
|
Gain on realignment of equity investment
(11)
|
|
|
|
|
|
|
|
(2,676)
|
|
|
(2,676)
|
|
|
|
(2.29)
|
Taiwan power outage
(12)
|
|
|
|
|
|
|
|
25
|
|
|
19
|
|
|
|
0.02
|
Core performance measures
|
$
|
7,159
|
|
$
|
138
|
|
$
|
1,454
|
|
$
|
1,240
|
|
14.7%
|
|
1.06
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2016 Corning Incorporated. All Rights Reserved.
|
Nine months ended September 30, 2015
|
|
Net
sales
|
|
Equity
earnings
|
|
Income
before
income
taxes
|
|
Net
income
|
|
Effective
tax
rate
|
|
Per
share
|
As reported
|
$
|
6,880
|
|
$
|
195
|
|
$
|
1,317
|
|
$
|
1,115
|
|
15.3%
|
|
0.82
|
Constant-yen
(1)
|
|
517
|
|
|
4
|
|
|
419
|
|
|
313
|
|
|
|
0.23
|
Constant-won
(1)
|
|
1
|
|
|
(1)
|
|
|
(13)
|
|
|
(10)
|
|
|
|
(0.01)
|
Foreign currency hedges related to translated earnings
(2)
|
|
|
|
|
|
|
|
(42)
|
|
|
(25)
|
|
|
|
(0.02)
|
Acquisition-related costs
(3)
|
|
|
|
|
|
|
|
40
|
|
|
25
|
|
|
|
0.02
|
Discrete tax items and other tax-related adjustments
(4)
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
0.02
|
Litigation, regulatory and other legal matters
(5)
|
|
|
|
|
|
|
|
(6)
|
|
|
(4)
|
|
|
|
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
6
|
|
|
6
|
|
|
|
|
Equity in earnings of affiliated companies
(7)
|
|
|
|
|
(16)
|
|
|
(16)
|
|
|
(16)
|
|
|
|
(0.01)
|
Impacts from the acquisition of Samsung Corning Precision Materials
(8)
|
|
|
|
|
|
|
|
4
|
|
|
3
|
|
|
|
|
Post-combination expenses
(9)
|
|
|
|
|
|
|
|
25
|
|
|
16
|
|
|
|
0.01
|
Pension mark-to-market
(10)
|
|
|
|
|
|
|
|
8
|
|
|
5
|
|
|
|
|
Core performance measures
|
$
|
7,398
|
|
$
|
182
|
|
$
|
1,742
|
|
$
|
1,453
|
|
16.6%
|
|
1.06
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2016 Corning Incorporated. All Rights Reserved.
Items which we exclude from GAAP measures to arrive at core performance measures are as follows:
(1)
|
Constant-currency adjustments:
|
|
Constant-yen
:
Because a significant portion of Display Technologies segment revenues and manufacturing costs are denominated in Japanese yen, management believes it is important to understand the impact on core earnings of translating yen into dollars. Presenting results on a constant-yen basis mitigates the translation impact of the Japanese yen, and allows management to evaluate performance period over period, analyze underlying trends in our businesses, and establish operational goals and forecasts. As of January 1, 2015, we used an internally derived management rate of ¥99, which is closely aligned to our current yen portfolio of foreign currency hedges, and have recast all periods presented based on this rate in order to effectively remove the impact of changes in the Japanese yen.
|
|
Constant-won
:
Because a significant portion of Corning Precision Materials’ costs are denominated in South Korean won, management believes it is important to understand the impact on core earnings from translating won into dollars. Presenting results on a constant-won basis mitigates the translation impact of the South Korean won, and allows management to evaluate performance period over period, analyze underlying trends in our businesses, and establish operational goals and forecasts without the variability caused by the fluctuations caused by changes in the rate of this currency. We use an internally derived management rate of ₩1,100, which is consistent with historical prior period averages of the won.
|
(2)
|
Foreign currency hedges related to translated earnings
:
We have excluded the impact of the gains and losses of our foreign currency hedges related to translated earnings for each period presented.
|
(3)
|
Acquisition-related costs
:
These expenses include intangible amortization, inventory valuation adjustments and external acquisition-related deal costs.
|
(4)
|
Discrete tax items and other tax-related adjustments
:
This represents the removal of discrete adjustments attributable to changes in tax law and other non-operational tax-related adjustments.
|
(5)
|
Litigation, regulatory and other legal matters
:
Includes amounts related to the Pittsburgh Corning Corporation (PCC) asbestos litigation, adjustments to our estimated liability for environmental-related items and other legal matters.
|
(6)
|
Restructuring, impairment and other charges
:
This amount includes restructuring, impairment and other charges, including goodwill impairment charges and other expenses and disposal costs not classified as restructuring expense.
|
(7)
|
Equity in earnings of affiliated companies
:
These adjustments relate to items which do not reflect expected on-going operating results of our affiliated companies, such as restructuring, impairment and other charges and settlements under “take-or-pay” contracts.
