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GLW > SEC Filings for GLW > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for CORNING INC /NY


26-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

· Overview

· Results of Operations

· Core Performance Measures

· Reportable Segments

· Liquidity and Capital Resources

· Critical Accounting Estimates

· New Accounting Standards

· Environment

· Forward-Looking Statements

OVERVIEW
Although Corning's net sales declined by $106 million, or 6%, in the first quarter of 2013 when compared to the first quarter of 2012, reflecting lower sales in all of our segments except Life Sciences, net income increased by $20 million, or 4%, driven by improvements in the Telecommunications and Specialty Materials segment. Lower volume in the Telecommunications segment was more than offset by improved manufacturing performance and strong spending controls. Results in our Specialty Materials segment improved by 77%, driven by improved manufacturing efficiency in the production of Corning® Gorilla® Glass and an increase in sales of higher-profit products. Partially offsetting the improvements in these segments were declines in operating results in the Environmental Technologies and Display Technologies segments. In the Environmental Technologies segment, operating results declined in the first quarter of 2013, due to reductions in demand for both light-duty and heavy-duty diesel products, and price declines in the automotive products business. Results in the Display Technologies segment were lower primarily due to the significant depreciation of the Japanese yen versus the U.S. dollar. Volume in the Display Technologies segment base business increased in the double-digits, which more than offset price declines.

In the first quarter of 2013, we generated net income of $494 million or $0.33 per share, compared to net income of $474 million or $0.31 per share for the same period in 2012. When compared to the same period last year, the increase in net income in the three months ended March 31, 2013 was due largely to the following items:

· A tax benefit in the amount of $54 million related to the impact of the American Taxpayer Relief Act enacted on January 3, 2013 retroactive to 2012;

· Lower operating expenses, driven by a decrease in stock compensation expense and cost control measures implemented by our segments;

· Higher net income in the Specialty Materials and Telecommunications segments; and

· Net gain recorded on our foreign exchange purchased collar hedge contracts.

The increase in net income for the three months ended March 31, 2013 was offset somewhat by the following:

· The negative impact on our Display Technologies segment of the significant depreciation of the Japanese yen versus the U.S. dollar; and

· Lower net income in the Environmental Technologies segment, driven by lower demand for our diesel products.

Our key priorities for 2013 remain similar to those from previous years: protect our financial health and invest in the future. During the first quarter of 2013, we made the following progress toward these priorities:

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Protecting Financial Health
Our balance sheet remains strong, and we generated positive cash flow from operating activities:

· We ended the first quarter of 2013 with $5.8 billion of cash, cash equivalents and short-term investments, a decrease from the balance at December 31, 2012 of $6.1 billion, but well above our debt balance at March 31, 2013 of $2.9 billion. The decrease in cash was largely driven by the repayment of the Chinese credit facility in the first quarter of 2013, in the amount of approximately $500 million.

· Our debt to capital ratio decreased from 14% reported at December 31, 2012 to 12% at March 31, 2013.

· Although operating cash flow in the three months ended March 31, 2013 declined by $139 million when compared to the first quarter of 2012, we generated significant positive operating cash flow in the amount of $623 million.

Investing In Our Future
We continue to focus on the future and on what we do best - creating keystone components that enable high-technology systems. We remain committed to investing in research, development and engineering to drive innovation. During 2013, we will maintain our balanced innovation strategy focused 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. Our spending levels for research, development, and engineering remained relatively consistent in the first quarter of 2013 when compared to the same period last year, and were approximately 10% of sales in both periods.

We continue to work on new products, including glass substrates for high performance displays and LCD applications, diesel filters and substrates, 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, fiber to the cell site and fiber to the antenna. We have focused our research, development and engineering spending to support the advancement of new product attributes for our Corning Gorilla Glass suite of products. 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 technologies.

Capital spending totaled $194 million and $412 million for the three months ended March 31, 2013 and 2012, respectively. Spending in the first three months of 2013 was driven primarily by the Display Technologies segment, and focused on high performance display capital investments, tank rebuilds and the expansion project in China. We expect our 2013 capital spending to be approximately $1.3 billion. Approximately $457 million will be directed toward our Display Technologies segment, of which approximately $82 million is related to capital projects started in 2011 and 2012.

