How Is Corning's Financial Condition Looking Today?
Oct 15 2013, 05:06 | 3 comments
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Before selecting a stock, there are a number of things that you need to consider in order to ensure that you are buying the stock of a high-quality company whose shares are poised to grow in value over time. Some of these concerns include what the company does, its competitive advantages, valuation, dividend payouts and sustainability, and earnings consistency.
Another important thing that you need to consider is the financial condition of the company in question. You want to know if the company is able to continue paying its bills, and how much debt it carries. The balance sheet is one of the most effective tools that you can use to evaluate a company's financial condition. In this article, I will discuss the balance sheet of Corning (GLW), in order to get some clues as to how well this company is doing.
I will go through the balance sheet, reviewing the most important items, in order to assess Corning's financial condition. The information that I am using for this article comes from the company's website here. Note that this article is not a comprehensive review as to whether Corning should be bought or sold, but rather, just an important piece of the puzzle when doing the proper due diligence.
This article might be a bit too basic for some and too long-winded for others, but I hope that some of you can derive benefit from it. More information on how I analyze financial statements can be found at my website here.
Background
Corning manufactures and sells specialty glass products, ceramics, and related materials around the world. Their operations are divided into five reportable segments. They are Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials, and Life Sciences.
Their Display Technologies segment accounted for 36% of the company's sales during 2012. This segment manufactures and sells liquid-crystal display (LCD) glass for flat panel displays. This segment features the company's 50% interest in Samsung Corning Precision Materials Ltd. Corning's business in this segment is pretty concentrated, as only four customers accounted for 93% of the revenue in this segment over the last six months.
The Telecommunications segment contributed 27% of Corning's revenue during 2012. This segment manufactures and sells optical fiber and cable, as well as hardware and equipment components for the telecom industry.
Corning's Environmental Technologies segment was responsible for 12% of the company's revenue over 2012. This segment manufactures ceramic substrates and filters for automotive and diesel applications. Over the last six months, just 3 customers accounted for 86% of this segment's sales.
The company's Specialty Materials segment produces products that provide more than 150 material formulations for glass, ceramics, and fluoride crystals in order to meet unique customer demands. This segment accounted for 17% of Corning's sales during 2012.
And, lastly, the Life Sciences segment produces glass and plastic labware, equipment, media, and reagents for use in scientific applications. This segment accounted for 8% of Corning's sales in 2012, with two customers accounting for 42% of the segment's sales over the last six months.
The company also has a 50% interest in Dow Corning, which is a U.S.-based producer of silicon products.
Cash and Cash Equivalents
The first line in the Assets column of the balance sheet is for the amount of cash and cash equivalents that the company has in its possession. Generally speaking, the more cash the better, as a company with a lot of cash can invest more in acquisitions, repurchase stock, pay down debt, and pay out dividends. Some people also value stocks according to their cash positions. Some of the larger and more mature companies tend not to carry a lot of cash on their balance sheets, as they might be more inclined to buy back stock with it, or pay out dividends.
As of June 30, 2013, Corning had $5.47B in cash and cash equivalents, which can be easily converted into cash. That is a lot of cash for a company that has a market capitalization of $21.1B. This means that the company trades at less than 4 times its cash position. This may make Corning an attractive play for value-minded investors. Over the last 12 months, Corning repurchased $566M worth of stock, and paid out $525M in dividends. The dividends and buybacks are well-supported by the company's trailing twelve-month free cash flow of $1.52B.
Net Receivables
Receivables constitute money that is owed to a company for products or services that have already been provided. Of course, the risk with having a lot of receivables is that some of your customers might end up not paying. For this reason, you usually like to see net receivables making up a relatively small percentage of the company's sales.
Corning had a total of $1.30B in net receivables on its most recent balance sheet, which represents 16.3% of its trailing 12-month sales of $7.98B. For fiscal 2012, 16.2% of its sales were booked as receivables, while that percentage was at 13.7% for fiscal 2011.
While this figure is high in absolute terms, it has been fairly consistent, and is more than likely reflective of the nature of the company's businesses. I don't see anything to be alarmed about here.