|
(8)
|
Impacts from the acquisition of Samsung Corning Precision Materials
:
Fair value adjustments to the indemnity asset related to contingent consideration and other items related to the acquisition of Samsung Corning Precision Materials.
|
(9)
|
Post-combination expenses
:
Post-combination expenses incurred as a result of an acquisition in the first quarter of 2015.
|
(10)
|
Pension mark-to-market adjustment
:
Mark-to-market pension gains and losses, which arise from changes in actuarial assumptions and the difference between actual and expected returns on plan assets and discount rates.
|
(11)
|
Gain on realignment of equity investment
:
Gain recorded upon the completion of the strategic realignment of our ownership interest in Dow Corning.
|
(12)
|
Taiwan power outage
:
Impact of the power outage that temporarily halted production at our Tainan, Taiwan manufacturing location in the first half of 2016. The impact includes asset write-offs and charges for facility repairs, offset somewhat by partial reimbursement through our insurance program. We expect to receive the remainder of the insurance reimbursement in the fourth quarter of 2016.
|
© 2016 Corning Incorporated. All Rights Reserved.
REPORTABLE SEGMENTS
Our reportable segments are as follows:
·
|
Display Technologies – manufactures glass substrates primarily for flat panel liquid crystal displays.
|
·
|
Optical Communications – manufactures carrier and enterprise network components for the telecommunications industry.
|
·
|
Environmental Technologies – manufactures ceramic substrates and filters for automotive and diesel emission control applications.
|
·
|
Specialty Materials – manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs.
|
·
|
Life Sciences – manufactures glass and plastic labware, equipment, media and reagents enabling workflow solutions for scientific applications.
|
All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This group is primarily comprised of the results of Corning’s Pharmaceutical Technologies business, which consists of a pharmaceutical glass business and a glass tubing business used in the pharmaceutical packaging industry. This segment also includes Corning Precision Materials’ non-LCD business and new product lines and development projects, as well as certain corporate investments such as Eurokera and Keraglass equity affiliates.
We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We included the earnings of equity affiliates that are closely associated with our reportable segments in the respective segment’s net income. We have allocated certain common expenses among our reportable segments differently than we would for stand-alone financial information prepared in accordance with GAAP. Our reportable segments include non-GAAP measures which are not prepared in accordance with GAAP. We believe investors should consider these non-GAAP measures in evaluating our results as they are more indicative of our core operating performance and how management evaluates our operational results and trends. These measures are not, and should not be viewed as a substitute for GAAP reporting measures. For a reconciliation of non-GAAP performance measures to their most directly comparable GAAP financial measure, please see “Reconciliation of Non-GAAP Measures” above. Segment net income may not be consistent with measures used by other companies. The accounting policies of our reportable segments are the same as those applied in the consolidated financial statements.
Display Technologies
The following tables provide net sales and net income for the Display Technologies segment and reconcile the non-GAAP financial measures for the Display Technologies segment with our financial statements presented in accordance with GAAP (in millions):
|
Three months ended
September 30, 2016
|
|
Nine months ended
September 30, 2016
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported - GAAP
|
$
|
902
|
|
$
|
279
|
|
$
|
2,408
|
|
$
|
692
|
Constant-yen
(1)
|
|
40
|
|
|
35
|
|
|
242
|
|
|
171
|
Constant-won
(1)
|
|
1
|
|
|
(3)
|
|
|
2
|
|
|
(24)
|
Foreign currency hedges related to translated earnings
(2)
|
|
|
|
|
(2)
|
|
|
|
|
|
(93)
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
|
|
|
13
|
Impacts from the acquisition of Samsung Corning Precision Materials
(8)
|
|
|
|
|
(41)
|
|
|
|
|
|
(38)
|
Taiwan power outage
(12)
|
|
|
|
|
2
|
|
|
|
|
|
9
|
Core performance
|
$
|
943
|
|
$
|
270
|
|
$
|
2,652
|
|
$
|
730
|
© 2016 Corning Incorporated. All Rights Reserved.
|
Three months ended
September 30, 2015
|
|
Nine months ended
September 30, 2015
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported - GAAP
|
$
|
757
|
|
$
|
255
|
|
$
|
2,354
|
|
$
|
852
|
Constant-yen
(1)
|
|
178
|
|
|
107
|
|
|
516
|
|
|
311
|
Constant won
(1)
|
|
1
|
|
|
(9)
|
|
|
1
|
|
|
(9)
|
Foreign currency hedges related to translated earnings
(2)
|
|
|
|
|
(106)
|
|
|
|
|
|
(313)
|
Impacts from the acquisition of Samsung Corning Precision Materials
(8)
|
|
|
|
|
10
|
|
|
|
|
|
|
Core performance
|
$
|
936
|
|
$
|
257
|
|
$
|
2,871
|
|
$
|
841
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
As Reported
Net sales in the Display Technologies segment increased by $145 million, or 19%, in the third quarter of 2016 when compared to the third quarter of 2015. The increase was driven by the positive impact from the strengthening of the Japanese yen in the amount of $138 million and an increase in volume in the low-teens in percentage terms, partially offset by LCD glass price declines slightly higher than 10%. Net income increased by $24 million, or 9%, in the third quarter of 2016, when compared to the third quarter of 2015. The increase was driven by the positive impact of the strengthening of the yen in the amount of $72 million, an increase in volume in the low-teens in percentage terms, the positive impact of the change in the contingent consideration fair value adjustment in the amount of $51 million and improvements in manufacturing efficiency, offset somewhat by the LCD glass price declines described above and a decrease of $104 million in the realized gain from our yen and won-denominated currency hedges.
