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GLW > SEC Filings for GLW > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for CORNING INC /NY

Form 10-Q for CORNING INC /NY


31-Jul-2014

Quarterly Report


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 2013 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," 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 in this filing and in "Risk Factors" in Part I, Item 1A of our 2013 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 June 30, 2014.

Our MD&A includes the following sections:

· Overview

· Results of Operations

· Core Performance Measures

· Reportable Segments

· Capital Resources and Liquidity

· Critical Accounting Estimates

· New Accounting Standards

· Environment

· Forward-Looking Statements

OVERVIEW
The impact of the Acquisition of the remaining equity interests in our affiliate Samsung Corning Precision Materials, now known as Corning Precision Materials, combined with strong business performance in the Optical Communications and Environmental Technologies segments, drove an increase in sales of 25% and 26%, respectively, in the second quarter and first half of 2014, when compared to the same periods last year. However, net income declined considerably in these periods, driven by several non-operating items, including the negative impact of the mark-to-market on our yen-denominated hedge programs, several tax-related items, the depreciation of the Japanese yen versus the U.S. dollar and the absence of several favorable events which occurred in 2013.

Net sales in the second quarter of 2014 increased by $500 million to $2,482 million, when compared to the second quarter of 2013. The increase in net sales was due to the following items:

· Higher sales in the Display Technologies segment, driven by the consolidation of Corning Precision Materials, which increased sales by $447 million, and an increase in volume in the high-single digits in percentage terms, offset somewhat by price declines in the mid-teens and the negative impact of the Japanese yen versus the U.S. dollar exchange rate;

· An increase in net sales in the Optical Communications segment in the amount of $85 million, driven by an increase in sales of carrier network products in the amount of $73 million, largely due to growth in North America and Europe, and an increase of $12 million in enterprise network products; and

· An increase of $57 million in the Environmental Technologies segment, due mainly to an increase in demand for our heavy duty diesel products, driven by new governmental regulations in Europe and China and increased demand for Class 8 vehicles in North America.

-32-

Net sales in the six months ended June 30, 2014 increased by $975 million to $4,771 million, when compared to the same period in 2013. The increase in net sales was due to the following items:

· Higher sales in the Display Technologies segment, driven by the consolidation of Corning Precision Materials, which increased sales by $868 million, and an increase in volume in the mid-single digits in percentage terms offset somewhat by price declines in the mid-teens;

· An increase in net sales in the Optical Communications segment in the amount of $208 million, driven by an increase in sales of carrier network products in the amount of $171 million, largely due to growth in North America, China and Europe, and an increase of $37 million in enterprise network products; and

· An increase of $104 million in the Environmental Technologies segment, due mainly to an increase in demand for our heavy duty diesel products, driven by new governmental regulations in Europe and China and increased demand for Class 8 vehicles in North America.

In the second quarter of 2014, we generated net income of $169 million or $0.11 per share, compared to net income of $638 million or $0.43 per share for the same period in 2013. When compared to the same period last year, the decrease in net income was due largely to the following items:

· The negative net impact of our yen-denominated hedge programs, driven by the strengthening of the Japanese yen in 2014 compared to significant weakening in 2013, in the amount of $248 million;

· Several tax-related items in the amount of $164 million, including the establishment of deferred tax valuation allowances in Japan and Germany;

· The negative net impact from the Japanese yen versus the U.S. dollar exchange rate in the amount of $32 million; and

· The absence of the $26 million gain recognized on the true-up to our 2012 pension liability and the $11 million gain resulting from the change in control of an equity investment, occurring in the second quarter of 2013.

The decrease in net income for the three months ended June 30, 2014 was offset somewhat by the following:

· Higher net income in the Environmental Technologies segment, driven by an increase in demand for our diesel products; and

· An increase in equity earnings from Dow Corning, due to a mark-to-market gain on a derivative instrument in the amount of $8 million, and an increase in volume in the polysilicon segment.

In the first half of 2014, we generated net income of $470 million or $0.32 per share, compared to net income of $1,132 million or $0.76 per share for the same period in 2013. When compared to the same period last year, the decrease in net income was due largely to the following items:

· The negative net impact of our yen-denominated hedge programs, driven by the strengthening of the Japanese yen in 2014 compared to significant weakening in 2013, in the amount of $267 million;

· Several tax-related items in the amount of $185 million, including the establishment of deferred tax valuation allowances in Japan and Germany, and the absence of a tax benefit in the amount of $54 million recorded in the first quarter of 2013 related to the impact of the American Taxpayer Relief Act enacted on January 3, 2013 retroactive to 2012;

· A dividend withholding tax in the amount of $102 million on Corning's share of the dividend from Samsung Corning Precision Materials distributed subsequent to the Acquisition of the remaining equity interests of the affiliate;

· The negative impact from the Japanese yen versus the U.S. dollar exchange rate in the amount of $93 million; and

· The absence of the $26 million gain recognized on the true-up to our 2012 pension liability and the $11 million gain resulting from the change in control of an equity investment, occurring in the second quarter of 2013.

