Feb. 12, 2021, 6:33 p.m. EST

10-K: CORNING INC /NY

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

For discussion of 2019 results year-over-year comparison with 2018 results refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Organization of Information

Management's Discussion and Analysis provides a historical and prospective narrative on the Company's financial condition and results of operations. This discussion includes the following sections:

?Overview

?Results of Operations

?Core Performance Measures

?Reportable Segments

?Liquidity and Capital Resources

?Environment

?Critical Accounting Estimates

?New Accounting Standards

?Forward-Looking Statements

OVERVIEW

In response to the COVID-19 pandemic and the ensuing economic uncertainty, including changing market conditions, the Company has and will continue to focus on three core priorities: preserving the financial health of the Company; protecting employees and communities; and delivering on customer commitments.

Strategy & Growth Framework

In 2019, we successfully completed our 2016 - 2019 Strategy and Capital Allocation Framework. Under the Framework, we outlined and demonstrated how Corning's probability of success increases as we invest in our world-class capabilities. We concentrate approximately 80% of our research, development and engineering investment along with capital spending on a cohesive set of three core technologies, four manufacturing and engineering platforms, and five Market-Access Platforms. This strategy allows us to quickly apply our talents and repurpose our assets across the company, as needed, to capture high-return opportunities.

Building on the success of the 2016 - 2019 Framework, we announced our 2020 - 2023 Strategy & Growth Framework, highlighting significant opportunities to sell more Corning content through each of our Market-Access Platforms. Under this new Framework, our leadership priorities and our fundamental approach to capital allocation remain the same. We continue to focus our portfolio and utilize our financial strength. We expect to generate strong operating cash flow as we move forward. We will continue to use our cash to grow, extend our leadership, and reward shareholders.

While 2020, brought unprecedented challenges to our end markets and operations, driven by the COVID-19 pandemic, economic uncertainty, and social unrest, Corning adapted rapidly and remained resilient. We executed well to preserve financial strength, while advancing major innovations with industry leaders. We effectively applied our focused and cohesive portfolio to create value and outperform our underlying markets, contributing to growth in the second half of this year.

?

Index

2020 Results

Net sales in the year ended December 31, 2020 were $11.3 billion, a net decrease of $200 million, or 2%, when compared to the year ended December 31, 2019, driven by lower sales in the Display Technologies, Optical Communications, Environmental Technologies and Life Sciences segments partially offset by higher sales the Specialty Materials segment and "All Other".

For the year ended December 31, 2020, we generated net income of $512 million, or $0.54 per share, compared to a net income of $960 million, or $1.07 per share, for 2019. When compared to 2019, the $448 million decrease in net income was primarily due to the following items (amounts presented after tax):

?The negative impact of mark-to-market translated earnings contract losses of $226 million;

?Higher costs of $170 million for an asset impairment loss related to investments in research and development programs within "All Other";

?Higher costs for litigation and environmental reserves of $133 million;

?Higher expenses of $117 million, primarily driven by severance costs for the Display Technologies segment;

?The negative impact of a cumulative adjustment recorded during the first quarter of 2020 to reduce revenue in the amount of $105 million. The adjustment was associated with a previously recorded commercial benefit asset, reflected as a prepayment, to a customer with a long-term supply agreement that is exiting its production of LCD panels; and

?Lower segment net income of $73 million mainly driven by lower volumes in the first half of 2020.

Partially offsetting these events were the following items:

?Gain on a previously held equity investment in HSG of $387 million; and

?An $83 million gain recognized from the initial public offering of an investment in the fourth quarter of 2020.

Diluted earnings per share decreased in 2020 by $0.53 per share, or 50%, when compared to 2019, primarily driven by the decrease in net income described above. The impact of share repurchases did not materially impact the change in diluted earnings per share.

The translation impact of fluctuations in foreign currency exchange rates, including the impact of hedges realized in the current year, positively impacted Corning's net income by approximately $51 million in the year ended December 31, 2020, when compared to the same period in 2019.