Net sales in the Display Technologies segment increased by $54 million, or 2%, in the first nine months of 2016 when compared to the same period in 2015, driven by the positive impact from the strengthening of the Japanese yen in the amount of $274 million and a low-single digit percentage volume increase, offset somewhat by LCD glass price declines slightly higher than 10%. Net income decreased by $160 million, or 19%, in the nine months ended September 30, 2016, when compared to the same period in 2015. The decrease was driven primarily by the LCD glass price declines described above and a decrease of $220 million in the realized gain from our yen and won-denominated currency hedges, offset partially by the impact of the strengthening of the yen of $140 million, an increase in volume in the low-single digit percentage, the positive impact of the change in the contingent consideration fair value adjustment in the amount of $38 million, improvements in manufacturing efficiency and a decline in operating expenses.
Core Performance
Core net sales increased in the third quarter of 2016 by $7 million, or 1%, when compared to the third quarter of 2015, driven by an increase in volume in the low-teens in percentage terms, partially offset by LCD glass price declines slightly higher than 10%. Core earnings also increased in the third quarter of 2016, up $13 million, or 5%, driven by the increase in volume described above, improvements in manufacturing efficiency and a decline in operating expenses. LCD glass price declines slightly higher than 10% partially offset the increase.
Core net sales decreased by $219 million, or 8%, in the first three quarters of 2016, when compared to the third quarter of 2015, driven by LCD glass price declines slightly higher than 10%, partially offset by a low-single digit percentage volume increase. Core earnings also decreased in this period, down $111 million, or 13%, driven by LCD glass price declines slightly higher than 10%, partially offset by a low-single digit percentage volume increase, improvements in manufacturing efficiency and a decline in operating expenses.
© 2016 Corning Incorporated. All Rights Reserved.
Outlook:
The company expects panel maker utilization to remain high and for LCD glass supply to remain tight in the fourth quarter. Sequentially, fourth-quarter volume is expected to be consistent to slightly down, in line with the glass market.
Optical Communications
The following tables provide net sales and net income for the Optical Communications segment and reconcile the non-GAAP financial measures for the Optical Communications segment with our financial statements presented in accordance with GAAP (in millions):
|
Three months ended
September 30, 2016
|
|
Nine months ended
September 30, 2016
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported - GAAP
|
$
|
795
|
|
$
|
78
|
|
$
|
2,186
|
|
$
|
172
|
Acquisition-related costs
(3)
|
|
|
|
|
3
|
|
|
|
|
|
16
|
Discrete tax items and other tax-related adjustments
(4)
|
|
|
|
|
6
|
|
|
|
|
|
6
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
7
|
|
|
|
|
|
12
|
Pension mark to market
(10)
|
|
|
|
|
4
|
|
|
|
|
|
4
|
Core performance
|
$
|
795
|
|
$
|
98
|
|
$
|
2,186
|
|
$
|
210
|
|
Three months ended
September 30, 2015
|
|
Nine months ended
September 30, 2015
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported - GAAP
|
$
|
747
|
|
$
|
70
|
|
$
|
2,244
|
|
$
|
204
|
Acquisition-related costs
(3)
|
|
|
|
|
1
|
|
|
|
|
|
15
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Post-combination expenses
(9)
|
|
|
|
|
|
|
|
|
|
|
16
|
Core performance
|
$
|
747
|
|
$
|
71
|
|
$
|
2,244
|
|
$
|
234
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
As Reported
Net sales in the Optical Communications segment increased by $48 million, or 6%, in the third quarter of 2016 when compared to the same period in 2015. The increase was due to higher sales of fiber-to-the-home products in North America and the impact of an acquisition completed in the second quarter of 2016. Net income in the third quarter of 2016 increased by $8 million, or 11%, when compared to the third quarter of 2015, driven by an increase in volume, favorable product mix and improvements in manufacturing efficiency, offset slightly by higher operating expenses driven by restructuring, impairment and other charges and pension mark-to-market costs. Movements in foreign exchange rates positively impacted segment net sales in the amount of $2 million and net income in the amount of $3 million in the third quarter of 2016 when compared to the same period in 2015.
© 2016 Corning Incorporated. All Rights Reserved.
