CORNING INCORPORATED 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 2019 Form 10-K. The various
sections of this MD&A contain forward-looking statements that involve 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 2019 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, 2020 .
Our MD&A includes the following sections:
?Overview ?Results of Operations ?Core Performance Measures ?Reportable Segments
?Capital Resources and Liquidity
?Critical Accounting Estimates
?Environment ?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.
Summary of results for the three and six months ended
In the second quarter, net sales were$2,561 million , compared to$2,940 million during the same period in 2019, a net decrease of$379 million , or 13%. Changes in net sales were as follows:
?Display Technologies net sales decreased by
?
?Net sales for Environmental Technologies decreased$140 million , as production facilities of vehicle manufacturers were temporarily shut down in key markets; and ?Net sales for Life Sciences declined by$17 million , as continued research lab closures inEurope , theMiddle East , andAfrica ("EMEA") andNorth America related to the COVID-19 pandemic more than offset strong demand for test kit consumables and other products to address the pandemic. The negative impacts to sales, outlined above, were partially offset by sales increases of$48 million in the Specialty Materials segment, primarily driven by strong demand for premium glasses 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.
Net sales for the six months ended
?Display Technologies net sales decreased by
?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; ? © 2020Corning Incorporated . All Rights Reserved. 29
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Index
?
?Net sales for Environmental Technologies decreased$182 million , as production facilities of vehicle manufacturers were temporarily shut down in key markets; and
?Net sales for Life Sciences were approximately flat.
The negative impacts to sales, outlined above, were partially offset by sales increases in the Specialty Materials segment in the amount of$91 million , primarily driven by strong demand for premium glasses 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. In the second quarter of 2020, we generated a net loss of$71 million , or$0.13 per share, compared to net income of$92 million , or$0.09 per share, for the same period in 2019. The decrease in net income of$163 million , was primarily driven by the following items (amounts presented after-tax):
?Higher costs of
?Higher costs of
?Lower segment net income of
The negative impacts to net income, outlined above, were partially offset by the following items:
?Translated earnings contract gains in the current period were
?The positive impact of discrete tax items and other tax adjustments of
?Translation gains on Japanese-yen denominated debt in the current period were
?Higher segment net income of
?Pension mark-to-market adjustment was
Diluted earnings per share decreased by$0.22 per share when compared to the second quarter of 2019, driven by the decrease in net income described above, partially offset by the repurchase of 23 million shares of common stock over the last twelve months. In the first half of 2020, we generated a net loss of$167 million , or$0.28 per share, compared to a net income of$591 million , or$0.65 per share, for the same period in 2019. The decrease in net income of$758 million , was primarily driven by the following items (amounts presented after-tax):
?Higher costs of
?Higher costs of
?Lower segment net income of
?The negative impact of discrete tax items and other tax adjustments of
?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.
The negative impacts to net income, outlined above, were partially offset by the following items:
?Higher segment net income of
?Pension mark-to-market adjustment was
?Larger gains on translated earnings contracts and lower losses on Japanese
yen-denominated debt of
Diluted earnings per share decreased by$0.93 per share when compared to the six months endedJune 30, 2019 , driven by the decrease in net income described above, partially offset by the repurchase of 23 million shares of common stock over the last twelve months. © 2020Corning Incorporated . All Rights Reserved. 30
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The translation impact of fluctuations in foreign currency exchange rates,
including the impact of hedges realized in the current quarter, did not
materially impact
2020 Corporate Outlook
Given the economic uncertainty and disruption created by COVID-19, the Company withdrew its full-year 2020 guidance during the first quarter of this year. In response to the pandemic, the Company has and will continue to focus its actions on three core priorities: preserving the financial strength of the Company, protecting employees and communities, and delivering on customer commitments. The Company has taken, and will continue to take, aggressive actions to mitigate the economic impact of the pandemic. During the second quarter of 2020, the Company positioned itself to emerge even stronger from the global health crisis. In anticipation of lower sales, we adjusted our operating plan to further reduce costs and capital spending. We have no debt due this year, and we expect to maintain a strong cash balance and generate positive free cash flow. We plan to maintain our dividend payments and have suspended share repurchases. The Company expects that third-quarter sales and profits will increase sequentially, with the amount of growth dependent upon end-market demand and economic activity during August and September. We are committed to preserving the financial strength of the Company and remain confident in our long-term growth prospects.