-33-

The decrease in net income for the six months ended June 30, 2014 was offset somewhat by the following:

· Higher net income in the Environmental Technologies segment, driven by an increase in demand for our diesel products; and

· An increase in equity earnings from Dow Corning, due to a mark-to-market gain on a derivative instrument in the amount of $40 million, and an increase in volume and the settlement of a long-term sales agreement in the amount of $9 million in the polysilicon segment.

Our key priorities for 2014 remain similar to those from previous years: protect our financial health and invest in the future. During the first six months of 2014, we made the following progress toward these priorities:

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

· We ended the first half of 2014 with $5.9 billion of cash, cash equivalents and short-term investments, an increase from the balance at December 31, 2013 of $5.2 billion, and well above our debt balance at June 30, 2014 of $3.7 billion. The increase in cash was driven by the consolidation of Corning Precision Materials beginning in the first quarter of 2014, and the cash received from Samsung Display for the additional issuance of Preferred Stock in connection with the Acquisition, offset by the cash paid for our share repurchases.

· Our debt to capital ratio increased from 13% reported at December 31, 2013 to 15% at June 30, 2014, driven by an increase in the amount of outstanding commercial paper and our share repurchase program.

· Operating cash flow in the six months ended June 30, 2014 was $2,480 million, an increase of $1,468 million when compared to the first six months of 2013, driven by a dividend from Samsung Corning Precision Materials distributed subsequent to the Acquisition of the remaining equity interests of the affiliate.

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. During 2014, we will maintain our 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. When compared to the same periods in 2013, our spending levels for research, development and engineering declined slightly to 8% of sales in the three months ended June 30, 2014, and in the first half of 2014, were consistent with the prior year at 9% of sales.

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 $478 million and $438 million for the six months ended June 30, 2014 and 2013, respectively. Spending in the first six months of 2014 was driven primarily by the Display Technologies segment, and focused on finishing line optimization and tank rebuilds. We expect our 2014 capital spending to be approximately $1.3 billion. We expect that approximately $500 million will be directed toward our Display Technologies segment, of which approximately $107 million is related to capital projects started in 2012 and 2013.

-34-

Corporate Outlook
Our recent Acquisition of the remaining equity interests in our affiliate Samsung Corning Precision Materials will drive sales growth in 2014. We also expect sales to grow in our Optical Communications, Life Sciences, Specialty Materials and Environmental Technologies segments. In our Display Technologies segment, we expect our market share to stabilize and price declines to be moderate. We anticipate a rise in global demand for Corning's carrier network products, combined with growth of enterprise network products, that will increase sales in our Optical Communications segment. We believe the overall LCD glass retail market in 2014 will increase in the mid-to-high single digits in percentage terms, 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 the effect 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 stability, will enable our continued long-term success.

RESULTS OF OPERATIONS

Selected highlights for the second quarter follow (dollars in millions):
                      Three months ended         %         Six months ended         %
                           June 30,           change           June 30,          change
                       2014         2013     14 vs. 13      2014       2013     14 vs. 13

Net sales            $   2,482     $ 1,982         25     $   4,771   $ 3,796         26

Gross margin         $   1,032     $   883         17     $   1,967   $ 1,653         19
(gross margin %)           42%         45%                      41%       44%

Selling, general
and administrative
expenses             $     318     $   266         20     $     713   $   525         36
(as a % of net
sales)                     13%         13%                      15%       14%

Research,
development and
engineering
expenses             $     208     $   179         16     $     406   $   357         14
(as a % of net
sales)                      8%          9%                       9%        9%

Equity in earnings
of affiliated
companies            $      62     $   166        (63)    $     148   $   339        (56)
(as a % of net
sales)                      2%          8%                       3%        9%

Transaction-related
gain, net                                                 $      74                    *
(as a % of net
sales)                                                           2%

Other (expense)
income, net          $   (155)     $   265       (158)    $   (131)   $   330       (140)
(as a % of net
sales)                      6%         13%                     (3)%        9%