Net sales and net income in the Optical Communications segment decreased by $58 million, or 3%, and $32 million, or 16%, respectively, in the nine months ended September 30, 2016, when compared to the same period in 2015. This decline was driven by production issues related to the implementation of new manufacturing software, which constrained our ability to manufacture product in the first half of 2016. Production returned to normal levels at the end of the second quarter, and the increase in volume in the third quarter partially offset the lower first half results. Movements in foreign exchange rates negatively impacted segment net sales in the amount of $6 million and positively impacted net income in the amount of $10 million, respectively, in the third quarter of 2016 when compared to the same period in 2015.
Core Performance
Core earnings increased in the third quarter of 2016 by $27 million, or 38%, respectively, driven by an increase in volume, favorable product mix and improvements in manufacturing efficiency. Core earnings were lower in the first nine months of 2016, down $24 million, or 10%, driven by the production issues described above, offset slightly by higher sales in the third quarter of 2016. Movements in foreign exchange rates positively impacted core earnings in the amounts of $3 million and $10 million, respectively, in the three and nine months ended September 30, 2016 when compared to the same periods in 2015.
Outlook
:
In the fourth quarter, Corning expects Optical Communications sales to increase by a high-single digit percentage on a year-over-year basis driven by continued fiber-to-the-home strength.
Environmental Technologies
The following table provides net sales and net income for the Environmental Technologies segment and reconciles the non-GAAP financial measures for the Environmental Technologies segment with our financial statements presented in accordance with GAAP (in millions):
|
Three months ended
September 30, 2016
|
|
Nine months ended
September 30, 2016
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported - GAAP
|
$
|
264
|
|
$
|
35
|
|
$
|
787
|
|
$
|
106
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
|
|
|
3
|
Core performance measures
|
$
|
264
|
|
$
|
35
|
|
$
|
787
|
|
$
|
109
|
|
Three months ended
September 30, 2015
|
|
Nine months ended
September 30, 2015
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported - GAAP
|
$
|
257
|
|
$
|
38
|
|
$
|
799
|
|
$
|
132
|
Core performance measures
|
$
|
257
|
|
$
|
38
|
|
$
|
799
|
|
$
|
132
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
As Reported
Net sales in the Environmental Technologies segment increased by $7 million, or 3%, in the third quarter of 2016 when compared to the same period in 2015. Sales of light-duty substrate products were at record levels in the third quarter, driven by market strength in North America, Europe and China. Lower sales of heavy-duty diesel products in North America and China partially offset this increase. Net income in the third quarter of 2016 decreased by $3 million, or 8%, driven by increased expenses in support of new product launches. Movements in foreign exchange rates versus the U.S. dollar negatively impacted net sales and net income in this segment in the amounts of $5 million and $2 million, respectively, in the third quarter of 2016, when compared to the same period in 2015.
© 2016 Corning Incorporated. All Rights Reserved.
Net sales in the Environmental Technologies segment decreased by $12 million, or 2%, in the first three quarters of 2016 when compared to the same period in 2015, driven by lower sales of diesel products due to the weakening of the North American truck market, offset partially by an increase in sales of light-duty substrates, driven by strength in the North American, European and Chinese markets. Net income decreased by $26 million, or 20%, driven by lower sales of heavy-duty diesel products and increased expenses in support of new product launches. Movements in foreign exchange rates versus the U.S. dollar negatively impacted net sales and net income in this segment in the amounts of $15 million and $6 million, respectively, in the nine months ended September 30, 2016, when compared to the same period in 2015.
Core Performance
Core earnings decreased by $3 million, or 8%, and $23 million, or 17%, in the third quarter and first three quarters of 2016, driven by the items impacting our As Reported results described above.
Outlook
:
In the fourth quarter, the Company anticipates Environmental Technologies sales to be down by a low-single digit percentage on a year-over-year basis driven by continued weakness in the heavy-duty truck markets.
Specialty Materials
The following tables provide net sales and net income for the Specialty Materials segment and reconciles the non-GAAP financial measures for the Specialty Materials segment with our financial statements presented in accordance with GAAP (in millions):
|
Three months ended
September 30, 2016
|
|
Nine months ended
September 30, 2016
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported - GAAP
|
$
|
295
|
|
$
|
42
|
|
$
|
788
|
|
$
|
106
|
Constant-yen
(1)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Constant-won
(1)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
|
|
|
|
|
|
14
|
Taiwan power outage
(12)
|
|
|
|
|
2
|
|
|
|
|
|
6
|
Core performance
|
$
|
295
|
|
$
|
44
|
|
$
|
788
|
|
$
|
124
|
|
Three months ended
September 30, 2015
|
|
Nine months ended
September 30, 2015
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported - GAAP
|
$
|
288
|
|
$
|
46
|
|
$
|
832
|
|
$
|
128
|
Constant-yen
(1)
|
|
|
|
|
(2)
|
|
|
|
|
|
(5)
|
Constant-won
(1)
|
|
|
|
|
(1)
|
|
|
|
|
|
(1)
|
Foreign currency hedges related to translated earnings
(2)
|
|
|
|
|
|
|
|
|
|
|
5
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
1
|
|
|
|
|
|
7
|
Core performance
|
$
|
288
|
|
$
|
44
|
|
$
|
832
|
|
$
|
134
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2016 Corning Incorporated. All Rights Reserved.