RESULTS OF OPERATIONS
Selected highlights from our operations follow (in millions):
Three months ended % Six months ended %
June 30, change June 30, change
2020 2019 20 vs. 19 2020 2019 20 vs. 19
Net sales $ 2,561 $ 2,940 (13) $ 4,952 $ 5,752 (14)
Gross margin $ 756 $ 1,065 (29) $ 1,317 $ 2,164 (39)
(gross margin %) 30% 36% 27% 38%
Selling, general and
? administrative expenses $ 401 $ 414 (3) $ 796 $ 815 (2)
(as a % of net sales) 16% 14% 16% 14%
Research, development and
? engineering expenses $ 430 $ 249 73 $ 691 $ 498 39
(as a % of net sales) 17% 8% 14% 9%
Translated earnings contract
? gain (loss), net $ 37 $ (107) * $ 105 $ 77 36
(as a % of net sales) 1% (4%) 2% 1%
(Loss) income before income taxes
*$ (157) $ 791 * (as a % of net sales) (2%) 7% (3%) 14% Provision for income taxes$ (22) $ (124) 82$ (10) $ (200) 95 (as a % of net sales) (1%) (4%) (0%) (3%) Net (loss) income attributable to ? Corning Incorporated$ (71) $ 92 *$ (167) $ 591 * (as a % of net sales) (3%) 3% (3%) 10% * Not meaningful ? © 2020 Corning Incorporated. All Rights Reserved. 31
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Index SegmentNet Sales The following table presents segment net sales by reportable segment and All Other (in millions): Three months ended % Six months ended % June 30, change June 30, change 2020 2019 20 vs. 19 2020 2019 20 vs. 19 Display Technologies$ 753 $ 848 (11%)$ 1,504 $ 1,666 (10%) Optical Communications 887 1,090 (19%) 1,678 2,154 (22%) Specialty Materials 417 369 13% 769 678 13% Environmental Technologies 226 366 (38%) 546 728 (25%) Life Sciences 243 260 (7%) 501 503 (0%) All Other 62 53 17% 119 107 11% Net sales of reportable segments and All Other 2,588 2,986 (13%) 5,117 5,836 (12%) Impact of foreign currency movements (1) (27) (46) 41% (60) (84) 29% Cumulative adjustment related to customer contract (2) (105) * Consolidated net sales$ 2,561 $ 2,940 (13%)$ 4,952 $ 5,752 (14%)
(1)This amount primarily represents the impact of foreign currency adjustments in the Display Technologies and Environmental Technologies 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.
* Not meaningful
For the three months ended
?Display Technologies net sales decreased by
?Optical Communications net sales declined$203 million , as sales volumes declined for carrier and enterprise products by$77 million and$126 million , respectively, due to general market weakness and capital spending reductions by several major customers; ?Net sales for Environmental Technologies decreased$140 million as production facilities of vehicle manufacturers were temporarily shut down in key markets; and ?Life Sciences net sales decreased by$17 million , as continued research lab closures in EMEA andNorth America related to the COVID-19 pandemic more than offset strong demand for test kit consumables and other products to address the pandemic. Specialty Materials segment net sales increased by$48 million , primarily driven by strong demand for premium glasses 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.
For the six months ended
?Display Technologies net sales decreased by
?Optical Communications net sales declined$476 million , as sales volumes declined for carrier and enterprise products by$284 million and$192 million , respectively, due to general market weakness and capital spending reductions by several major customers; ?Net sales for Environmental Technologies decreased$182 million as production facilities of vehicle manufacturers were temporarily shut down in key markets; and
?Net sales for Life Sciences were approximately flat.
Specialty Materials segment net sales increased by$91 million , primarily driven by strong demand for premium glasses 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.
Movements in foreign exchange rates did not materially impact
© 2020 Corning Incorporated . All Rights Reserved.
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Index 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 endedJune 30, 2020 , gross margin decreased by$309 million , or 29% and$847 million , or 39%, respectively. Gross margin as a percentage of sales declined by 6% and 11% for the three and six months endedJune 30, 2020 , respectively. Negative impacts to gross margin were primarily driven by accelerated depreciation for the Display Technologies segment, severance charges primarily incurred by ourDisplay Technologies and Optical Communications segments, asset write-offs in our Display Technologies and Special Materials segments, and lower volumes in Display Technologies,Optical Communications and Environmental Technologies. Movements in foreign exchange rates had a positive impact of$30 million and$45 million onCorning's consolidated gross margin in the three and six months endedJune 30, 2020 , when compared to the same periods in 2019.
Selling, General and Administrative Expenses
In the three and six months ended
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 endedJune 30, 2020 , research, development and engineering expenses increased by$181 million , or 73%, and$193 million , or 39%, respectively, when compared to the same periods last year, primarily driven by a pre-tax asset impairment loss of$195 million related to the reassessment and reprioritization of research and development programs within our All Other segment. 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 9% and 5% higher when compared to the same periods last year.
