) third-quarter 2013 earnings beat the Zacks Consensus Estimate
by a penny, or 3.1%. Earnings have been adjusted for asbestos
litigation charges, currency, pension-related accounting
adjustments and other items net of tax.
Corning reported revenue of $2.07 billion, which was up 4.3%
sequentially, 1.4% year over year and 1.6% short of our
Revenue by Segment
segment generated around 31% of total revenue. The segment was up
2.7% sequentially and down 15.1% year over year. Corning and
Samsung Precision ("SCP") combined volume grew low single-digits
(in line with the guidance of flat to slightly up). The moderate
decline in glass prices was also as guided.
Sales of EAGLE XG and Lotus Glass from display equity
affiliates (including SCP and the OLED JV called Samsung Corning
Advanced Glass) were down 19% year over year, while related
equity earnings from these ventures were down 40%.
Management stated that channel inventories continue to
(32% of revenue) grew 8.2% sequentially and 24.3% from the
year-ago quarter, better than Corning's guidance of a 20%
increase from the year-ago quarter.
The year-over-year increase was due to carrier growth in North
America and the EMEA and enterprise growth in North America that
offset weak fiber sales in China. Management stated that the
consolidation of some business that was previously treated as
equity affiliate and a small acquisition also contributed to the
generated 16% of revenue, up 8.3% sequentially and down 10.2%
year over year. Management was looking for a 10% sequential
increase driven by continued strength in Gorilla Glass (GG), so
sales were below expectations. Management stated that consumption
was up 30% over the course of the year and relatively modest
growth numbers were indicative of channel inventory being worked
down. This is expected to continue to the end of the year.
segment generated around 11% of revenue, down 1.3% sequentially
and 3.4% year over year. Revenue missed expectations of a slight
year-over-year increase. Light-duty diesel sales were impacted by
softness in Europe, the heavy duty segment (trucks) remained soft
in the U.S. with light-duty substrate sales coming in flat.
business accounted for around 10% of revenue. The business was
down 1.8% sequentially and up 38.7% from a year ago. Corning
attributed the increase to contributions from the Discovery
Labware acquisition, which closed on Oct 31 last year. Government
sequestration impacted sales by $5-10 million.
The gross margin was 43.6%, down 96 bps from 44.6% reported in
the previous quarter, down 3 bps from last year and weaker than
the guided increase of 1 percentage point. Weaker-than-expected
volumes in the Display business and continued price declines
(albeit in line with expectations) contributed to the gross
margin weakness in the last quarter. The increasing demand,
improved efficiencies especially in GG production and move to
thinner glass remain positives for overall gross margin
The operating expenses of $142 million were down 13.9%
sequentially and 84.4% year over year. R&D and SG&A
expenses declined as a percentage of sales from both the previous
and year-ago quarters. R&D declined 13 bps and 3 bps from the
two periods, respectively, while SG&A declined 60 bps and 136
Corning's pro forma net income was $487 million or 23.6% of
sales compared to $469 million or 23.7% in the previous quarter
and $421 million or 20.7% of sales in the year-ago quarter. The
pro forma estimate excludes acquisition-related charges, asbestos
litigation and other charges on a tax-adjusted basis in the last
Including these special items, the GAAP net income was $408
million ($0.28 per share), compared to $638 million ($0.43 per
share) in the previous quarter and $533 million (0.36 per share)
in the year-ago quarter.
Inventories were up 2.8% during the quarter, with inventory
turns increasing from 3.5X to 3.7X. DSOs were up from 60 to 61.
Corning ended the quarter with $5.45 billion in cash and short
term investments, down $25 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
$85 million at the end of the quarter, up $24 million during the
Cash generated from operations was $485 million, of which $244
million was spent on capex, $209 million on share repurchases and
$146 million on dividends.
Management did not mention the expected growth in the Display
business but stated that volumes in the wholly-owned and SCP
businesses together would be down slightly sequentially. Price
declines are expected to be moderate and similar to the third
Telecom segment sales are expected to be down low
single-digits on a year-over-year basis driven by a slower ramp
of the FTTH sales in Australia, optical fiber inventory buildup
due to weaker-then-expected sales through the year offset by a
10% increase in wireless carrier sales.
Specialty Materials revenue is expected to be flat
sequentially and down 20% year over year, as GG inventories
continue to be burned off.
The Life Sciences business is expected to be up 10% year over
year on account of the acquisition completed last year.
Corning expects the core gross margin to be consistent with
the year-ago quarter's 42%. SG&A and R&D are expected to
be 15% and 9% of sales, respectively.
Equity earnings are expected to be down 20%, with SCP
declining on both volumes and prices. The tax rate for the year
is expected to be 17%.
Corning's fourth-quarter results were disappointing. Since
Display remains the largest contributor to its revenue, any
weakness in either volumes or prices has a significant impact on
Corning's revenues. Additionally, GG being one of the other
important drivers of its business also has a significant impact
on results. Since the outlook for both these businesses is weak,
it looks like Corning will not end the year well and this will
tell on its share prices.
Corning shares carry a Zacks Rank #3 (Hold). However,
companies with better prospects in the segment include
), with a Zacks Rank #1 (Strong Buy),
), with a Zacks Rank #2 (Buy) and
) with a Zacks Rank #2.
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