As Reported
Net sales in the Specialty Materials segment increased by $7 million, or 2%, in the third quarter of 2016 when compared to the same period in 2015, driven by higher sales of advanced optics products and an increase in Corning Gorilla Glass volume. Net income in the third quarter of 2016 decreased by $4 million, or 9%, impacted by ramp up costs associated with launch of new products, and customer mix. Movements in foreign exchange rates did not materially impact net sales and net income in the Specialty Materials segment in the three months ended September 30, 2016 when compared to the same period in 2015.
Net sales in the Specialty Materials segment decreased by $44 million, or 5%, in the first three quarters of 2016 when compared to the same period in 2015, driven by a decrease in sales of Corning Gorilla Glass products. The mobile consumer electronics industry is experiencing lower smartphone and tablet demand in 2016, driven by worldwide macroeconomic conditions, fewer major product launches and longer repurchases cycles. Net income decreased by $22 million, or 17%, driven by higher restructuring, impairment and other charges and the impact of a power outage that temporarily halted production at our Tainan, Taiwan manufacturing location. Movements in foreign exchange rates did not materially impact net sales and net income in the Specialty Materials segment in the nine months ended September 30, 2016 when compared to the same period in 2015.
Core Performance
Core earnings in the third quarter of 2016 was consistent with the same period in 2015. Core earnings declined by $10 million, or 7%, in the nine months ended September 30, 2016, driven primarily by a decline in sales of Corning Gorilla Glass products and higher research and development costs.
Outlook
:
Fourth-quarter segment sales are expected to increase by a high-single digit percentage year over year driven by volume growth in Corning Gorilla Glass.
Life Sciences
The following tables provide net sales and net income for the Life Sciences segment and reconcile the non-GAAP financial measures for the Life Sciences segment with our financial statements presented in accordance with GAAP (in millions):
|
Three months ended
September 30, 2016
|
|
Nine months ended
September 30, 2016
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported – GAAP
|
$
|
214
|
|
$
|
16
|
|
$
|
633
|
|
$
|
45
|
Acquisition-related costs
(3)
|
|
|
|
|
3
|
|
|
|
|
|
9
|
Restructuring, impairment and other charges
(6)
|
|
|
|
|
2
|
|
|
|
|
|
6
|
Core performance
|
$
|
214
|
|
$
|
21
|
|
$
|
633
|
|
$
|
60
|
|
Three months ended
September 30, 2015
|
|
Nine months ended
September 30, 2015
|
(in millions)
|
Net
sales
|
|
Net
income
|
|
Net
sales
|
|
Net
income
|
As reported – GAAP
|
$
|
211
|
|
$
|
18
|
|
$
|
619
|
|
$
|
52
|
Acquisition-related costs
(3)
|
|
|
|
|
3
|
|
|
|
|
|
9
|
Core performance
|
$
|
211
|
|
$
|
21
|
|
$
|
619
|
|
$
|
61
|
See Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Results of Operations – Core Performance Measures, Reconciliation of Non-GAAP Measures, “Items which we exclude from GAAP measures to arrive at core performance measures” for the descriptions of the footnoted reconciling items.
© 2016 Corning Incorporated. All Rights Reserved.
As Reported
Net sales in the Life Sciences segment increased by $3 million, or 1%, in the third quarter of 2016 when compared to the same period in 2015, driven by volume growth in Europe, North America and China, slightly offset by the impact of movements in foreign exchange rates in the amount of $2 million. Net income declined by $2 million, or 11%, driven by the negative impact of movements in foreign exchange rates.
Net sales in the Life Sciences segment increased by $14 million, or 2%, in the nine months ended September 30, 2016 when compared to the same period in 2015, driven by volume growth in Europe, North America and China, slightly offset by the impact of movements in foreign exchange rates in the amount of $7 million. Net income declined by $7 million, or 13%, driven by the negative impact of movements in foreign exchange rates.
Core Performance
Core earnings in the three and nine months ended September 30, 2016 were consistent with the prior year.
Outlook
:
Fourth-quarter sales are expected to grow by a low single-digit percentage when compared to the fourth quarter of 2015.
All Other
All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This group is primarily comprised of the results of Corning’s Pharmaceutical Technologies business, which consists of a pharmaceutical glass business and a glass tubing business used in the pharmaceutical packaging industry. This segment also includes Corning Precision Materials’ non-LCD business and new product lines and development projects, as well as certain corporate investments such as Eurokera and Keraglass equity affiliates.
The following table provides net sales and other data for All Other (in millions):
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
As Reported
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
37
|
|
$
|
12
|
|
$
|
112
|
|
$
|
32
|
Research, development and engineering expenses
|
$
|
47
|
|
$
|
34
|
|
$
|
139
|
|
$
|
123
|
Equity earnings of affiliated companies
|
$
|
(3)
|
|
$
|
4
|
|
$
|
(8)
|
|
$
|
12
|
Net loss
|
$
|
(47)
|
|
$
|
(38)
|
|
$
|
(187)
|
|
$
|
(131)
|
The increase in net sales of this segment in the three and nine months ended September 30, 2016 reflects the impact of an acquisition in the Corning Pharmaceutical Technologies business completed in the fourth quarter of 2015 and an increase in sales in our emerging businesses. The increase in the net loss of this segment was driven by asset write-offs in emerging businesses, offset slightly by the addition of the Corning Pharmaceutical Technologies business net income.