Restructuring, Impairment, and Other Charges and Credits
In the first half of 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 three and six months endedJune 30, 2020 ,Corning recorded restructuring, impairment, and other charges and credits of$337 million and$562 million , respectively. During the second quarter of 2020, the Company implemented a corporate-wide workforce reduction program. Severance charges for the three and six months endedJune 30, 2020 , were primarily incurred to facilitate realignment of capacity in theAsia regions for our Display Technologies segment, optimize ourOptical Communications segment and contain corporate costs. For the three and six months endedJune 30, 2019 , severance charges were primarily related to a reduction in force program to facilitate realignment of capacity in theAsia regions for ourOptical Communications segment. Severance paid to employees for the three and six months endingJune 30, 2020 , was$22 million and$97 million , respectively. As ofJune 30, 2020 andDecember 31, 2019 , the unpaid severance liabilities of$82 million and$44 million are expected to be substantially completed within the next twelve months. Capacity realignment charges of$60 million and$149 million , respectively, including accelerated depreciation and asset disposals, were related to the exit of certain facilities and other exit activities in our Display Technologies and Specialty materials segments. A pre-tax asset impairment loss of$195 million related to the rescoping and reduction of investment in research and development programs within our All Other segment was recorded in the second quarter of 2020, and was substantially all the carrying value of this asset group. Other charges and credits of$24 million and$83 million , respectively, 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. © 2020Corning Incorporated . All Rights Reserved. 33
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Index
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,
2020 2019 2020 2019
Hemlock Semiconductor Group $ 82 $ 35 $ 99 $ 60
All other (3) (2) (6) (2)
Total equity earnings $ 79 $ 33 $ 93 $ 58
HSG's net income for the three months ended June 30, 2020 , included a pre-tax
gain on settlement of a long-term sales agreement of approximately $165 million ,
partially offsetting this gain was an inventory provision of approximately $44
million associated with the settlement of this contract. Corning's share of the
net settlement impact to equity earnings was approximately $62 million .
Translated earnings contract gain (loss), net
Included in the line item translated earnings contract gain (loss), net, is the impact of foreign currency hedges which hedge our translation exposure arising from movements in the Japanese yen, South Korean won, newTaiwan dollar, euro, Chinese yuan and British pound and its impact on our net (loss) income. The following table provides detailed information on the impact of our translated earnings contract gains and losses: Three months ended Three months ended Change June 30, 2020 June 30, 2019 2020 vs. 2019 Income Loss Income before Net before Net before Net (in millions) taxes income taxes loss taxes income
Hedges related to translated ? earnings: Realized (loss) gain, net (1)$ (5) $ (4) $ 8$ 6 $ (13) $ (10) Unrealized gain (loss), net (2) 42 33 (115) (90) 157 123 Total translated earnings contract ? gain (loss), net$ 37 $ 29 $ (107) $ (84) $ 144 $ 113 Six months ended Six months ended Change June 30, 2020 June 30, 2019 2020 vs. 2019 Income Income Income before Net before Net before Net (in millions) taxes income taxes income taxes income Hedges related to translated ? earnings: Realized (loss) gain, net (1)$ (2) $ (1) $ 15 $ 12 $ (17) $ (13) Unrealized gain, net (2) 107 83 62 48 45 35 Total translated earnings contract ? gain, net$ 105 $ 82 $ 77 $ 60 $ 28 $ 22
(1)Includes before tax realized losses related to the expiration of option
contracts for the three and six months ended
(2)The impact to income was primarily driven by yen-denominated hedges of translated earnings.
© 2020 Corning Incorporated . All Rights Reserved.
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Index
The gross notional value outstanding on our translated earnings contracts and foreign currency cash flow hedges were as follows (in billions):
June 30 ,
2020 2019
Japanese yen-denominated translated earnings contracts $ 9.5 $
10.2
South Korean won-denominated translated earnings contracts 0.6
0.4
Euro-denominated translated earnings contracts 0.9
1.3
Other translated earnings contracts 0.1
0.3
Total gross notional value outstanding for translated earnings contracts 11.1
12.2
Japanese yen-denominated foreign currency cash flow hedges
0.7 1.5
Other foreign currency cash flow hedges 0.3
0.6
Total gross notional value for foreign currency cash flow hedges 1.0
2.1
Total gross notional value outstanding$ 12.1 $
14.3
(Loss) Income Before Income Taxes
The translation impact of fluctuations in foreign currency exchange rates, including the impact of hedges realized in the current quarter, did not materially impactCorning's consolidated (loss) income before income taxes in the three and six months endedJune 30, 2020 , when compared to the same periods in 2019. Provision for Income Taxes Our provision for income taxes and the related effective income tax rates are as follows (in millions): Three months ended Six months ended June 30, June 30, 2020 2019 2020 2019
Provision for income taxes
(44.9%) 57.4% (6.4%) 25.3%
For the three months ended June 30, 2020 , the effective income tax rate differed
from the U.S. statutory rate of 21% primarily due to changes in income tax
reserves of approximately $40 million . For the six months ended June 30, 2020 ,
the effective income tax rate differed from the U.S. statutory rate of 21%
primarily due to changes in income tax reserves of approximately $40 million , an
adjustment to our permanently reinvested foreign income position, foreign
valuation allowances on deferred tax assets, and certain non-deductible expenses
for tax purposes.
