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Corning Down on Weak Outlook - Analyst Blog
Corning's ( GLW ) 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 expectations.
Revenue by Segment
The Display Technologies 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 shrink.
Telecommunications (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 increase.
Specialty Materials 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.
The Environmental Technologies 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.
The Life Sciences 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 improvement.
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 bps, respectively.
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 quarter.
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 quarter.
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 quarter.
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 Exfo Inc ( EXFO ), with a Zacks Rank #1 (Strong Buy), Clearfone Inc ( CLRO ), with a Zacks Rank #2 (Buy) and Envivo Inc ( ENVI ) with a Zacks Rank #2.
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