Corporate Outlook
We expect sales to grow in our Telecommunications, Life Sciences, Specialty Materials and Environmental Technologies segments, and for our market share to remain stable and price declines to be moderate in our Display Technologies segment. A rise in global demand for Corning's optical fiber and cable, combined with growth of enterprise network solutions products and fiber-to-the-premises sales in Australia should propel the sales improvement in our Telecommunications segment. Our recent acquisition of the Discovery Labware business is expected to drive the Life Sciences segment sales growth in 2013. We believe the overall LCD glass retail market in 2013 will increase in the mid-to-high single digits from 3.5 billion square feet in 2012, driven by the combination of an increase in retail sales of LCD televisions and the demand for larger television screen sizes. Net income may be negatively impacted by lower equity earnings from our equity affiliate Dow Corning and the impact of movements in foreign exchange rates. We may take advantage of acquisition opportunities that support the long-term strategies of our businesses. We remain confident that our strategy to grow through global innovation, while preserving our financial health, will enable our continued long-term success.

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RESULTS OF OPERATIONS

Selected highlights for the first quarter follow (dollars in millions):
                                                  Three months ended         %
                                                      March 31,           change
                                                   2013         2012     13 vs. 12

Net sales                                        $   1,814     $ 1,920         (6)

Gross margin                                     $     770     $   824         (7)
(gross margin %)                                       42%         43%

Selling, general, and administrative expenses    $     259     $   273         (5)
(as a % of net sales)                                  14%         14%

Research, development, and engineering expenses  $     178     $   184         (3)
(as a % of net sales)                                  10%         10%

Equity in earnings of affiliated companies       $     173     $   218        (21)
(as a % of net sales)                                  10%         11%

Income before income taxes                       $     528     $   592        (11)
(as a % of net sales)                                  29%         31%

Provision for income taxes                       $    (34)     $ (118)          71
(as a % of net sales)                                 (2)%        (6)%

Net income attributable to Corning Incorporated  $     494     $   474           4
(as a % of net sales)                                  27%         25%

Net Sales
For the three months ended March 31, 2013, net sales decreased by $106 million when compared to the same period in 2012, driven by lower sales in our Display Technologies, Telecommunications, Environmental Technologies and Specialty Materials segments. Net sales increased in the Life Sciences segment, driven by the impact of the acquisition of the Discovery Labware business in the fourth quarter of 2012. Although the impact of fluctuations in foreign currency exchange rates did not materially impact our Telecommunications, Environmental Technologies, Life Sciences and Specialty Materials segments, the impact of the fluctuation in the Japanese yen had a negative impact of approximately $100 million on sales in our Display Technologies segment in the first quarter, when compared to the first quarter of 2012. Volume gains more than outpaced the decline in price in the Display Technologies segment in the first quarter of 2013.

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.

-34-

Gross Margin
As a percentage of net sales, gross margin for the three months ended March 31, 2013 decreased slightly when compared to the same period last year, due primarily by the impact of the weakening of the Japanese yen and lower prices in our Display Technologies segment, offset somewhat by improvements in manufacturing performance in the Telecommunications, Specialty Materials and Environmental Technologies segments.

Selling, General, and Administrative Expenses For the three months ended March 31, 2013, selling, general, and administrative expenses decreased by $14 million, driven by a decrease in stock compensation expense and cost control measures implemented by our segments. As a percentage of net sales, these expenses remained consistent with the same period last year.

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; depreciation and amortization, utilities, and rent for administrative facilities.

Research, Development, and Engineering Expenses For the three months ended March 31, 2013, research, development, and engineering expenses decreased by $6 million, when compared to the same period last year, driven by lower spending in our Display Technologies and Environmental Technologies segments, offset by spending for new product development. As a percentage of net sales, research, development, and engineering expenses remained consistent with the same period in 2012.

Equity in Earnings of Affiliated Companies The following provides a summary of equity in earnings of associated companies (in millions):

                            Three months ended
                                March 31,
                            2013         2012
Samsung Corning Precision  $    133     $    183
Dow Corning Corporation          35           35
All other                         5
Total equity earnings      $    173     $    218

Equity earnings of affiliated companies decreased for the three months ended March 31, 2013, when compared to the same period last year, reflecting lower earnings at Samsung Corning Precision, driven by the significant depreciation of the Japanese yen versus the U.S. dollar. The change in equity earnings from Samsung Corning Precision is explained more fully in the discussion of Core Performance Measures, the performance of the Display Technologies segment and in All Other.