2021 Corporate Outlook

We believe 2021 will be a year of growth and we will continue to focus on operational excellence, cash-flow generation and prudent capital allocation. We expect year-over-year sales growth to accelerate in the first quarter of 2021, with approximately $3.0 - $3.2 billion of net sales.

Index







        RESULTS OF OPERATIONS
        Selected highlights from our operations follow (in millions):
                                                  Year ended December 31,              % change
                                                 2020        2019       2018     20 vs. 19   19 vs. 18
        Net sales                             $   11,303   $ 11,503   $ 11,290      (2)          2
        Gross margin                          $    3,531   $  4,035   $  4,461     (12)        (10)
        (gross margin %)                             31%        35%        40%
        Selling, general and administrative
        expenses                              $    1,747   $  1,585   $  1,799      10         (12)
        (as a % of net sales)                        15%        14%        16%
        Research, development and engineering
        expenses                              $    1,154   $  1,031   $    993      12           4
        (as a % of net sales)                        10%         9%         9%
        Equity in (losses) earnings of
        affiliated companies                  $     (25)   $     17   $    390       *         (96)
        (as a % of net sales)                       (0)%         0%         3%
        Translated earnings contract (loss)
        gain, net                             $     (38)   $    248   $   (93)       *           *
        (as a % of net sales)                       (0)%         2%       (1)%
        Transaction-related gain, net         $      498                             *           *
        (as a % of net sales)                         4%
        Income before income taxes            $      623   $  1,216   $  1,503     (49)        (19)
        (as a % of net sales)                         6%        11%        13%
        Provision for income taxes            $    (111)   $  (256)   $  (437)      57          41
        (as a % of net sales)                       (1)%       (2)%       (4)%
        Net income attributable to Corning
        Incorporated                          $      512   $    960   $  1,066     (47)        (10)
        (as a % of net sales)                         5%         8%         9%
        


* Percent change not meaningful.

?

Index







        Segment Net Sales
        The following table presents segment net sales by reportable segment (in
        millions):
                                                                                     %           %
                                                  Year ended December 31,         change      change
                                                 2020        2019       2018     20 vs. 19   19 vs. 18
        Display Technologies                  $    3,172   $  3,254   $  3,276     (3)%        (1)%
        Optical Communications                     3,563      4,064      4,192     (12)%       (3)%
        Specialty Materials                        1,884      1,594      1,479      18%         8%
        Environmental Technologies                 1,370      1,499      1,289     (9)%         16%
        Life Sciences                                998      1,015        946     (2)%         7%
        All Other                                    465        230        216     102%         6%
        Net sales of reportable segments and
        All Other                             $   11,452   $ 11,656   $ 11,398     (2)%         2%
        Impact of foreign currency movements
        (1)                                         (44)      (153)      (108)      71%        (42)%
        Cumulative adjustment related to
        customer contract (2)                      (105)                             *
        Consolidated net sales                $   11,303   $ 11,503   $ 11,290     (2)%         2%
        


(1)This amount primarily represents the impact of foreign currency adjustments in the Display Technologies, Environmental Technologies and Life Sciences segments.

(2)Amount represents the negative impact of a cumulative adjustment recorded during the first quarter of 2020 to reduce revenue in the amount of $105 million. The adjustment was associated with a previously recorded commercial benefit asset, reflected as a prepayment, to a customer with a long-term supply agreement that is exiting its production of LCD panels.

* Percent change not meaningful.

For the year ended December 31, 2020, segment net sales decreased by $204 million, or 2%, when compared to the same period in 2019. The primary sales drivers by segment were as follows:

?Display Technologies' net sales decreased by $82 million, primarily driven by lower sales and production volumes in the first half of the year;

?Optical Communications' net sales declined $501 million, as sales declined for carrier products by $273 million and enterprise products by $228 million, due to general market weakness and capital spending reductions by several major customers;

?Net sales for Environmental Technologies decreased $129 million, as production facilities of vehicle manufacturers were temporarily shut down during the first half of 2020 in key markets;

?Net sales in the Life Sciences segment decreased by $17 million, primarily driven by lab closures due to the COVID-19 pandemic;

?Net sales increased in the Specialty Materials segment in the amount of $290 million, primarily driven by strong demand for premium cover materials in support of second-half customer launches, growth in IT products due to work and study from home trends, as well as demand for semiconductor equipment products; and

?Net sales for "All Other" increased by $235 million, primarily driven by the consolidation of HSG on September 9, 2020, which added sales of $194 million.