For the three and six months ended June 30, 2019 , the effective income tax rate
differed from the U.S. statutory rate of 21% primarily due to additional net tax
expense of $86 million driven by changes to our tax reserves, rate differences
on income (loss) of consolidated foreign companies, estimated impact of base
erosion and BEAT offset by the expected benefits related to FDII and the release
of foreign valuation allowances on deferred tax assets.
Refer to Note 6 (Income Taxes) to the consolidated financial statements for additional information.
© 2020 Corning Incorporated . All Rights Reserved.
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Index
Net (Loss) Income Attributable to
Our net (loss) income and per share data is as follows (in millions, except per
share amounts):
Three months ended Six months ended
June 30, June 30,
2020 2019 2020 2019
Net (loss) income attributable to
Corning Incorporated $ (71) $ 92 $ (167) $ 591
Net (loss) income attributable to
Corning Incorporated used in
? basic (loss) earnings per common
share calculation (1) $ (96) $ 68 $ (216) $ 542
Net (loss) income attributable to
Corning Incorporated used in
? diluted (loss) earnings per common
share calculation (1) $ (96) $ 68 $ (216) $ 591
Basic (loss) earnings per common share $ (0.13) $ 0.09 $ (0.28) $ 0.69
Diluted (loss) earnings per common
share $ (0.13) $ 0.09 $
(0.28)
Weighted-average common shares outstanding - basic 759 781 760 782 Weighted-average common shares outstanding - diluted 759 789 760 906
(1)Refer to Note 8 ((Loss) Earnings per Common Share) to the consolidated financial statements for additional information.
Comprehensive (Loss) Income
For the three months ended
?A decrease in net income of
?An increase in the unamortized losses and prior service costs for
postretirement benefit plans of
These losses were partially offset by the following:
?An increase in the gain on foreign currency translation adjustments in the
amount of
?The positive impact of a change to net unrealized gains on designated hedges of
For the six months ended
?A decrease in net income of
?An increase in the loss on foreign currency translation adjustments in the
amount of
?The negative impact of a change to net unrealized losses on designated hedges
of
These losses were partially offset by the absence of$53 million prior period unamortized actuarial losses related to the adoption of the new standard for reclassification of stranded tax effects in accumulated other comprehensive income.
Refer to Note 14 (Shareholders' Equity) to the consolidated financial statements for additional information.
© 2020 Corning Incorporated . All Rights Reserved.
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Index CORE PERFORMANCE MEASURES In managing the Company and assessing our financial performance, we adjust certain measures provided by our consolidated financial statements to exclude specific items to report core performance measures. These items include gains and losses on our translated earnings contracts, acquisition-related costs, certain discrete tax items and other tax-related adjustments, restructuring, impairment losses, and other charges and credits, 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.Corning utilizes constant-currency reporting for our Display Technologies, Environmental Technologies, Specialty Materials and Life Sciences segments for the Japanese yen, South Korean won, Chinese yuan, newTaiwan dollar and the euro. The Company believes that the use of constant-currency reporting allows investors to understand our results without the volatility of currency fluctuations and reflects the underlying economics of the translated earnings contracts used to mitigate the impact of changes in currency exchange rates on our earnings and cash flows.Corning also believes that reporting core performance measures provides investors greater transparency to the information used by our management team to make financial and operational decisions. Core performance measures are not prepared in accordance with Generally Accepted Accounting Principles inthe 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 outlook for future periods, it is not possible to provide reconciliations for these non-GAAP measures because the Company does not forecast the movement of foreign currencies against theU.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.
For a reconciliation of non-GAAP performance measures to their most directly comparable GAAP financial measure, please see "Reconciliation of Non-GAAP Measures".