Income before
income taxes         $     341     $   829        (59)    $     822   $ 1,357        (39)
(as a % of net
sales)                     14%         42%                      17%       36%

Provision for
income taxes         $   (172)     $ (191)        (10)    $   (352)   $ (225)         56
(as a % of net
sales)                    (7)%       (10)%                     (7)%      (6)%

Net income
attributable to
Corning
Incorporated         $     169     $   638        (74)    $     470   $ 1,132        (58)
(as a % of net
sales)                      7%         32%                      10%       30%

* Percent change not meaningful

-35-

Net Sales
For the three months ended June 30, 2014, net sales increased by $500 million, improving in all of our segments except Specialty Materials, when compared to the same period in 2013. Driving the growth in net sales are the following items:

· An increase in sales in the Display Technologies segment in the amount of $356 million, driven by the consolidation of Corning Precision Materials, which increased sales by $447 million, and an increase in volume in the high-single digits in percentage terms, offset somewhat by price declines in the mid-teens and the negative impact of the Japanese yen versus the U.S. dollar exchange rate;

· An increase in net sales in the Optical Communications segment in the amount of $85 million, driven by an increase in sales of carrier network products in the amount of $73 million and an increase of $12 million in enterprise network products. Specifically, the following items impacted sales within the carrier network products group in the three months ended June 30, 2014, when compared to the same period in 2013:

o Higher sales of cable and hardware and equipment products used in fiber-to-the-home solutions in North America and Europe, up $28 million and $26 million, respectively;

o The impact of a full quarter of sales from a small acquisition and the consolidation of an equity investment due to a change in control which occurred at the end of the second quarter of 2013, which added approximately $19 million; and

o Lower sales of optical fiber, driven by a $21 million decrease in China, offset slightly by higher sales in North America and Europe, each increasing by $6 million;

· An increase of $57 million in the Environmental Technologies segment, due mainly to an increase in demand for our heavy duty diesel products, driven by new governmental regulations in Europe and China and increased demand for Class 8 vehicles in North America; and

· An increase of $4 million in the Life Sciences segment, due mainly to volume growth in North America.

Net sales in the six months ended June 30, 2014 increased by $975 million to $4,771 million, when compared to the same period in 2013. The increase in net sales was due to the following items:

· An increase in sales in the Display Technologies segment in the amount of $635 million, driven by the consolidation of Corning Precision Materials, which increased sales by $868 million, and an increase in volume in the mid-single digits in percentage terms, offset somewhat by price declines in the mid-teens;

· An increase in net sales in the Optical Communications segment in the amount of $208 million, driven by an increase in sales of carrier network products in the amount of $171 million and an increase of $37 million in enterprise network products. Specifically, the following items impacted sales within the carrier network products group in the first six months of 2014, when compared to the same period in 2013:

o Higher sales of cable and hardware and equipment products used in fiber-to-the-home solutions in North America and Europe, up $59 million and $58 million, respectively;

o The impact of a small acquisition and the consolidation of an equity investment due to a change in control which occurred at the end of the second quarter of 2013, which added approximately $40 million; and

o Consistent sales of optical fiber, driven by a $29 million increase in sales in all regions of the world except China, which declined by the same amount;

· An increase of $104 million in the Environmental Technologies segment, due mainly to an increase in demand for our heavy duty diesel products, driven by new governmental regulations in Europe and China and increased demand for Class 8 vehicles in North America; and

· An increase of $7 million in the Life Sciences segment, due mainly to volume growth in North America.

Although the impact of fluctuations in foreign currency exchange rates did not materially impact net sales in our Optical Communications, Environmental Technologies, Life Sciences and Specialty Materials segments, the impact of the fluctuation in the Japanese yen had a negative impact of approximately $95 million and $195 million, respectively, on net sales in our Display Technologies segment in the three and six months ended June 30, 2014.

-36-

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 and six months ended June 30, 2014, gross margin dollars increased by $149 million and $314 million, respectively, when compared to the same periods in 2013, driven largely by the consolidation of Corning Precision Materials and higher volume of Optical Communications and Environmental Technologies products. As a percentage of net sales, gross margin decreased when compared to the same periods last year, due primarily to the impact of the depreciation of the Japanese yen versus the U.S. dollar in the amounts of $57 million and $140 million, respectively, price declines in the mid-teens in percentage terms in our Display Technologies segment and the impact of inventory builds in 2013 in the Optical Communications and Specialty Materials segments that did not repeat in 2014, offset somewhat by the positive impact of Corning Precision Materials.

