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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