GLW Corning Inc

Corning’s (GLW) fourth quarter 2011 earnings beat the Zacks Consensus Estimate by 8 cents, or 26.5%. However, shares gained just 0.77% after the company reported, despite losing 10.74% during the day, reflecting continued challenges in the company’s display and specialty materials businesses.

Revenue

Corning reported revenue of $1.89 billion, which was down 9.1% sequentially and up 6.9% year over year. The stronger yen helped results slightly in the last quarter. 

Revenue by Segment

The Display Technologies segment generated around 41% of total revenue. The segment was down 4.3% sequentially and up 4.0% year over year. Samsung Precision (“SCP”) LCD glass volumes were down 7% sequentially (although higher than the revised guidance), as a major customer purchased below the committed amount.

Volumes in the wholly-owned business were in line with expectations. Glass price declines continued in the last quarter.

Telecommunications (26% of revenue) declined 12.5% sequentially and increased 10.6% from the year-ago quarter. Corning stated that the decline was in line with expectations (the segment sees negative seasonality in the December quarter).

Fiber and cable products declined 5.1% sequentially, while hardware and equipment sales declined 19.7%. Compared to the year-ago quarter, sales in the two categories were up 14.4% and 6.5%, respectively.

The Environmental Technologies segment, which generated 12% of revenue, was down 5.3% sequentially, while staying flat year over year. Both automotive and diesel businesses were weak on a sequential basis, with automotive down 5.0% and diesel 5.5%. However, the diesel business was the stronger of the two, growing 5.2% from the year-ago quarter, while automotive declined 3.4%.

Specialty Materials generated over 13% of revenue, down 20.4% sequentially and up 20.8% year over year. Gorilla Glass sales were down 25% sequentially, generating $161 million in the quarter. The weakness in the last quarter was on account of significantly weaker demand, accumulated inventory in the channel and better yields at customers. Gorilla Glass remains the primary factor determining Corning’s performance in the specialty materials segment.

The Life Sciences business accounted for around 8% of revenue. The business was down 6.5% sequentially and up 2.1% from a year ago.

Margins

The pro forma gross margin was 43.7%, down 341 bps from 47.1% reported in the September 2011 quarter and up 26 bps from last year. The sequential decline was mainly on account of lower volumes and weaker prices in the Display segment and lower utilization rates and asset write-downs in the Specialty Materials segment. Corning expects to get more aggressive on the pricing of its products going forward in order to protect market share.

The operating expenses of $460 million were up 20.4% sequentially. The greatest contributor to the 9.8 bp sequential contraction in the operating margin to 19.3% was the 459 bp increase in SG&A as a percentage of sales, helped by the 341 bp increase in cost of sales and 138 bp decline in R&D expenses (as a percentage of sales).

Net Income

Corning’s pro forma net income was $633 million or 33.5% of sales compared to $772 million or 37.2% in the previous quarter and $727 million or 41.2% of sales in the year-ago quarter. Our pro forma estimate excludes restructuring charges, intangibles amortization charges and asbestos litigation charges in the last quarter. A much lower tax rate helped results.

Including these special items, the GAAP net income was $491 million ($0.31 per share), compared to $811 million ($0.51 per share) in the previous quarter and $1.04 billion (0.66 per share) in the year-ago quarter.

Balance Sheet

Inventories were up 3.8% during the quarter, with inventory turns dropping from 4.7X to 4.4X. DSOs were flat at around 52.

Corning ended the quarter with $5.83 billion in cash and short term investments, down $596 million during the quarter. However, the company has a huge debt balance. Including long-term liabilities and short-term debt, the net cash position was just $1.18 billion, down from $1.92 billion at the start of the quarter. Cash generated from operations was $1.16 billion, with $766 million being spent on capex, $67 million on acquisitions, $780 million on share repurchases and $117 million on dividends.

Guidance

Corning did not shed much light on the Display business for the upcoming first quarter, simply stating that significant price declines maybe expected to continue. It also expects volumes in the wholly-owned business grow in line with the market, while volumes at SCP comes in flat to down double-digits, depending on negotiations with a key customer.

Telecom segment sales are expected to be up 5-10% sequentially, due to continued strength in demand for FTTH, enterprise networks and wireless products. Environmental Technologies sales are expected to be up just slightly. 

Corning expects the Specialty Materials sales to be up slightly, due to increased Gorilla Glass demand for tablets from Apple (AAPL) and Google (GOOG) partners, as well as handheld IT devices, partially offset by continued yield improvements at customers and price declines.

Corning expects the Life Sciences business to be up 10% sequentially, helped by the Mediatech acquisition that was completed towards the end of the last quarter.

The gross margin is expected to shrink one percentage points, mainly due to aggressive pricing in Display. SG&A and R&D will be consistent on a sequential basis.

Other income is expected to be half that in the fourth quarter due to lower royalty revenue. Equity earnings will be down 5-20% and equity earnings in Dow Corning will be down 35%. This would impact Corning’s net income.

The tax rate is expected to be 20%.

Our Take

Corning’s fourth quarter results were satisfactory, considering the issues in its two key segments.

The uncertainty in TV demand is impacting glass volumes and Corning expects supply chain inventories to decline. The other concern is glass pricing, where Corning intends to continue with its pricing actions for another quarter at least. The lower utilization rates and greater efficiency at customers are additional negatives.

Gorilla Glass, the other important product line and the second best in terms of gross margin, is also facing challenges. Adoption looks slower on platforms such as TVs and tablets from its customers have proved slow to take off. Although management's tone was positive going forward, it was apparent that the first quarter and the rest of the year were not going to be as strong as previously expected.

Dow Corning is also underperforming, which will impact the other income line.

Net-net, it looks as if Corning too has become subject to economic pressures that are impacting consumer sentiment. Therefore, near-to-mid-term results are unlikely to be exciting.

We also think that there will be more investment in the business (new technologies, China), which will drive up costs. The higher costs and higher tax rate will negatively impact the bottom line.

 
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