Equity earnings from Dow Corning remained consistent with the first quarter of 2012. The following table provides a summary of equity in earnings from Dow Corning, by segment (in millions):

                                      Three months ended
                                          March 31,
                                       2013          2012
Silicones                             $     42        $ 32
Hemlock Semiconductor (Polysilicon)         (7)          3
Total Dow Corning                     $     35        $ 35

-35-

Equity earnings from Dow Corning in the first quarter of 2013 were consistent with the prior year, with the increase in results in the Silicones segment offset by lower earnings at Dow Corning's consolidated subsidiary, Hemlock Semiconductor Group (Hemlock), a producer of high purity polycrystalline silicon for the semiconductor and solar industries. Overcapacity at all levels of the solar industry supply chain, which largely began in the fourth quarter of 2012, continued in the first quarter of 2013, resulting in further declines in volume and price at Hemlock. Dow Corning continues to monitor events and circumstances for potential triggering events for indicators of impairment.

Other items impacting equity earnings of Dow Corning in the first quarter of 2013 included:

· Higher earnings in the silicone segment, driven by lower raw materials costs, gain on insurance proceeds received under the Plan of Reorganization, and a reduction in costs as result of restructuring actions implemented in the fourth quarter of 2012. Offsetting these gains somewhat was a decrease in price and lower volume; and

· A 3% decrease in the effective tax rate.

Other Income, Net
"Other income, net" in Corning's consolidated statements of income includes the
following (in millions):
                                                     Three months ended
                                                          March 31,
                                                     2013           2012
Royalty income from Samsung Corning Precision       $     15       $     22
Foreign currency exchange and hedge gains, net            31              5
Net loss attributable to noncontrolling interests          1              1
Other, net                                                18              1
Total                                               $     65       $     29

Included in the line item Foreign currency exchange and hedge gains for the three months ended March 31, 2013, net, is the impact of the purchased collars which hedge our exposure to movements in the Japanese yen and its impact on our net earnings, in the amount of $24 million.

Income Before Income Taxes
Income before income taxes for the three months ended March 31, 2013, was impacted in the approximate amount of $100 million by the significant depreciation of the Japanese yen versus the U.S. dollar when compared to the same period last year.

Provision for Income Taxes
Our provision for income taxes and the related effective income tax rates were
as follows (in millions):
                              Three months ended
                                  March 31,
                             2013          2012

Provision for income taxes  $   (34)     $    (118)
Effective tax rate              6.4%          19.9%

For the three months ended March 31, 2013, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

· Rate differences on income (loss) of consolidated foreign companies;

· The impact of equity in earnings of nonconsolidated affiliates reported in the financials net of tax;

· $54 million tax benefit to record the impact of the American Taxpayer Relief Act enacted on January 3, 2013 retroactive to 2012; and

· The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.

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For the three months ended March 31, 2012, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

· Rate differences on income/(losses) of consolidated foreign companies;

· The impact of equity in earnings of nonconsolidated affiliates reported in the financials net of tax;

· The expiration of favorable U.S. tax provisions; and

· The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.

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
                                                      March 31,
                                                   2013         2012
Net income attributable to Corning Incorporated  $     494     $   474
Basic earnings per common share                  $    0.33     $  0.31
Diluted earnings per common share                $    0.33     $  0.31
Shares used in computing per share amounts
Basic earnings per common share                      1,472       1,516
Diluted earnings per common share                    1,481       1,530

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 for our financial and operational decision making. Net sales, equity in earnings of affiliated companies, and net income are adjusted to exclude the impacts of changes in the Japanese yen, the impact of the purchased collars, the impact of acquisitions, the results of the polysilicon business of our equity affiliate Dow Corning Corporation, discrete tax items, restructuring and restructuring-related charges, certain litigation-related expenses and the annual pension mark-to-market adjustment. Management discussion and analysis on our Reportable Segments has also been adjusted for these items, as appropriate. These measures are not prepared in accordance with U.S. Generally Accepted Accounting Principles (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 with how management evaluates our operational results and trends. These measures are not, and should not be viewed as a substitute for U.S. GAAP reporting measures. For a reconciliation of non-GAAP performance measures and a further discussion of the measures, 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):
                                                 Quarter 1     Quarter 1
                                                   2013          2012       % Change
Core net sales                                   $    1,814    $    1,820    (0.3)%
Core equity in earnings of affiliated companies  $      180    $      178      1%
Core earnings                                    $      445    $      397     12%