CAPITAL RESOURCES AND LIQUIDITY
Financing and Capital Resources
The following items impacted Corning’s financing and capital structure in the nine months ended September 30, 2016 and 2015:
2016
On July 20, 2016, Corning’s Board of Directors approved a $1 billion increase to our commercial paper program, raising it to $2 billion. If needed, this program is supported by our $2 billion revolving credit facility that expires in 2019.
© 2016 Corning Incorporated. All Rights Reserved.
2015
In the second quarter of 2015, we issued $375 million of 1.50% senior unsecured notes that mature on May 8, 2018 and $375 million of 2.90% senior unsecured notes that mature on May 15, 2022. The net proceeds of $745 million will be used for general corporate purposes. We can redeem these debentures at any time, subject to certain stipulations.
Common Stock Dividends
On February 3, 2016, Corning’s Board of Directors declared a 12.5% increase in the Company’s quarterly common stock dividend, which increased the quarterly dividend from $0.12 to $0.135 per share of common stock, beginning with the dividend paid in the first quarter of 2016.
Share Repurchase Program
On July 28, 2016, Corning entered into an accelerated share repurchase transaction (“ASR”) with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase $2 billion of Corning’s common stock in two tranches of $1.5 billion and $500 million, respectively, each with its own scheduled termination date. The ASR was executed under the $4 billion share repurchase program authorized on October 26, 2015 (the “2015 Repurchase Program”). Under the ASR, Corning made a $2 billion aggregate payment to Morgan Stanley on July 28, 2016 and received an initial aggregate delivery of 74.4 million shares of Corning common stock from Morgan Stanley on the same day. Each tranche is subject to acceleration at Morgan Stanley’s option during an acceleration period prior to its scheduled termination date. The total number of shares Corning will repurchase under each tranche of the ASR will be based generally upon the average daily volume weighted average price of Corning’s common stock during the repurchase period for such tranche, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR. Depending on the circumstances at settlement of each tranche, Morgan Stanley may be required to deliver additional shares of common stock to Corning or Corning may be required either to deliver shares of common stock or to make a cash payment to Morgan Stanley. Final settlement of both tranches of the ASR is scheduled to occur in the fourth quarter of 2016.
In addition to the ASR, during the three and nine months ended September 30, 2016, the Company repurchased 15.3 million and 96 million shares of common stock on the open market for approximately $340 million and $1,901 million, respectively, as part of its 2015 Repurchase Program.
Capital Spending
Capital spending totaled $815 million and $939 million for the nine months ended September 30, 2016 and 2015, respectively. Spending in the first nine months of 2016 was driven primarily by the Display Technologies segment, and focused on finishing line optimization and tank rebuilds. We expect our 2016 capital spending to be approximately $1.2 billion.
Cash Flow
Summary of cash flow data (in millions):
|
Nine months ended
September 30,
|
|
2016
|
|
2015
|
Net cash provided by operating activities
|
$
|
1,095
|
|
$
|
1,845
|
Net cash provided by (used in) investing activities
|
$
|
3,956
|
|
$
|
(822)
|
Net cash used in financing activities
|
$
|
(4,858)
|
|
$
|
(1,589)
|
Net cash provided by operating activities decreased by $750 million in the nine months ended September 30, 2016 when compared to the same period last year, driven largely by a decline of $123 million in dividends received from equity affiliates primarily driven by the strategic realignment of our ownership interest in Dow Corning and an increase in accounts receivable in all of our segments, notably in the Display Technologies and Optical Communications segments, offset somewhat by a decrease in accounts payable and other current liabilities.
© 2016 Corning Incorporated. All Rights Reserved.
Net cash provided by investing activities increased substantially in the nine months ended September 30, 2016, when compared to the same period last year, driven by the cash received on the realignment of Dow Corning, lower capital expenditures and a decrease in acquisition spending, offset slightly by a decrease in realized gains on our translated earnings contracts.
Net cash used in financing activities in the nine months ended September 30, 2016 increased when compared to the same period last year, driven by an increase in share repurchases, net commercial paper repayments and the absence of cash received from the issuance of long-term debt in the third quarter of 2015.
