Earnings - Corning Finishes Year on a Down Note
Corning reported its Q4 and full year earnings this week, and the company finished the year on a downswing in its two biggest businesses, Display Technologies and Optical Communications, but had much more favorable results from its three smaller businesses. In Display, the company looks for the slowdown to continue in Q1 but expects a recovery in glass demand in the 2nd half of 2020.
Corning’s two Japanese competitors, AGC and NEG, report results next week, and we will cover some comparisons for the glass industry when they do.
Corning reported core earnings of $406 million or $0.46 per share on revenues of $2.82 billion. Revenues were down 7% Y/Y and core net income was down 25%, while earnings per share were down 22% as the number of shares has been reduced. Corning reported GAAP net income of only $32 million, down 89% from a year ago, as the company took substantial reductions for restructuring and equity affiliates, which were partially offset by a gain on hedging contracts. Corning reports its “core earnings” as separate from GAAP results, which strips out the effect of changes in the exchange rate between the Japanese yen and the US dollar. According to GAAP, each quarter Corning reports non-cash, mark-to-market gains or losses associated with the company’s currency-hedging contracts. In many quarters, these mark-to-market gains are the largest difference between Core and GAAP earnings, but this quarter the one-time items were more substantial. For the rest of this article, we will use core results but we will comment later on restructuring in Display.
Corning’s earnings fell because of slowdowns in its two largest and most profitable businesses, Display Technologies and Optical Communications. Corning had warned investors of the slowdown in both businesses back in mid-September, revising its Q3 and full-year guidance, and the Q4 results were slightly better than that revision. Display revenues declined 12% Y/Y, while revenues in Optical Communications fell 23% from the prior year. Corning’s Specialty Materials segment, the largest piece of which is the Gorilla Glass business for consumer electronics cover glass, finished the year strong with a 14% increase Y/Y, and Corning’s Life Sciences and Environmental Technologies businesses recorded strong Y/Y revenue increases, but the three smaller businesses weren’t enough to overcome the weakness of the two big ones.
Corning Revenue by Business Segment, 4Q17 to 4Q19
In operating profits, the same pattern among Corning’s businesses was amplified, with Display down 25% Y/Y and Optical down 62%, while Life Sciences improved by 31% and Environmental jumped an impressive 52% Y/Y, while Specialty Materials rang up an 8% Y/Y gain.
Corning took one-time charges in Q4 in both the Display and Optical Communications businesses and in its equity investment in Hemlock Semiconductor. The restructuring charges amounted to $158 million, and the equity investment charge was for $174 million; CFO Tony Tripeny noted that Hemlock took a charge related to realigning capacity to a lower sales level.
Corning did not split out the amount of the capacity adjustment charge by business, but based on the tone of the comments I would guess that the majority of the charge was in Optical Communications, which is seeing a more severe downturn. Tripeny addressed a question on the call related to Corning’s capacity in Korea. With the huge capacity reduction that Samsung has been making on their LCD lines in Korea, Corning is left with substantial overcapacity in that country compared to local demand. Tripeny noted, however, that Korea remains a low-cost facility and will continue to operate as a melting source for full-sheet glass to feed finishing operations in China. He also noted that glass melting capacity in Korea had shifted from Display to Gorilla Glass. Tripeny implied that the capacity adjustment charge for Display was limited to finishing lines in Korea.
Another piece of the profit picture was Corning’s “All Other” segment, the total for the corporation minus the five named product groups. Corning’s All Other businesses recorded a net loss of $32 million on revenues of $36 million. Revenues, were up 157% Y/Y but the loss increased from $24 million in Q4 2018. Tripeny noted that Corning started ramping its automotive Gorilla Glass business in Hefei, China in the quarter. Auto glass, along with pharmaceutical technologies, new product lines, and some other projects fall into this All Other category. Corning remains optimistic about its auto glass business, and in response to a question CEO Wendell Weeks indicated that when the auto glass business reaches a run rate of $100 million in revenues per year Corning will be able to provide more detail, and while he did not give a timetable for this increase, Tripeny’s answer to a related question hinted that it may happen in 2021.
Tripeny described the slowdown of display glass demand in 2H 2019 as a supply chain correction, and this is in line with DSCC’s analysis, as we have reported the sharp drops in TV panel prices and the large inventory overhang of LCD TVs in the USA precipitated by the US-China trade war. Tripeny indicated that Corning believes that the supply chain inventory exiting 2019 is healthy, and that the correction is behind us. Corning expects the display glass market to grow by low single digits sequentially in Q1, but Corning expects that their own volume will be down mid-single digits because of the reduction of demand in Korea.
Corning did not make any adjustments to its outlook in consideration of the coronavirus, and we believe that it can have a material impact on Corning’s glass demand in Q1. As Ross reports elsewhere in this newsletter, DSCC expects that all fabs in Wuhan will be down for the full month of February and into March, and other regions in China will be affected as the work forces at panel maker operations will be short for a substantial part of February. Corning will certainly miss some expected glass sales to BOE’s B17 Gen 10.5 fab in Wuhan, and is likely to see diminished demand from many of its China customers in Q1 as a result of the virus.
For the full year 2020, Corning expects the display glass market to increase by mid-single digits and for Corning’s volume to increase by a similar amount. The demand increase is driven by TV screen size growth, and is in line with DSCC’s estimates. The combination of volume increases and price declines implies that Display Technologies in 2020 will have revenues roughly flat Y/Y, which is consistent with the 0.7% revenue decrease experienced in 2019. During the decade of the 2010s, Corning’s Display business had only one year of revenue growth in 2018; nevertheless it continues to be the largest source of profits in the corporation.
On glass pricing, Corning indicated that Q4 glass price declines were “moderate”, and they expect the same in Q1. For the full year 2019, Corning saw mid-single digit % price declines, and they expect the same in 2020. Tripeny recited the three reasons that drive favorable glass pricing: glass supply/demand balance or tightness, competitor profitability challenges, and requirements for continuing investment. The description of these three drivers has been nearly identical on every earnings call for years, since long before I departed Corning in four years ago, but in my opinion it continues to be accurate, so why change it?
Corning Specialty Materials Business Segment Revenues and Net Income, 4Q17 to 4Q19
As noted above, Corning’s Gorilla Glass business finished a strong year with 14% Y/Y revenue growth in Q4 in the Specialty Materials business. Specialty Materials net income was up 8% Y/Y in Q4 but for the full year 2019 it fell short of 2018 profits by 4%. Corning is benefiting from increasing adoption of its more advanced generations of Gorilla Glass, which carry price premiums, and they expect that revenues in this business will increase by high-single digits.