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Core Net Sales
Core net sales in the first quarter of 2013 and 2012, which excludes the impact of changes in the Japanese yen, totaled $1,814 million and $1,820 million, respectively, a decrease of $6 million, or 0.3%. Lower sales in our Telecommunications, Environmental Technologies and Specialty Materials segments were offset by improvements in the Display Technologies and Life Sciences segment. The increase in our Display Technologies segment was driven by a double-digit volume increase, offset somewhat by price declines, while sales increased in the Life Sciences segment due to the acquisition of the Discovery Labware business in the fourth quarter of 2012.

Core Equity in Earnings of Affiliated Companies The following provides a summary of equity in earnings of associated companies, excluding the impact of changes in the Japanese yen and the results of Dow Corning's consolidated subsidiary, Hemlock Semiconductor (in millions):

                            Three months ended
                                March 31,
                            2013         2012
Samsung Corning Precision  $    133     $    145
Dow Corning Corporation          42           32
All other                         5            1
Total equity earnings      $    180     $    178

Core equity earnings of affiliated companies remained consistent in the first quarter of 2013, when compared to the same period last year. Equity earnings from Samsung Corning Precision decreased by $12 million, or 8%, when the impact of the changes in the Japanese yen are excluded, driven by a significant decline in price, offset slightly by a small increase in volume and improved manufacturing performance. Excluding the impact of Hemlock Semiconductor, equity earnings from Dow Corning increased by $10 million, or 31%, in the first quarter of 2013, when compared to 2012, driven by lower raw materials costs and a reduction in expenses as a result of restructuring actions implemented in the fourth quarter of 2012 in the silicones segment, coupled with a gain from insurance proceeds received under the Plan of Reorganization. Offsetting these gains somewhat was a decrease in price and lower volume for silicone products.

Core Earnings

When compared to the same period last year, core earnings increased in the three months ended March 31, 2013 by $48 million, or 12%, driven by the following items:

· Lower operating expenses, driven by a decrease in stock compensation expense and cost control measures implemented by our segments;

· Higher net income in the Specialty Materials, Telecommunications and Life Sciences segments; and

· A decrease in our effective tax rate of approximately 4 percentage points.

The increase in core earnings for the three months ended March 31, 2013 was offset somewhat by lower net income in the Environmental Technologies segment, driven by lower demand for our diesel products.

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.

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Core net sales, core equity 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.

The following tables reconcile our non-GAAP financial measures to their most directly comparable GAAP financial measure.

                                   Three months ended March 31, 2013
                                                Income
                                                before                Effective
                           Net      Equity      income       Net         tax
                          sales    earnings      taxes      income      rate
As reported              $ 1,814    $    173    $   528     $  494      6.4%
Acquisition-related
costs (4)                                            18         13
Discrete tax items (5)                                         (54)
Equity in earnings of
affiliated companies (7)                   2          2          2
Asbestos settlement (6)                               2          1
Hemlock
Semiconductor (3)                          5          5          4
Purchased collars (2)                               (24)       (15)
Core Performance
measures                 $ 1,814    $    180    $   531     $  445       16%



                                    Three months ended March 31, 2012
                                                  Income
                                                  before              Effective
                            Net        Equity     income      Net        tax
                           sales      earnings     taxes    income      rate
As reported               $ 1,920     $    218     $ 592     $ 474      19.9%
Asbestos settlement (6)                                1         1
Hemlock Semiconductor (3)                   (3)       (3)       (3)
Constant-yen (1)             (100)         (37)      (92)      (75)
Core Performance measures $ 1,820     $    178     $ 498     $ 397       20%

Items which we exclude from GAAP measures to arrive at Core Performance measures are as follows:

(1) Constant-yen: Because a significant portion of Corning's LCD glass business revenues and manufacturing costs are denominated in Japanese yen, management believes it is important to understand the impact on core earnings from translating yen into dollars. Presenting results on a constant-yen basis eliminates the translation impact of the Japanese yen, and allows management to evaluate performance period over period, analyze underlying trends in our . . .

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