Corning’s Earnings Stabilize As It Hedges Against Further Yen Decline

by Trefis Team
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    Quick Take 

  • Corning’s revenues declined in the first quarter due to lower sales across most of its segments. However, its profits rose driven by cost and efficiency improvements at Telecommunications segment and Gorilla Glass business.
  • Corning’s LCD glass business faced more moderate price declines in the first quarter and its LCD glass shipment volumes increased on higher demand.
  • The company also entered in to hedging contracts during the quarter to prevent its sales from getting impacted by a further weakening in Japanese yen against the dollar.
  • Corning is optimistic about its growth over the remainder of 2013 with sequential sales improvements expected at many of its segments in the second quarter.

Corning‘s (NYSE:GLW) revenues declined by 6% year-over-year to $1.8 billion in the first quarter due to lower sales across all its segments except Life Sciences where sales increased significantly driven by the acquisition of Discovery Labware. However, the company’s profits increased by 4% y-o-y to $494 million driven by bottom line improvements at the Telecommunications and Specialty Materials segments. [1]

At Telecommunications, lower sales driven by winding down of U.S. government’s broadband stimulus and continued weakness in demand for optical fibers from Europe, were more than offset by cost-controls to grow profits. While in the Specialty Materials segment lower sales driven by weakness in the semiconductor market were offset by improved manufacturing performance of Gorilla Glass to drive growth in profits.

Display is Corning’s biggest segment and incorporates its LCD glass business and continued to stabilize during the quarter. In addition, the sudden weakening of the yen relative to the dollar forced the company to start a hedging program and introduce related reporting changes to allow a better comparison between quarter-over-quarter or year-over-year performance metrics.

We currently have a stock price estimate of $14.26 for Corning, which is in-line with its current market price.

See our complete analysis of Corning here

LCD Glass Business Stabilizes

In the first quarter, Corning experienced more moderate LCD price declines compared to the declines it faced in the fourth quarter of 2012. Volume shipments of LCD glass from Corning’s wholly owned display business and Samsung Corning Precision also improved in a mid-teen percentage range on a y-o-y basis driven by a gradual recovery in global demand for televisions, notebooks and smartphones coupled with their larger average screen sizes. Overall, net income at Corning’s display segment was $349 million in the first quarter, down from $422 million in the prior year period. [1]

Corning Moves To Hedge Against Further Weakening Of Yen Against Dollar

However, a large portion of this decline in display segment’s net income was attributable to the weakness in the value of Japanese yen relative to the dollar. The yen’s value against the dollar moved from below 80 in October to above 90 in February. [2] This sharp drop impacted results at Corning’s display segment as a large portion of the company’s LCD glass is priced in yen. Thus, a weaker yen yielded fewer dollars for Corning on currency translation.

As this segment constitutes the largest portion of Corning’s value among other segments, the company moved quickly to enter in to hedging agreements during the quarter to prevent losses from further decline in the value of yen. As a result of these hedges, Corning has effectively capped its economic exposure to further weakening in yen at 93 yens to a dollar. Benefits from these hedges have already begun to realize as yen has traded much above 93 to a dollar in April.

The company also introduced corresponding reporting changes. It now reports core performance metrics which calculate sales, profits and other metrics at a constant rate of 93 yens to a dollar. This effectively weighs out the impact from dollar-yen exchange rate fluctuation on the company’s earnings and provides for clearer comparison between periods. Corning has also omitted results from the polysilicon segment of Dow Corning from its core performance metrics.

Revised sales figures for the display segment in core metrics reveal y-o-y growth in the first quarter - from $341 million in the first quarter of 2012, to $349 million in the first quarter of 2013. Corning’s overall core earnings also improved by 12% y-o-y to $445 million in the first quarter. [1]

Outlook

Looking ahead, Corning anticipates that price declines in LCD glass will continue to be moderate throughout 2013. Specifically, in the second quarter, Corning anticipates LCD glass prices to decline in a 2%-3% range, compared to the first quarter. [1] The company will also benefit from its yen hedges that last through 2014. Corning also anticipates sales at its other segments including Telecommunication, Specialty Materials and Environment Technologies, to improve sequentially in the second quarter.

Separately, the company’s board authorized a new share repurchase program that allows repurchase of $2 billion of the company’s stock through 2014. [3]

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Notes:
  1. Corning’s second quarter earnings release, Form 8-K, April 24 2013, www.corning.com [] [] [] []
  2. US dollar-Japanese Yen exchange rate, April 29 2013, www.bloomberg.com []
  3. Corning’s share repurchase program worth $2 billion, April 24 2013, www.corning.com []
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