Current Ratio
Another factor that I like to look at is the current ratio. This helps to provide an idea as to whether or not the company can meet its short-term financial obligations in the event of a disruption of its operations. To calculate this ratio, you need the amount of current assets and the amount of current liabilities. Current assets are the assets of a company that are either cash or assets that can be converted into cash within the fiscal year. In addition to cash and short-term investments, some of these assets include inventory, accounts receivable, and prepaid expenses. Current liabilities are expenses that the company will have to pay within the fiscal year. These might include short-term debt and long-term debt that is maturing within the year, as well as accounts payable (money owed to suppliers and others in the normal course of business). Once you have these two figures, simply divide the amount of current assets by the amount of current liabilities to get your current ratio.
If a company's operations are disrupted due to a labor strike or a natural disaster, then the current assets will need to be used to pay for the current liabilities until the company's operations can get going again. For this reason, you generally like to see a current ratio of at least 1.0, although some like to see it as high as 1.5.
The current ratio of Corning is 5.66, which is fantastic.
Property, Plant and Equipment
Every company, regardless of the industry in which it operates, requires a certain amount of capital expenditure. Land has to be bought, factories have to be built, machinery has to be purchased, and so on. However, less may be more when it comes to outlays for property, plant and equipment, as companies that constantly have to upgrade and change their facilities to keep up with competition may be at a bit of a disadvantage.
However, another way of looking at it is that large amounts of money invested in this area may present a large barrier-to-entry for competitors. Right now, Corning has $9.95B worth of property, plant, and equipment on its balance sheet. This figure is slightly less than the $10.6B that the company reported at the end of fiscal 2012, and the $10.7B that it reported at the end of fiscal 2011. Of these assets, 70% is tied up in equipment. 24% is in buildings, while the remaining 6% is in construction in progress.
Goodwill
Goodwill is the price paid for an acquisition that's in excess of the acquired company's book value. The problem with a lot of goodwill on the balance sheet is that if the acquisition doesn't produce the value that was originally expected, then some of that goodwill might come off of the balance sheet, which could, in turn lead to the stock going downhill. Then again, acquisitions have to be judged on a case-by-case basis, as good companies are rarely purchased at or below book value.
Corning has $1B worth of goodwill on its most recent balance sheet, which is inline with the $974M worth of goodwill that it reported 6 months prior. It is higher than the $664M that was reported at the end of fiscal 2011. The increase in goodwill that occurred in 2012 is due to the company's $723M acquisition of Discovery Labware and Plasso Technologies Ltd. from Becton Dickinson, in an effort to bolster its Life Sciences division.
Usually, I don't like to see goodwill account for more than 20% of a company's total assets for the reason that I discussed at the beginning of this section. However, since goodwill only accounts for about 3.5% of Corning's total assets, I don't see anything to be concerned about here.
Intangible Assets
Intangible assets that are listed on the balance sheet include items such as licensed technology, patents, brand names, copyrights, and trademarks that have been purchased from someone else. They are listed on the balance sheet at their fair market values. Internally developed intangible assets do not go on the balance sheet in order to keep companies from artificially inflating their net worth by slapping any old fantasy valuation onto their assets. Many intangible assets like patents have finite lives, over which their values are amortized. This amortization goes as annual subtractions from assets on the balance sheet and as charges to the income statement. If the company that you are researching has intangible assets, with finite lives, that represent a very large part of its total asset base, then you need to be aware that with time, those assets are going to go away, resulting in a reduction in net worth, which may result in a reduction in share price, unless those intangible assets are replaced with other assets.
Corning currently has $558M worth of intangible assets on its balance sheet. This is inline with the $522B that it had 6 months prior, but higher than the $262M that the company reported at the end of fiscal 2011. The increase in intangible assets that occurred during 2012 was the result of the acquisition mentioned above, in the goodwill section. The company's intangible assets include patents, trademarks, trade names, and customer lists.
While the eventual loss of $558M from the balance sheet is not a good thing, considering that amount represents less than 2% of the company's total assets, I don't see anything to be alarmed about here, going forward.
Return on Assets
The return on assets is simply a measure of the efficiency in which management is using the company's assets. It tells you how much earnings management is generating for every dollar of assets at its disposal. For the most part, the higher, the better, although lower returns due to large asset totals can serve as effective barriers to entry for would-be competitors. The formula for calculating return on assets looks like this:
Return on Assets = (Net Income) / (Total Assets).
