Corning Sees Glass Price Moderation - Analyst Blog

By Zacks | January 30, 2013 AAA

Corning's (GLW) fourth quarter 2012 earnings beat the Zacks Consensus Estimate by 2 cents, or 5.1%. Revenue

Corning reported revenue of $2.15 billion, which was up 5.3% sequentially and 13.7% year over year.

Revenue by Segment

The Display Technologies segment generated around 37% of total revenue. The segment was up 4.8% sequentially and 2.6% year over year, much better than the guided low-to-mid-single digit decline and despite a $27 million negative currency impact.

Samsung Precision ("SCP") LCD glass volumes were up slightly sequentially (better than the guidance of flat to slightly down). Price declines were moderate according to management.

Volumes in the wholly-owned business were up sequentially in the mid-teens percentage range (better than expectations of its being flat to down), as customers increased utilization rates and new agreements. Glass price declines were in the mid-single-digit range, but are expected to moderate in the next few quarters (according to new agreements).

Telecommunications (25% of revenue) grew 3.3% sequentially and 10.2% from the year-ago quarter. The sequential increase was better than Corning's guidance of a flattish quarter for the segment.

FTTH spending, particularly in Australia's broadband project and Sandy-driven spending were the drivers of the sequential increase. The project in Australia and increased optical fiber sales in China drove the increase from last year.

Overall, fiber & cable and hardware & equipment products were up 5.5% and 7.1% sequentially. They were also up 2.3% and 19.3%, respectively from the year-ago quarter.

Specialty Materials generated 19% of revenue, up 9.9% sequentially and 67.6% year over year, significantly better than the guidance of a flattish quarter. Corning saw significantly higher demand for Gorilla Glass, as Corning's IT and handheld customers ramped production of new products. GG remains the primary factor determining Corning's performance in the specialty materials segment.

The Environmental Technologies segment generated 10% of revenue, down 6.0% sequentially and 6.4% year over year. Management's guidance was a little vague (flat to down slightly).  Both the automotive and diesel product lines saw revenue declining sequentially while growing on a year-over-year basis.

The weakness in light duty diesel products was worse than expected, mainly on account of Europe and the fact that year-end supply chain shut-downs were far more than expected also did not help. Weakness in heavy-duty diesel products was as expected.

The Life Sciences business accounted for nearly 9% of revenue. The business was up 19.4% sequentially and 29.4% from a year ago, much better than guided. Corning attributed the increase to contributions from the Discovery Labware acquisition, which closed on Oct 31.

Margins

The pro forma gross margin was 42.3%, down 87 bps from 43.1% reported in the Sep 2012 quarter and down 151 bps from last year. The significant decline in LCD glass prices was the main reason.

The operating expenses of $520 million were up 7.7% sequentially. Higher cost of sales (up 87 bps sequentially) and higher SG&A (up 90 bps) sequentially were the main reason for the 140 bp sequential decline in the operating margin to 18.0%. The 46 bp decline in R&D (as a percentage of sales) was an offsetting factor.

Net Income

Corning's pro forma net income was $498 million or 23.2% of sales compared to $514 million or 25.2% in the previous quarter and $513 million or 27.2% of sales in the year-ago quarter. Our pro forma estimate excludes intangibles amortization, asbestos litigation and other charges on a tax-adjusted basis in the last quarter.

Including these special items, the GAAP net income was $283 million ($0.19 per share), compared to $521 million ($0.35 per share) in the previous quarter and $491 million (0.31 per share) in the year-ago quarter.

Balance Sheet

Inventories were up 5.2% during the quarter, with inventory turns flat at 4.4X. DSOs were up from 55 to 58.

Corning ended the quarter with $6.14 billion in cash and short term investments, up slightly 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 $182 million, down $674 million during the quarter.

Cash generated from operations was $1.2 billion, of which $526 million was spent on capex, $411 million on acquisitions, $140 million on share repurchases and $133 million on dividends.

Guidance

Corning provided guidance for the first quarter. Management did not mention the expected growth in the Display business but stated that volumes would be up year over year in both the wholly-owned and SCP segments while declining sequentially. Price declines are expected to moderate sequentially for the wholly-owned business while remaining similar to the fourth quarter for the SCP business.

Telecom segment sales are expected to be flat sequentially and down 15% year over year, with both the light and heavy duty businesses contributing.  

Specialty Materials are expected to decline 30% sequentially due to seasonality-driven inventory adjustments in the channel.

Corning expects the gross margin to shrink two percentage points, driven by lower volumes. SG&A and R&D will be consistent as a percentage of sales on a sequential basis.

Equity earnings excluding special items, will be down 35% sequentially, with equity earnings from Dow Corning declining significantly. The tax rate for the year is expected to be 19%.

Our Take

Corning's fourth quarter results were better than expected. Additionally, glass volumes are expected to increase from last year with price declines moderating. This seems to indicate improvement in Corning's largest and most important segment.

While Gorilla Glass will see some negative seasonality, Corning has seen great success here. The success in this segment is encouraging and should help absorb costs at the new Chinese facility.

At the same time, we also think that there will be more investment in the business (new technologies, China, India), which will drive up costs. The higher costs will negatively impact the bottom line.

Corning shares carry a Zacks Rank #5 (Strong Sell), so investors are encouraged to avoid investing in the shares.

However, here are a few companies with telecom infrastructure exposure that are likely to be good investments:

Exfo Inc (EXFO) with a Zacks Rank #2, Comverse Technology Inc (CMVT) with a  Zacks Rank #2 and KVH Industries Inc (KVHI) with a Zacks Rank #1.

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