Movements in foreign exchange rates positively impacted Corning's consolidated net sales by $115 million in the year ended December 31, 2020, when compared to the same period in 2019.

In 2020 and 2019, sales in international markets accounted for 70% and 68%, respectively, of total net sales.

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.

Index

Gross Margin

In the year ended December 31, 2020, gross margin decreased by $504 million, or 12%. Gross margin as a percentage of sales declined by 4 percentage points. Negative impacts to gross margin were primarily driven by severance charges for the Display Technologies segment and lower volumes in Display Technologies, Optical Communications and Environmental Technologies segments for the year ended December 31, 2020.

Movements in foreign exchange rates had a $91 million positive impact on Corning's consolidated gross margin in the year ended December 31, 2020, when compared to the same period in 2019.

Selling, General and Administrative Expenses

When compared to the year ended December 31, 2019, selling, general and administrative expenses increased by $162 million, or 10%, in the year ended December 31, 2020. Selling, general and administrative expenses increased by 1% as a percentage of sales. The increase was primarily driven by higher litigation, restructuring and share-based compensation costs, partially offset by salary and cost reductions across the Company.

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.

Research, Development and Engineering Expenses

For the year ended December 31, 2020, research, development and engineering expenses increased by $123 million, or 12%, when compared to the same period in the prior year, primarily driven by a pre-tax asset impairment loss of $211 million related to the reassessment and reprioritization of research and development programs within "All Other". Given the current economic environment and market opportunities, Corning has rescoped and significantly reduced its investment in these research and development programs. As a percentage of sales, these expenses were 1% higher when compared to the same period last year.

Restructuring, Impairment, and Other Charges and Credits

For the year ended December 31, 2020, and in response to uncertain global economic conditions, Corning undertook actions to transform the Company's cost structure and improve operational efficiency. During the year ended December 31, 2020, Corning recorded restructuring, impairment, and other charges and credits of $827 million.

In the second quarter of 2020, the Company implemented a corporate-wide workforce reduction program. Severance charges were primarily incurred to facilitate realignment of capacity in the Asia regions for the Display Technologies segment, optimize the Optical Communications segment and contain corporate costs. For the year ended December 31, 2020, severance charges were $148 million. As of December 31, 2020, the unpaid severance liabilities of $45 million are expected to be substantially completed within the next twelve months.

For the year ended December 31, 2020, Corning incurred a long-lived asset impairment and disposal loss for an asset group related to the reassessment of research and development programs within "All Other". Given the economic environment and market opportunities, Corning discontinued its investment in these research and development programs. The impairment analysis and disposition of certain assets resulted in a total pre-tax charge of $217 million, primarily recorded in research, development and engineering expenses, as noted above, which was substantially all the carrying value, inclusive of an insignificant amount of goodwill.

Capacity realignment costs of $304 million for the year ended December 31, 2020, primarily include accelerated depreciation and asset disposals associated with the exit of certain facilities and other exit activities in the Display Technologies and Specialty Materials business segments. Other charges and credits of $158 million, were related to other exit activities.

Refer to Note 2 (Restructuring, Impairment and Other Charges and Credits) to the consolidated financial statements for additional information on restructuring activities and impairment.

Index







        Equity in (Losses) Earnings of Affiliated Companies
        The following provides a summary of equity in (losses) earnings of affiliated
        companies (in millions):
                                             Year ended December 31,
                                           2020               2019   2018
        Hemlock Semiconductor Group (1) $       22           $   27  $ 388
        All other (2)                         (47)             (10)      2
        Total equity (losses) earnings  $     (25)           $   17  $ 390
        


(1)The year ended December 31, 2020, includes HSG's results of operations through September 8, 2020. Corning began consolidating HSG on September 9, 2020.