Selling, General and Administrative Expenses For the three months ended June 30, 2014, selling, general and administrative expenses increased by $52 million, driven by the consolidation of Corning Precision Materials, which increased selling, general and administrative expenses by approximately $26 million, an increase of $9 million in share-based and performance-based compensation expenses and an increase of approximately $2 million in acquisition-related costs, offset somewhat by cost control measures implemented by our segments. As a percentage of net sales, selling, general and administrative expenses remained consistent at 13%, when compared to the second quarter of 2013.

For the six months ended June 30, 2014, selling, general and administrative expenses increased by $188 million, driven by the consolidation of Corning Precision Materials, which increased selling, general and administrative expenses by approximately $51 million, an increase of $19 million in share-based and performance-based compensation expenses and an increase of approximately $92 million in acquisition-related costs, including $72 million of post-combination compensation expense, offset somewhat by cost control measures implemented by our segments. As a percentage of net sales, selling, general and administrative expenses were 15%, an increase of 1% when compared to the same period in 2013, driven by expenses related to the Acquisition.

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 three and six months ended June 30, 2014, research, development and engineering expenses increased by $29 million and $49 million, respectively, when compared to the same periods last year. Driving the increase was the consolidation of Corning Precision Materials, which added approximately $20 million and $37 million, respectively, and an increase in spending for new business development, offset by a decrease of $6 million and $8 million, respectively, in the Specialty Materials segment. As a percentage of net sales, research, development and engineering expenses were 8% in the second quarter, slightly lower than the same period in 2013, and were consistent with the prior year at 9% in the first six months of 2014.

-37-

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

                                       Three months ended          Six months ended
                                            June 30,                   June 30,
                                      2014           2013         2014         2013
Samsung Corning Precision Materials                 $     111                 $    244
Dow Corning Corporation               $    54              45    $    146           80
All other                                   8              10           2           15
Total equity earnings                 $    62       $     166    $    148     $    339

Equity earnings of affiliated companies decreased in the three and six months ended June 30, 2014, when compared to the same period last year, reflecting the Acquisition and subsequent consolidation of Samsung Corning Precision Materials, offset somewhat by an increase in equity earnings from Dow Corning. Equity earnings from Dow Corning increased by 20% and 83%, respectively, when compared to the three and six months ended June 30, 2013, and were impacted by the following items:

· Corning's share of a mark-to-market gain on a derivative instrument in the amount of $8 million and $40 million, respectively;

· An increase in equity earnings of $7 million and $36 million, respectively, in the polysilicon segment, driven by higher volume and the settlement of a long-term sales agreement in the first quarter of 2014 in the amount of $9 million; and

· The absence of restructuring charges incurred in the three and six months ended June 30, 2013, in the amounts of $9 million and $11 million, respectively.

Other (Expense) Income, Net
"Other (expense) income, net" in Corning's consolidated statements of income
includes the following (in millions):
                                       Three months ended         Six months ended
                                            June 30,                  June 30,
                                        2014          2013        2014         2013
Royalty income from Samsung Corning
Precision Materials                                  $   14                   $    29
Foreign currency exchange and hedge
(loss) gain, net                      $    (142)        251     $    (148)        282
Net (gain) loss attributable to
noncontrolling interests                     (1)          1             2           2
Other, net                                  (12)         (1)           15          17
Total                                 $    (155)     $  265     $    (131)    $   330

Beginning in the first quarter of 2014, due to the Acquisition and subsequent consolidation of Samsung Corning Precision Materials (now Corning Precision Materials), royalty income from Corning Precision Materials is no longer recognized in Corning's consolidated statement of income.

Included in the line item Foreign currency exchange and hedge (loss) gain, net, for the three and six months ended June 30, 2014 and 2013 is the impact of purchased collars and average forward contracts which hedge our exposure to movements in the Japanese yen and its impact on our net earnings. In the three and six months ended June 30, 2013, we recorded a net gain in the amounts of $229 million and $252 million, respectively, driven by the significant depreciation in the 2013 exchange rates for the Japanese yen. In the three and six months ended June 30, 2014, the exchange rates for the Japanese yen rebounded slightly, resulting in a net loss of $145 million and $143 million, respectively, driven by the mark-to-market of our yen-denominated purchased collars and average forward contracts. The gross notional value outstanding for purchase collars and average rate forwards which hedge our exposure to the Japanese yen at June 30, 2014 and December 31, 2013 was $12.5 billion and $6.8 billion, respectively.

. . .

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