RESULTS OF OPERATIONS - CORE PERFORMANCE MEASURES
Selected highlights from our continuing operations, excluding certain items,
follow (in millions):
Three months ended % Six months ended %
June 30, change June 30, change
2020 2019 20 vs. 19 2020 2019 20 vs. 19
Core net sales $ 2,588 $ 2,986 (13)% $ 5,117 $ 5,836 (12)%
Core equity in earnings of
affiliated companies $ 55 $ 28 96% $ 69 $ 54 28%
Core net income $ 218 $ 410 (47)% $ 395 $ 775 (49)%
Core Net Sales
Core net sales are consistent with net sales by reportable segment. Net sales by reportable segment are presented below (in millions):
Three months ended % Six months ended %
June 30, change June 30, change
2020 2019 20 vs. 19 2020 2019 20 vs. 19
Display Technologies $ 753 $ 848 (11%) $ 1,504 $ 1,666 (10%)
Optical Communications 887 1,090 (19%) 1,678 2,154 (22%)
Specialty Materials 417 369 13% 769 678 13%
Environmental Technologies 226 366 (38%) 546 728 (25%)
Life Sciences 243 260 (7%) 501 503 (0%)
All Other 62 53 17% 119 107 11%
Net sales of reportable segments and
All Other 2,588 2,986 (13%) 5,117 5,836 (12%)
Impact of foreign currency
movements (1) (27) (46) 41% (60) (84) 29%
Cumulative adjustment related to
customer contract (2) (105) *
Consolidated net sales $ 2,561 $ 2,940 (13%) $ 4,952 $ 5,752 (14%)
(1)This amount primarily represents the impact of foreign currency adjustments in the Display Technologies and Environmental Technologies 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. * Not meaningful ? © 2020Corning Incorporated . All Rights Reserved. 37
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Index
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 Six months ended
June 30, June 30,
2020 2019 2020 2019
Hemlock Semiconductor Group $ 58 $ 24 $ 75 $ 50
All other (3) 4 (6) 4
Total core equity earnings $ 55 $ 28 $ 69 $ 54
Core Net Income
In the three months ended June 30, 2020 , we generated core net income of $218
million , or $0.25 per share, compared to core net income generated in the three
months ended June 30, 2019 , of $410 million , or $0.45 per share. The decrease of
$192 million was due to lower earnings across Display Technologies, Optical
Communications and Environmental Technologies segments of $61 million , $77
million and $65 million , respectively, partially offset by higher earnings in
Specialty Materials of $23 million , when compared to the same period in 2019.
In the six months ended June 30, 2020 , we generated core net income of $395
million , or $0.45 per share, compared to core net income generated in the six
months ended June 30, 2019 , of $775 million , or $0.86 per share. The decrease
of $380 million was due to lower earnings across Display Technologies, Optical
Communications and Environmental Technologies segments of $117 million , $190
million and $85 million , respectively, partially offset by higher earnings in
Specialty Materials of $25 million , when compared to the same period in 2019.
Included in core net income for the three and six months ended
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 Six months ended
June 30, June 30,
2020 2019 2020 2019
Core net income attributable to Corning
Incorporated $ 218 $ 410 $ 395 $ 775
Less: Series A convertible preferred stock
dividend 25 24 49 49
Core net income available to common
stockholders - basic 193 386 346 726
Add: Series A convertible preferred stock
dividend 25 24 49 49
Core net income available to common
stockholders - diluted $ 218 $
410
Weighted-average common shares outstanding - basic 759 781 760 782 Effect of dilutive securities: Stock options and other dilutive securities 6 8 6 9 Series A convertible preferred stock 115 115 115 115 Weighted-average common shares outstanding - diluted 880 904 881 906
Core basic earnings per common share
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
consolidated statements of (loss) income or statements 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 consolidated statements of (loss)
income or statements of cash flows.
© 2020 Corning Incorporated . All Rights Reserved.
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Index
Core net sales, core equity in earnings of affiliated companies and core net income 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 (amounts in millions except percentages and per share amounts):
Three months ended
(Loss) income Effective
Net Equity before income Net (loss) tax Per
sales earnings taxes income rate (a) share
As reported - GAAP $ 2,561 $ 79 $ (49) $ (71) (44.9%) $ (0.13)
Constant-currency adjustment (1) 27 6 3 0.00
Translation gain on Japanese
? yen-denominated debt (2) (3) (3) (0.00)
Translated earnings contract
gain (3) (35) (27) (0.04)
Acquisition-related costs (4) 29 21 0.03
Discrete tax items and other
tax-related
? adjustments (5) 40 0.05
Litigation, regulatory and other
legal
? matters (6) 25 20 0.03
Restructuring, impairment and
other
? charges and credits (7) 337 254 0.33
Equity in earnings of affiliated
? companies (9) (24) (24) (18) (0.02)
Pension mark-to-market
adjustment (10) (2) (1) (0.00)
Core performance measures $ 2,588 $ 55 $ 284 $ 218 23.2% $ 0.25
(a)Based upon statutory tax rates in the specific jurisdiction for each event.
