Business Context and Reporting Period
Company: Corning Incorporated (NYSE: GLW)
Filing Type: Form 8-K (Current Report)
Reporting Period: Third Quarter ended September 30, 2008
Report Date: October 29, 2008
Corning reported third-quarter results amidst a global economic downturn affecting retail demand, particularly in the display and automotive sectors. The company initiated cost-cutting measures, including reduced capital spending and manufacturing scale-backs, in response to worsening economic conditions.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | Q2 2008 |
|---|---|---|---|
| Net Sales | $1,555 million | $1,553 million | $1,692 million |
| Net Income (GAAP) | $768 million | $617 million | $3,211 million |
| Net Income (Non-GAAP) | $732 million | $619 million | $782 million |
| EPS (GAAP) | $0.49 | $0.38 | $2.01 |
| EPS (Non-GAAP) | $0.46 | $0.38 | $0.49 |
| Gross Margin | $735 million (47.3%) | $742 million (47.8%) | $872 million (51.5%) |
| Operating Cash Flow | $763 million | $677 million | $N/A |
| Cash & Short-Term Investments | $3,172 million | $N/A | $N/A |
| Total Debt | $1,545 million | $N/A | $N/A |
Note: Q2 2008 GAAP Net Income and EPS were significantly inflated by a $2.45 billion release of valuation allowance on deferred tax assets.
Material Changes vs. Prior Period
- Revenue: Sales were flat year-over-year ($1.56 billion vs. $1.55 billion) but declined 8% sequentially due to a supply chain correction in the Display Technologies segment and weaker demand in Environmental Technologies.
- Profitability: GAAP Net Income increased 24% year-over-year but dropped 76% sequentially. This sequential drop is largely due to the absence of the massive $2.45 billion tax benefit recorded in Q2 2008. Non-GAAP Net Income declined 6% sequentially.
- Segment Performance:
- Display Technologies: Sales of $696 million were flat year-over-year but down 14% sequentially. Wholly owned glass volume decreased 10% sequentially, while equity earnings from Samsung Corning Precision (SCP) rose 6% sequentially.
- Telecommunications: Sales increased 4% sequentially and 5% year-over-year, driven by private network solutions.
- Environmental Technologies: Sales declined 15% sequentially and 11% year-over-year due to weak automotive demand and a slump in the U.S. freight shipping industry.
- Special Items: The quarter included net special gains of $36 million ($0.03/share), primarily driven by a $43 million tax settlement gain and a $70 million release of deferred tax asset valuation allowances, offset by losses on investments and business sales.
Guidance, Outlook, and Risks
Fourth Quarter 2008 Guidance
- Sales: Expected range of $1.2 billion to $1.3 billion.
- EPS (Non-GAAP): Expected range of $0.20 to $0.28.
- Gross Margin: Expected to range from 31% to 36%, reflecting lower margins in Display, Telecommunications, and Environmental segments.
- Volume: Combined LCD glass volume expected to decline 10% to 20% sequentially. Wholly owned business volume expected to drop 20% to 30%.
2009 Outlook
- Capital Spending: 2008 total spending revised to $1.8 billion - $1.9 billion. 2009 spending range reduced from $1.6 billion - $1.7 billion.
- Market Forecasts: LCD glass market growth revised down to 5% - 15%. Worldwide auto volume expected to decline 5% - 8%.
Risks and Contingencies
- Economic Conditions: Accelerating economic decline is impacting retail demand for LCD TVs and automotive products.
- Investment Losses: The company recorded a $39 million loss on cash and short-term investments due to exposure to financial industry securities. Dow Corning also recorded an $18 million impairment charge related to Fannie Mae and Freddie Mac securities.
- Asbestos Litigation: Ongoing proceedings regarding Pittsburgh Corning Corporation (PCC) bankruptcy; an amended plan is being negotiated.
- Currency: Guidance assumes a Yen-to-Dollar rate of 101 and a Dollar-to-Euro rate of 1.27. Further strengthening of the dollar could negatively impact sales.
Investor Verification Checklist
- Q2 Tax Benefit Impact: Verify the sustainability of earnings by excluding the $2.45 billion one-time tax benefit recorded in Q2 2008 when analyzing year-to-date profitability.
- Display Segment Utilization: Monitor the severity of the 20-30% sequential volume decline in the wholly owned Display business and the associated 20-30 percentage point gross margin reduction in Q4.
- Investment Portfolio Exposure: Review the composition of the $3.2 billion cash and short-term investment portfolio for continued exposure to impaired financial securities.
- Asbestos Liability: Track the progress of the Amended PCC Plan negotiations and potential changes to the estimated liability.
- Capital Expenditure Cuts: Assess the long-term impact of reduced R&D and capital spending on future product innovation and capacity.