For Corning, the return on assets would be $1.93B in core earnings over the last 12 months, divided by $28.4B in total assets. This gives a return on assets for the trailing twelve months of 6.80%, which is decent. I also calculated Corning's returns on assets over fiscal years 2012, 2011 and 2010 for comparative purposes. This can be seen in the table below.
(click link for charts/tables)
Table 1: Declining Returns On Assets At Corning
Table 1 shows that returns on assets at Corning have been in decline over the last few years. This is due to declining earnings resulting mostly from volume and price declines in the company's Display Technologies segment due to oversupply. There has also been overcapacity in the solar industry that has led to lower prices and volumes in silicon products at Dow Corning.
Management is expecting these price declines to moderate in the Display Technologies segment, as well as positive sales growth in the company's other four segments to help turn things around.
Short-Term Debt Versus Long-Term Debt
In general, you don't want to invest in a company that has a large amount of short-term debt when compared to the company's long-term debt. If the company in question has an exorbitant amount of debt due in the coming year, then there may be questions as to whether the company is prepared to handle it.
Corning has just $72M worth of short-term debt, which is simply the current portion of the company's long-term debt. Given the company's cash position of almost $5.5B, and their free cash flow of $1.5B, they shouldn't have any problem in meeting this obligation.
Long-Term Debt
Long-term debt is debt that is due more than a year from now. An excessive amount of it can be crippling in some cases. For this reason, the less of it, the better. Companies that have sustainable competitive advantages in their fields usually don't need much debt in order to finance their operations. Their earnings are usually enough to take care of that. A company should generally be able to pay off its long-term debt with 3-4 years' worth of earnings.
Right now, Corning carries $2.82B of long-term debt. This figure is less than the $3.38B that was reported at the end of fiscal 2012, but more than the $2.36B that was reported at the end of fiscal 2011. The increase in 2012 is due to the fact that the company issued $750M of notes at 4.75%, with maturities in 2037 and 2042. Of the company's long-term debt, only about 10% of it is due within the next 5 years.
In determining how many years' worth of earnings it will take to pay off the long-term debt, I use the average of the company's core earnings over the last 3 fiscal years. The average core earnings of Corning over this period is $2.67B. When you divide the long-term debt by the average earnings of the company, here is what we find.
Years of Earnings to Pay off LT Debt = LT Debt / Average Earnings
For Corning, here is how it looks: $2.82B / $2.67B = 1.06 years
This is great for Corning, in that the company could pay off its long-term debt with just over one year's worth of earnings if it wanted to. For this reason, I don't see anything at all to worry about when it comes to Corning's long-term debt position.
Debt-To-Equity Ratio
The debt-to-equity ratio, as normally calculated, is simply the total liabilities divided by the amount of shareholder equity. The lower this number, the better. Companies with sustainable competitive advantages can finance most of their operations with their earnings power rather than by debt, giving many of them a lower debt-to-equity ratio. I usually like to see companies with this ratio below 1.0, although some raise the bar (or lower the bar if you're playing limbo) with a maximum of 0.8. Let's see how Corning stacks up here.
Debt-To-Equity Ratio = Total Liabilities / Shareholder Equity
For Corning, the debt-to-equity ratio is calculated by dividing its total liabilities of $6.94B by its shareholder equity of $21.4B. This yields a debt-to-equity ratio of 0.32.
This tells us that Corning is in very good shape with regard to its debt and equity positions.
The table below shows how the debt-to-equity ratio has changed over the last few years.
(click link for charts/tables)
Table 2: Debt-To-Equity Ratios Of Corning
From Table 2, we can see that Corning's debt is very manageable when compared to its equity position. The debt-to-equity ratio is well below 1.0, and has been very consistent over the last few years. I see nothing to worry about at this time with regard to Corning's debt and equity positions.
Tangible Book Value
Tangible book value is a measure of the company's tangible net worth when subtracting out the company's non-tangible assets, like its goodwill and intangible assets. It is calculated by subtracting the company's non-tangible assets and its liabilities from its total asset base. Corning, right now, has a tangible book value of $19.8B. Given that Corning currently has a market capitalization of $21.1B, the stock is currently trading at just a 6.5% premium to its tangible book value. When a stock trades at or below the company's tangible asset value, that means that you can acquire part of a company at just the cost of its hard assets (like buildings, equipment, land, etc.). You would practically be getting the company's intangible assets (like goodwill, patents, copyrights, etc.) and any earnings for free, providing that the company is making money. For this reason, you generally don't see well-known companies trading so close to their tangible book values. However, Corning is a rare example. This could be a very exciting proposition for value-oriented investors.