Key Balance Sheet Data
Balance sheet and working capital measures are provided in the following table (dollars in millions):
|
As of
September 30,
2016
|
|
As of
December 31,
2015
|
|
|
|
|
|
|
Working capital
|
$
|
6,185
|
|
$
|
5,455
|
Current ratio
|
|
3.7:1
|
|
|
2.9:1
|
Trade accounts receivable, net of allowances
|
$
|
1,645
|
|
$
|
1,372
|
Days sales outstanding
|
|
59
|
|
|
55
|
Inventories
|
$
|
1,516
|
|
$
|
1,385
|
Inventory turns
|
|
3.8
|
|
|
4.0
|
Days payable outstanding
(1)
|
|
43
|
|
|
42
|
Long-term debt
|
$
|
3,916
|
|
$
|
3,890
|
Total debt to total capital
|
|
18%
|
|
|
19%
|
(1)
|
Includes trade payables only.
|
Credit Rating
Our credit ratings remain the same as those disclosed in our 2015 Form 10-K.
RATING AGENCY
|
Rating
Long-Term Debt
|
|
Outlook
last update
|
|
|
|
|
Fitch
|
BBB+
|
|
Stable
|
|
|
|
October 29, 2015
|
|
|
|
|
Standard & Poor’s
|
BBB+
|
|
Stable
|
|
|
|
October 27, 2015
|
|
|
|
|
Moody’s
|
Baa1
|
|
Stable
|
|
|
|
October 28, 2015
|
Management Assessment of Liquidity
We ended the third quarter of 2016 with approximately $4.8 billion of cash and cash equivalents, an increase of $321 million from December 31, 2015. We believe the Company has adequate sources of liquidity and we are confident in our ability to generate cash to meet reasonably likely future cash requirements. Our cash and cash equivalents, which are generally unrestricted, are held in various locations throughout the world, with approximately 64% of the consolidated amount held outside of the United States at September 30, 2016. We believe we have sufficient U.S. liquidity, including borrowing capacity, to fund foreseeable U.S. cash needs without requiring the repatriation of foreign cash. We utilize a variety of financing strategies to ensure that our worldwide cash is available in the locations in which it is needed.
© 2016 Corning Incorporated. All Rights Reserved.
Corning also has a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes. On July 20, 2016, Corning’s Board of Directors approved an increase to the allowable maximum aggregate principal amount outstanding at any time from $1 billion to $2 billion. Under this program, the Company may issue the notes from time to time and will use the proceeds for general corporate purposes. The Company’s $2 billion revolving credit facility is available to support obligations under the commercial paper program, if needed. Corning did not have outstanding commercial paper at September 30, 2016.
Other
We complete comprehensive reviews of our significant customers and their creditworthiness by analyzing their financial strength at least annually or more frequently for customers where we have identified a measure of increased risk. We closely monitor payments and developments which may signal possible customer credit issues. We currently have not identified any potential material impact on our liquidity resulting from customer credit issues.
Our major source of funding for 2016 and beyond will be our operating cash flow, our existing balances of cash and cash equivalents and proceeds from any issuances of debt. We believe we have sufficient liquidity for the next several years to fund operations, acquisitions, the asbestos litigation, capital expenditures, scheduled debt repayments and dividend payments and share repurchase programs.
Corning has access to a $2 billion unsecured committed revolving credit facility. This credit facility includes a leverage ratio financial covenant. The required leverage ratio, which measures debt to total capital, is a maximum of 50%. At September 30, 2016, our leverage using this measure was approximately 18% and we are in compliance with the financial covenant.
Our debt instruments contain customary event of default provisions, which allow the lenders the option of accelerating all obligations upon the occurrence of certain events. In addition, some of our debt instruments contain a cross default provision, whereby an uncured default in excess of a specified amount on one debt obligation of the Company, also would be considered a default under the terms of another debt instrument.
As of September 30, 2016, we were in compliance with all such provisions.
Management is not aware of any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in a material decrease in our liquidity. In addition, other than items discussed, there are no known material trends, favorable or unfavorable, in our capital resources and no expected material changes in the mix and relative cost of such resources.
Off Balance Sheet Arrangements
There have been no material changes outside the ordinary course of business in our off balance sheet arrangements as disclosed in our 2015 Form 10-K under the caption “Off Balance Sheet Arrangements.”
Contractual Obligations
There have been no material changes outside the ordinary course of business in the
contractual
obligations disclosed in our 2015 Form 10-K
under the caption “Contractual
Obligations.”
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The estimates that required management’s most difficult, subjective or complex judgments are described in our 2015 Form 10-K and remain unchanged through the first nine months of 2016. For certain items, additional details are provided below.
© 2016 Corning Incorporated. All Rights Reserved.
Impairment of Assets Held for Use
We are required to assess the recoverability of the carrying value of long-lived assets when an indicator of impairment has been identified. We review our long-lived assets in each quarter in which impairment indicators are present. We must exercise judgment in assessing whether an event of impairment has occurred.
Manufacturing equipment includes certain components of production equipment that are constructed of precious metals, primarily platinum and rhodium. These metals are not depreciated because they have very low physical losses and are repeatedly reclaimed and reused in our manufacturing process and have a very long useful life. Precious metals are reviewed for impairment as part of our assessment of long-lived assets. This review considers all of the Company’s precious metals that are either in place in the production process; in reclamation, fabrication, or refinement in anticipation of re-use; or awaiting use to support increased capacity. Precious metals are only acquired to support our operations and are not held for trading or other purposes.
