Business Context and Reporting Period
Company: Corning Incorporated (NYSE: GLW)
Filing Type: Form 8-K (Current Report)
Reporting Period: Third Quarter ended September 30, 2009
Date of Report: October 26, 2009
Corning is a global leader in specialty glass and ceramics, serving consumer electronics, mobile emissions control, telecommunications, and life sciences markets. The filing reports financial results for Q3 2009 and includes an outlook for Q4 2009 and 2010.
Key Financial Metrics
| Metric | Q3 2009 | Q2 2009 | Q3 2008 |
|---|---|---|---|
| Net Sales | $1,479 million | $1,395 million | $1,555 million |
| Gross Margin | 41% | N/A | N/A |
| Net Income (GAAP) | $643 million | $611 million | $768 million |
| Net Income (Non-GAAP) | $654 million | $614 million | $732 million |
| EPS (GAAP) | $0.41 | $0.39 | $0.49 |
| EPS (Non-GAAP) | $0.42 | $0.39 | $0.46 |
| Equity Earnings | $418 million | $361 million | $391 million |
| Cash & Equivalents | $1,962 million | N/A | N/A |
| Total Debt (Current + Long-term) | $2,020 million | N/A | N/A |
Note: Non-GAAP measures exclude restructuring, impairment, asbestos litigation adjustments, and other special items.
Material Changes vs. Prior Periods
- Sequential Growth (Q3 vs. Q2 2009): Net sales increased 6% to $1.479 billion. GAAP EPS rose 5% to $0.41, while Non-GAAP EPS increased 8% to $0.42. Equity earnings reached an all-time record of $418 million, up 16% sequentially.
- Year-Over-Year Decline (Q3 2009 vs. Q3 2008): Net sales decreased 5% to $1.479 billion. GAAP Net Income fell 16% to $643 million, and GAAP EPS dropped 16% to $0.41. Non-GAAP EPS declined 9% to $0.42.
- Segment Performance:
- Display Technologies: Sales of $679 million were slightly higher than Q2, despite an earthquake in Japan impacting production in August. Volume shipments of Gen 10 glass substrates began.
- Telecommunications: Sales of $450 million increased 3% sequentially, driven by optical fiber sales in China and private network demand in North America.
- Environmental Technologies: Sales of $167 million surged 27% sequentially, aided by automotive incentives (e.g., "cash for clunkers") and demand for diesel products ahead of 2010 emissions regulations.
- Specialty Materials: Sales of $90 million rose 27% sequentially, driven by Gorilla glass demand for notebooks and portable devices.
- Life Sciences: Sales of $92 million increased from $81 million in Q2, including $7 million from the newly acquired Axygen Bioscience.
- Acquisition: Corning completed the acquisition of Axygen Bioscience, Inc. for approximately $410 million.
Guidance, Outlook, and Risks
Q4 2009 Outlook
- Display Technologies: Glass volume in wholly owned business expected to be flat to down slightly; SCP volume expected to be consistent. Pricing expected to remain consistent. A power disruption at the Taichung facility impacted production, though management remains confident in strong performance.
- Telecommunications: Sales expected to decline 15% due to seasonal demand drops in North America, though China demand remains strong.
- Environmental Technologies: Sales expected to decline 10-15% sequentially due to seasonality and the end of U.S. incentive programs.
- Specialty Materials: Sales expected to be similar to Q3 or down 5%.
- Life Sciences: Sales expected to increase 25%, driven by the Axygen acquisition.
2010 Outlook
- Market Growth: Worldwide LCD glass market expected to grow approximately 15% to at least 2.7 billion square feet. LCD TV unit sales forecast to reach 156 million (20% increase); notebook sales expected to grow 20%.
- Seasonality: First-quarter glass demand expected to be sequentially lower due to panel makers reducing utilization rates. Second-quarter demand expected to increase significantly.
Risks and Contingencies
- Asbestos Litigation: Ongoing negotiations regarding the Amended PCC Plan. Corning recorded a $6 million charge in Q3 to adjust the liability. The liability is fixed by dollar value and no longer impacted by stock price movements.
- Operational Disruptions: Earthquake in Japan (August) and power disruption at Taichung facility impacted production.
- General Risks: Global economic conditions, currency fluctuations, product demand, competition, and reliance on a concentrated customer base.
Investor Verification Checklist
- Equity Earnings Quality: Verify the sustainability of the record $418 million in equity earnings, particularly the 59% sequential increase from Dow Corning and the 7% increase from Samsung Corning Precision.
- Display Segment Resilience: Assess the impact of the Taichung power disruption and the Japan earthquake on Q4 volume guidance versus the expected 5% volume increase that was lost.
- Acquisition Integration: Monitor the integration and revenue contribution of Axygen Bioscience in the Life Sciences segment to ensure the projected 25% Q4 growth is realized.
- Asbestos Liability: Review the status of the Amended PCC Plan negotiations and the fixed nature of the liability to understand future cash flow implications.
- Seasonal Declines: Confirm the magnitude of expected seasonal declines in Telecommunications and Environmental Technologies segments in Q4 against historical trends.