Three months ended June 30, 2019
Income before Effective
Net Equity income Net tax Per
sales earnings taxes income rate (a) share
As reported - GAAP $ 2,940 $ 33 $ 216 $ 92 57.4% $ 0.09
Constant-currency adjustment
(1) 46 36 43 0.05
Translation loss on Japanese
? yen-denominated debt (2) 36 28 0.04
Translated earnings contract
loss (3) 107 84 0.11
Acquisition-related
costs (4) 34 26 0.03
Discrete tax items and other
tax-related
? adjustments (5) 74 0.09
Restructuring, impairment
and other
? charges and credits (7) 6 67 53 0.07
Equity in earnings of
affiliated
? companies (9) (11) (11) (9) (0.01)
Pension mark-to-market
adjustment (10) 24 19 0.02
Core performance measures $ 2,986 $ 28 $ 509 $
410 19.4%
(a)Based upon statutory tax rates in the specific jurisdiction for each event.
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 report core performance measures" for the descriptions of the footnoted
reconciling items.
?
© 2020 Corning Incorporated . All Rights Reserved.
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Index
Six months ended June 30, 2020
(Loss) income Effective
Net Equity before income Net (loss) tax Per
sales earnings taxes income rate (a) share
As reported - GAAP $ 4,952 $ 93 $ (157) $ (167) (6.4%) $ (0.28)
Constant-currency adjustment
(1) 60 25 (19) (0.03)
Translation loss on Japanese
? yen-denominated debt (2) 11 8 0.01
Translated earnings contract
gain (3) (93) (72) (0.09)
Acquisition-related costs (4) 57 42 0.06
Discrete tax items and other
tax-related
? adjustments (5) 77 0.10
Litigation, regulatory and
other legal
? matters (6) 25 20 0.03
Restructuring, impairment and
other
? charges and credits (7) 562 420 0.55
Cumulative adjustment related
to customer
? contract (8) 105 105 105 0.14
Equity in earnings of
affiliated
? companies (9) (24) (24) (18) (0.02)
Pension mark-to-market
adjustment (10) (2) (1) (0.00)
Core performance measures $ 5,117 $ 69 $ 509 $ 395 22.4% $ 0.45
(a)Based upon statutory tax rates in the specific jurisdiction for each event.
Six months ended June 30, 2019
Income before Effective
Net Equity income Net tax Per
sales earnings taxes income rate (a) share
As reported - GAAP $ 5,752 $ 58 $ 791 $ 591 25.3% $ 0.65
Constant-currency adjustment
(1) 84 1 73 74 0.08
Translation loss on Japanese
? yen-denominated debt (2) 21 17 0.02
Translated earnings contract
gain (3) (77) (60) (0.07)
Acquisition-related
costs (4) 71 54 0.06
Discrete tax items and other
tax-related
? adjustments (5) 31 0.03
Restructuring, impairment
and other
? charges and credits (7) 6 74 58 0.06
Equity in earnings of
affiliated
? companies (9) (11) (11) (9) (0.01)
Pension mark-to-market
adjustment (10) 24 19 0.02
Core performance measures $ 5,836 $ 54 $ 966 $
775 19.8%
(a)Based upon statutory tax rates in the specific jurisdiction for each event.
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 report core performance measures" for the descriptions of the footnoted
reconciling items.
?
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Index
Items which we exclude from GAAP measures to arrive at core performance measures are as follows:
(1) Constant-currency adjustment: Because a significant portion of segment revenues and
expenses are denominated in currencies other than the
is important to understand the impact on core net income of translating these currencies
into
denominated in Japanese yen, but also impacted by the South Korean won, Chinese yuan, and
new
income are impacted by the euro, Chinese yuan and Japanese yen. Presenting results on a
constant-currency basis mitigates the translation impact and allows management to
evaluate performance period over period, analyze underlying trends in our businesses, and
establish operational goals and forecasts. We establish constant-currency rates based on
internally derived management estimates which are closely aligned with the currencies we
have hedged.