(2)Includes the Company's share of a loss related to the sale of a business for the year ended December 31, 2020.

HSG acquired DuPont's Trichlorosilane ("TCS") manufacturing assets, which was determined to be a business and recorded as a business combination. The fair value of the purchase price was $255 million. In conjunction with this acquisition, HSG settled its pre-existing contract dispute related to a long-term supply agreement with DuPont ("TCS Settlement") for a contractual amount of $175 million, which was determined to have a fair value of $200 million. See Note 4 (HSG Transactions) to the consolidated financial statements for more information.

HSG's net income for the period ended September 8, 2020, included a pre-tax gain recorded in the second quarter of 2020, related to the settlement of a long-term supply agreement of approximately $165 million, partially offset by an inventory provision of approximately $44 million associated with the settlement of the agreement. Prior to the Redemption, in the third quarter of 2020, HSG recorded a pre-tax loss of $200 million resulting from the settlement of a pre-existing contract dispute related to a long-term supply agreement with DuPont ("TCS Settlement"). Corning's share of the pre-tax loss was $81 million. Accordingly, Corning's share of the net impact was an equity loss of $19 million.

Since September 9, 2020, HSG's revenue of $194 million has been consolidated in "All Other" in Corning's consolidated statements of income for the year ended December 31, 2020. The amount of net income is not material to Corning's consolidated financial statements for the current year.

Additional information about corporate investments is presented in Note 3 (Investments) and Note 4 (HSG Transactions and Acquisitions) to the consolidated financial statements.

Index

Translated earnings contract (loss) gain, net

Included in the line item translated earnings contract (loss) gain, net, is the impact of foreign currency contracts which hedge our translation exposure arising from movements in the Japanese yen, South Korean won, new Taiwan dollar, euro, Chinese yuan and British pound and its impact on our net income.

The following table provides detailed information on the impact of our translated earnings contracts gains and losses for the years ended December 31, 2020, 2019 and 2018:







                                          (Loss)          Net            Income        Net       Income
                                         ? income       ?(loss)          ?(loss)     ?income     ?before       Net
        (in millions)                   ?before tax     ? income       ?before tax   ?(loss)      ?tax       ?income
                                                  2020                        2019                  2020 vs. 2019
        Hedges related to translated
        earnings:
        Realized (loss) gain, net (1)  $         (8)   $      (5)   $          18   $      14   $    (26)   $    (19)
        Unrealized (loss) gain,
        net (1) (2)                             (30)         (24)             230         179       (260)       (203)
        Total translated earnings
        contract (loss) gain, net      $        (38)   $     (29)   $         248   $     193   $   (286)   $   (222)
                                                  2019                        2018                  2019 vs. 2018
        Hedges related to translated
        earnings:
        Realized gain, net (1)         $          18   $       14   $          97   $      78   $    (79)   $    (64)
        Unrealized gain (loss),
        net (1) (2)                              230          179           (190)       (189)         420         368
        Total translated earnings
        contract gain (loss), net      $         248   $      193   $        (93)   $   (111)   $     341   $     304
        


(1)Includes pre-tax realized losses related to the expiration of option contracts for the year ended 2020, 2019, 2018 of $20 million, $37 million and $11 million, respectively, and was reflected in operating activities in the consolidated statements of cash flows.

(2)The impact to income was primarily driven by Japanese yen, South Korean won, and euro-denominated hedges of translated earnings.

Income Before Income Taxes

The translation impact of fluctuations in foreign currency exchange rates, including the impact of hedges realized in the current year, positively impacted Corning's income before income taxes by $60 million in the year ended December 31, 2020, when compared to the same period in 2019.