At September 30, 2016 and December 31, 2015, the carrying value of precious metals was higher than the fair market value by $868 million and $976 million, respectively. These precious metals are utilized by the Display Technologies and Specialty Materials segments. Corning believes these precious metal assets to be recoverable due to the significant positive cash flow in both segments. The potential for impairment exists in the future if negative events significantly decrease the cash flow of these segments. Such events include, but are not limited to, a significant decrease in demand for products or a significant decrease in profitability in our Display Technologies or Specialty Materials segments.
NEW ACCOUNTING STANDARDS
Refer to Note 1 (Significant Accounting Policies) to the Consolidated Financial Statements
.
ENVIRONMENT
Corning has been named by the Environmental Protection Agency (“the Agency”) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 17 active hazardous waste sites. Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise. It is Corning’s policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants. At September 30, 2016 and December 31, 2015, Corning had accrued approximately $45 million (undiscounted) and $37 million (undiscounted), respectively, for the estimated liability for environmental cleanup and related litigation. Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company’s liability and that the risk of an additional loss in an amount materially higher than that accrued is remote.
FORWARD-LOOKING STATEMENTS
The statements in this Quarterly Report on Form 10-Q, in reports subsequently filed by Corning with the Securities and Exchange Commission (“SEC”) on Forms 8-K, and related comments by management that are not historical facts or information and contain words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “seek,” “see,” “would,” and “target” and similar expressions are forward-looking statements. Such statements relate to future events that by their nature address matters that are, to different degrees, uncertain. These forward-looking statements relate to, among other things, the company’s future operating performance, the company's share of new and existing markets, the company's revenue and earnings growth rates, the company’s ability to innovate and commercialize new products, and the company’s implementation of cost-reduction initiatives and measures to improve pricing, including the optimization of the company’s manufacturing capacity.
© 2016 Corning Incorporated. All Rights Reserved.
Although the company believes that these forward-looking statements are based upon reasonable assumptions regarding, among other things, current estimates and forecasts, general economic conditions, its knowledge of its business, and key performance indicators that impact the company, actual results could differ materially. The company does not undertake to update forward-looking statements. Some of the risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements include, but are not limited to:
-
|
global business, financial, economic and political conditions;
|
-
|
tariffs and import duties;
|
-
|
currency fluctuations between the U.S. dollar and other currencies, primarily the Japanese yen, New Taiwan dollar, euro, Chinese renminbi and South Korean won;
|
-
|
product demand and industry capacity;
|
-
|
competitive products and pricing;
|
-
|
availability and costs of critical components and materials;
|
-
|
new product development and commercialization;
|
-
|
order activity and demand from major customers;
|
-
|
capital allocation plans, as such plans may change including with respect to the timing and size of share repurchases, acquisitions, joint ventures, dispositions and other strategic actions;
|
-
|
the effectiveness of our risk management framework;
|
-
|
fluctuations in capital spending by customers;
|
-
|
the amount and timing of our cash flows and earnings and other conditions, which may affect our ability to pay our quarterly dividend at the planned level or to repurchase shares at planned levels;
|
-
|
possible disruption in commercial activities due to terrorist activity, cyber-attack, armed conflict, political or financial instability, natural disasters, or major health concerns;
|
-
|
unanticipated disruption to equipment, facilities, IT systems or operations;
|
-
|
facility expansions and new plant start-up costs;
|
-
|
effect of regulatory and legal developments;
|
-
|
ability to pace capital spending to anticipated levels of customer demand;
|
-
|
credit rating and ability to obtain financing and capital on commercially reasonable terms;
|
-
|
adequacy and availability of insurance;
|
-
|
financial risk management;
|
-
|
acquisition and divestiture activities;
|
-
|
rate of technology change;
|
-
|
level of excess or obsolete inventory;
|
-
|
ability to enforce patents and protect intellectual property and trade secrets;
|
-
|
product and components performance issues;
|
-
|
retention of key personnel;
|
-
|
stock price fluctuations;
|
-
|
trends for the continued growth of the Company’s businesses;
|
-
|
the ability of research and development projects to produce revenues in future periods;
|
-
|
a downturn in demand or decline in growth rates for LCD glass substrates;
|
-
|
customer ability, most notably in the Display Technologies segment, to maintain profitable operations and obtain financing to fund their ongoing operations and manufacturing expansions and pay their receivables when due;
|
-
|
loss of significant customers;
|
-
|
fluctuations in supply chain inventory levels;
|
-
|
equity company activities;
|
-
|
changes in tax laws and regulations;
|
-
|
changes in accounting rules and standards;
|
-
|
the potential impact of legislation, government regulations, and other government action and investigations;
|
-
|
temporary idling of capacity or delaying expansion;
|
-
|
the ability to implement productivity, consolidation and cost reduction efforts, and to realize anticipated benefits;
|
-
|
restructuring actions and charges; and
|
-
|
other risks detailed in Corning’s SEC filings.
|
© 2016 Corning Incorporated. All Rights Reserved.