Constant-currency rates are as follows:
Currency Japanese yen Korean won Chinese yuan New Taiwan dollar Euro
Rate ¥107 ?1,175 ¥6.7 NT$31 €.81
(2) Translation (gain) loss on Japanese yen-denominated debt: We have excluded the gain or
loss on the translation of our yen-denominated debt to
unrealized gains and losses of our Japanese yen, South Korean won, Chinese yuan, euro and
new
well as the unrealized gains and losses of our British pound-denominated foreign currency
hedges related to translated earnings. (4) Acquisition-related costs: These expenses include intangible amortization, inventory
valuation adjustments and external acquisition-related deal costs. (5) Discrete tax items and other tax-related adjustments: These include discrete period tax
items such as changes in tax law, the impact of tax audits, changes in judgement about
the realizability of certain deferred tax assets and other tax-related adjustments. (6) Litigation, regulatory and other legal matters: Includes amounts that reflect
developments in commercial litigation, intellectual property disputes, adjustments to our
estimated liability for environmental-related items and other legal matters. (7) Restructuring, impairment and other charges and credits: This amount includes
restructuring, impairment losses and other charges and credits, as well as other
expenses, primarily accelerated depreciation and asset write-offs, which are not related
to continuing operations and are not classified as restructuring expense. (8) Cumulative adjustment related to customer contract: The negative impact of a cumulative
adjustment recorded during the first quarter of 2020 to reduce revenue in the amount of
asset, reflected as a prepayment, to a customer with a long-term supply agreement that is
exiting its production of LCD panels. (9) Equity in earnings of affiliated companies: These adjustments relate to costs not related
to continuing operations of our affiliated companies, such as restructuring, impairment
losses, inventory adjustments, other charges and credits and settlements under
"take-or-pay" contracts. (10) Pension mark-to-market adjustment: Defined benefit pension mark-to-market gains and
losses, which arise from changes in actuarial assumptions and the difference between
actual and expected returns on plan assets and discount rates.
?
© 2020 Corning Incorporated . All Rights Reserved.
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Index REPORTABLE SEGMENTS
Our reportable segments are as follows:
?Display Technologies - manufactures glass substrates for flat panel liquid crystal displays and other high-performance display panels.
?
?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.
?Environmental Technologies - manufactures ceramic substrates and filters for automotive and diesel applications.
?Life Sciences - manufactures glass and plastic labware, equipment, media, serum and reagents enabling workflow solutions for drug discovery and bioproduction.
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 the pharmaceutical technologies, auto glass and new product lines
and development projects, as well as certain corporate investments.
We prepared the financial results for our reportable segments on a basis
consistent with our internal disaggregation of financial information to assist
our chief operating decision maker ("CODM") in making internal operating
decisions. The impact of changes in the Japanese yen, South Korean won, Chinese
yuan and new Taiwan dollar are excluded from segment sales and segment net
income for the Display Technologies and Specialty Materials segments. The impact
of changes in the euro, Chinese yuan and Japanese yen are excluded from segment
sales and segment net income for our Environmental Technologies and Life
Sciences segments. Certain income and expenses are included in the unallocated
amounts in the reconciliation of reportable segment net income (loss) to
consolidated net (loss) income. These include items that are not used by our
CODM in evaluating the results of or in allocating resources to our segments and
include the following items: the impact of our translated earnings contracts;
acquisition-related costs; discrete tax items and other tax-related adjustments;
certain litigation, regulatory and other legal matters; restructuring,
impairment losses and other charges and credits; adjustments relating to
acquisitions; and other non-recurring non-operational items. Although we exclude
these amounts from segment results, they are included in reported consolidated
results.
We included the earnings of equity affiliates that are closely associated with
our reportable segments in the respective segment's net income (loss). We have
allocated certain common expenses among reportable segments differently than we
would for stand-alone financial information. Segment net income (loss) may not
be consistent with measures used by other companies.
Display Technologies
The following table provides net sales and net income for the Display Technologies segment (in millions):
Three months ended % Six months ended %
June 30, change June 30, change
2020 2019 20 vs. 19 2020 2019 20 vs. 19
Segment net sales $ 753 $ 848 (11%) $ 1,504 $ 1,666 (10%)
Segment net income $ 152 $ 213 (29%) $ 304 $ 421 (28%)
Net sales in the Display Technologies segment decreased by $95 million and $162
million in the three and six months ended June 30, 2020 , respectively. Volume
decreases and display glass price declines in the mid-single digits in
percentage terms drove the change for the current quarter when compared to the
three months ended June 30, 2019 . Volume and display glass price declines in the
low-single digits and mid-single digits in percentage terms, respectively, drove
the change compared to the six months ended June 30, 2019 .
Net income in the Display Technologies segment decreased by
?
© 2020 Corning Incorporated . All Rights Reserved.
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IndexOptical Communications
The following table provides net sales and net income for the
Three months ended % Six months ended %
June 30, change June 30, change
2020 2019 20 vs. 19 2020 2019 20 vs. 19
Segment net sales $ 887 $ 1,090 (19%) $ 1,678 $ 2,154 (22%)
Segment net income $ 81 $ 158 (49%) $ 110 $ 300 (63%)
Optical Communications net sales declined $203 million and $476 million in the
three and six months ended June 30, 2020 , respectively. Net sales of carrier
products were $77 million and $284 million lower, respectively, and enterprise
products were $126 million and $192 million lower, respectively, due to general
market weakness and capital spending reductions by several major customers. The
year-over-year decline in sales was in-line with the passive optical market
decline.