        Provision for Income Taxes
        Our provision for income taxes and the related effective income tax rates were
        as follows (dollars in millions):
                                        Year ended December 31,
                                      2020           2019     2018
        Provision for income taxes $    (111)       $ (256)  $ (437)
        Effective tax rate              17.8%         21.1%    29.1%
        


For the year ended December 31, 2020, the effective income tax rate differed from the U.S. statutory rate of 21% primarily due to the following:

?Additional net provision of $73 million from changes to our tax reserves;

?A net provision of $45 million due primarily to stronger foreign earnings relative to U.S. earnings in the current year, as well as U.S. income inclusion under the Internal Revenue Code ("Subpart F income"); and

?A net benefit of $116 million due to a net operating loss carryback allowed under the CARES Act.

?

Index

For the year ended December 31, 2019, the effective income tax rate differed from the U.S. statutory rate of 21% primarily due to the following:

?Additional net provision of $102 million from changes to our tax reserves;

?A net benefit of $45 million due to releases of foreign valuation allowances on foreign deferred tax assets that are now considered realizable; and

?Additional net benefit, including a change in estimate from prior year, from the 2017 Tax Act attributable to foreign intangible income (FDII) deduction of $103 million offset by taxes for global intangible low-taxed income (GILTI) of $15 million.

Generally, Corning will indefinitely reinvest the foreign earnings of: (1) any of its subsidiaries located in jurisdictions where Corning lacks the ability to repatriate its earnings, (2) any of its subsidiaries where Corning's intention is to reinvest those earnings in operations, (3) legal entities for which Corning holds a non-controlling interest, (4) any subsidiaries with an accumulated deficit in earnings and profits, (5) any subsidiaries which have a positive earnings and profits balance but for which the entity lacks sufficient local statutory earnings or stock basis from which to make a distribution, or

During 2020, the Company distributed approximately $914 million from foreign subsidiaries to their respective U.S. parent companies. As of December 31, 2020, Corning has approximately $2 billion of indefinitely reinvested foreign earnings. It remains impracticable to calculate the tax cost of repatriating our unremitted earnings which are considered indefinitely reinvested.

Refer to Note 8 (Income Taxes) to the consolidated financial statements for further details regarding income tax matters.







        Net Income Attributable to Corning Incorporated
        As a result of the items discussed above, net income and per share data was as
        follows (in millions, except per share amounts):
                                                                  Year ended December 31,
                                                           2020                2019         2018
        Net income attributable to Corning Incorporated $       512         $      960   $    1,066
        Net income attributable to Corning Incorporated
        used in
        ? basic earnings per common share
        calculation (1)                                 $       414         $      862   $      968
        Net income attributable to Corning Incorporated
        used in
        ? diluted earnings per common share
        calculation (1)                                 $       414         $      960   $    1,066
        Basic earnings per common share                 $      0.54         $     1.11   $     1.19
        Diluted earnings per common share               $      0.54         $     1.07   $     1.13
        Weighted-average common shares outstanding -
        basic                                                   761                776          816
        Weighted-average common shares outstanding -
        diluted                                                 772                899          941
        


(1)Refer to Note 18 (Earnings per Common Share) to the consolidated financial statements for additional information.

Index







        Comprehensive Income
                                                                 Year ended December 31,
        (In millions)                                      2020               2019         2018
        Net income attributable to Corning Incorporated $       512        $      960   $    1,066
        Foreign currency translation adjustments and
        other                                                   528             (143)        (185)
        Net unrealized gains (losses) on investments                                1          (1)
        Unamortized (losses) gains and prior service
        (costs) credits for
         postretirement benefit plans                          (88)              (64)           19
        Net unrealized (losses) gains on designated
        hedges                                                  (9)                45          (1)
        Other comprehensive income (loss), net of tax
        (Note 17)                                               431             (161)        (168)
        Comprehensive income attributable to Corning
        Incorporated                                    $       943        $      799   $      898
        


For the year ended December 31, 2020, comprehensive income increased by $144 million, when compared to the same period in 2019, primarily due to the following:

?An increase in the gain on foreign currency translation adjustments in the . . .

Feb 12, 2021

COMTEX_380766229/2041/2021-02-12T18:32:40

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