Return On Equity
Like the return on assets, the return on equity helps to give you an idea as to how efficient management is with the assets that it has at its disposal. It is calculated by using this formula.
Return On Equity = Net Income / Shareholder Equity
Generally speaking, the higher this figure, the better. However, it can be misleading, as management can juice this figure by taking on lots of debt, reducing the equity. This is why the return on equity should be used in conjunction with other metrics when determining whether a stock makes a good investment. Also, it should be mentioned that some companies are so profitable that they don't need to retain their earnings, so they buy back stock, reducing the equity, making the return on equity higher than it really should be. Some of these companies even have negative equity on account of buybacks. However, Corning is not one of these companies.
So, the return on equity for Corning is as follows:
$1.93B / $21.4B = 9.02%
While a solid return on equity, it isn't anything to write home about. In the table below, you can see how the return on equity has fared over the past three years.
Table 3: Returns On Equity At Corning
From Table 3, it can be seen that like the company's return on assets, the return on equity has been in decline. This is also due to the company's decline in earnings that was described in the return on assets section of this article.
Retained Earnings
Retained earnings are earnings that management chooses to reinvest into the company as opposed to paying it out to shareholders through dividends or buybacks. It is simply calculated as:
Retained Earnings = Net Income - Dividend Payments - Stock Buybacks
On the balance sheet, retained earnings is an accumulated number, as it adds up the retained earnings from every year. Growth in this area means that the net worth of the company is growing. You generally want to see a strong growth rate in this area, especially if you're dealing with a growth stock that doesn't pay much in dividends or buybacks. More mature companies, however, tend to have lower growth rates in this area, as they are more likely to pay out higher dividends.
Below, you can see how the retained earnings have fared at Corning at the ends of each of the last four fiscal years.
(click link for charts/tables)
Table 4: Retained Earnings At Corning
From the above table, you can see that Corning has an impressive retained earnings figure of $10.6B, and that the retained earnings have almost tripled since the end of 2009. This has been happening as the company has been buying back stock and paying dividends. While not necessarily a dividend growth champion, the company has increased its dividend in each of the last two years, signaling that perhaps, the company is going to start moving in this direction over the next few years.
Conclusion
After reviewing the most recent balance sheet, it can be concluded that there are a lot of things to like about the financial condition of Corning. For starters, Corning has a whopping $5.47B in cash, which is a lot for a company with a market cap that's just north of $20B. This cash position gives the company more flexibility when it comes to servicing debt, paying dividends, buying back stock, and reinvesting into the growth of the company. Corning also has a fantastic current ratio, which shows that the company has more than enough current assets on hand in order to meet its short-term obligations in the event that its operations encounter an unlikely disruption. The company's debt is also well under control, as can be seen by its consistently low debt-to-equity ratio and the fact that less than two years worth of earnings could cover its long-term debt. Retained earnings growth has also been excellent, leaving Corning with plenty of money to reinvest back into the company for more growth. I should also mention that Corning is currently trading at just a slight premium to its tangible book value, which is very rare for well-known companies.
At this time, the only concern that I have with Corning is the fact that its earnings have been in decline for some time now. This decline has led to declines in the company's returns on assets and equity. Investors should also keep in mind that four of the company's five divisions depend on just 2-4 customers for large chunks of their revenues. So, anyone who owns Corning stock should monitor the operations of the company's customers in order to get an idea of where Corning goes from here. However, with all of that said the declining trend in earnings should level off if the recovery in glass pricing and volumes takes hold like management expects it to. It is also worth noting that the company is working on new products, such as Willow Glass, which is an ultra-slim flexible glass substrate that can be used on electronic consumer products. If innovations such as these take off, then that could go a long way toward getting the company's returns on assets and equity back on track. An excellent article that goes into more detail about Corning's prospects can be found here.
While this is not a comprehensive review as to whether Corning should be bought or sold, I think that the company is in very good financial condition, with its manageable debt levels, economic moats, and solid cash position.
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