Net income decreased by $77 million and $190 million for the three and six
months ended June 30, 2020 , respectively, primarily driven by the changes in
sales, outlined above. Profitability was impacted by lower sales and production
volumes.
Specialty Materials
The following table provides net sales and net income for the Specialty Materials segment (in millions):
Three months ended % Six months ended %
June 30, change June 30, change
2020 2019 20 vs. 19 2020 2019 20 vs. 19
Segment net sales $ 417 $ 369 13% $ 769 $ 678 13%
Segment net income $ 90 $ 67 34% $
141
Net sales in the Specialty Materials segment increased by$48 million and$91 million for the three and six months endedJune 30, 2020 , respectively, primarily driven by strong demand for premium glasses 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.
Net income increased by
Environmental Technologies
The following table provides net sales and net income for the Environmental Technologies segment (in millions):
Three months ended % Six months ended %
June 30, change June 30, change
2020 2019 20 vs. 19 2020 2019 20 vs. 19
Segment net sales $ 226 $ 366 (38%) $ 546 $ 728 (25%)
Segment net income $ - $ 65 * $
35
* Not meaningful
Net sales in the Environmental Technologies segment declined by$140 million and$182 million for the three and six months endedJune 30, 2020 , respectively. Sales were negatively impacted by the temporary shutdown of vehicle manufacturing facilities in key markets that began in the first quarter and continued for much of the second quarter.
Net income decreased by
© 2020 Corning Incorporated . All Rights Reserved.
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Index
Life Sciences
The following table provides net sales and net income for the Life Sciences
segment (in millions):
Three months ended % Six months ended %
June 30, change June 30, change
2020 2019 20 vs. 19 2020 2019 20 vs. 19
Segment net sales $ 243 $ 260 (7%) $ 501 $ 503 (0%)
Segment net income $ 31 $ 40 (23%) $
69
Net sales in the Life Sciences segment decreased by$17 million and$2 million for the three and six months endedJune 30, 2020 . Life Sciences second-quarter sales were down 7% year over year as continued research lab closures in EMEA andNorth America related to the COVID-19 pandemic more than offset strong demand for test kit consumables and other products to address the pandemic. Net income decreased by$9 million and$2 million for the three and six months endedJune 30, 2020 , respectively, driven by the lower sales volume, outlined above. All Other All other segments that do not meet the quantitative threshold for separate reporting have been grouped as "All Other." This group is primarily comprised of the results of the pharmaceutical technologies, auto glass and new product lines and development projects, as well as certain corporate investments. The following table provides net sales and net loss for All Other (in millions): Three months ended % Six months ended % June 30, change June 30, change 2020 2019 20 vs. 19 2020 2019 20 vs. 19 Segment net sales$ 62 $ 53 17%$ 119 $ 107 11% Segment net loss$ (66) $ (68) 3%$ (135) $ (140) 4% Net sales of this segment increased by$9 million and$12 million for the three and six months endedJune 30, 2020 , respectively, when compared to the same periods in 2019, driven primarily by sales changes in our emerging businesses. Net loss decreased by$2 million and$5 million , respectively, primarily driven by the change in sales when compared to the same periods in 2019.
CAPITAL RESOURCES AND LIQUIDITY
Financing and Capital Resources
Debt Issuances
2020
During the second quarter of 2020,Corning established an incremental liquidity facility for25 billion Japanese yen , equivalent to$232 million USD , with a maturity of three years. As ofJune 30, 2020 , the facility has not been drawn upon. In the first quarter of 2020,Corning established two unsecured variable rate loan facilities for 1,050 million Chinese yuan, equivalent to$150 million USD , and 749 million Chinese yuan, equivalent to$105 million USD , each with a maturity of five years. Borrowings under these loan facilities through the end of the second quarter totaled 1,466 million Chinese yuan, equivalent to$209 million USD . These Chinese yuan-denominated proceeds will not be converted into USD and will be used for capital projects. Payments of principal and interest on the Notes will be in Chinese yuan, or should yuan be unavailable due to circumstances beyondCorning's control, a USD equivalent.
2019
There was no material debt activity in the first half of 2019.
© 2020 Corning Incorporated . All Rights Reserved.
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Index Share Repurchase Program
On
The Company suspended share buybacks during the first quarter of 2020 and made no share repurchases for the three months endedJune 30, 2020 . For the six months endedJune 30, 2020 , the Company repurchased 4.1 million shares of common stock on the open market for approximately$105 million , as part of its 2018 Repurchase Program. In the three and six months endedJune 30, 2019 , the Company repurchased 4.8 million and 12.6 million shares of common stock on the open market for approximately$151 million and$395 million , respectively, as part of its 2018 Repurchase Program.
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