Why Corning’s Margins Are Likely To Remain Under Pressure In 2020

by Trefis Team
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Corning’s (NYSE: GLW) total expenses to revenue ratio has increased from 84.8% in 2016 to 92.5% due to the company’s expense growth outpacing its revenue growth – a trend we believe continued in 2019 and is likely to remain in 2020. Corning’s elevated expenses over recent years have primarily been due to a sizable increase in Cost of Sales as well as Research, Development and Engineering Costs. While higher Cost of Sales can be attributed to the company’s Display Technologies segment, Research Development & Engineering Costs have been soaring over the years due to new product launches and Corning’s focus on emerging businesses. Trefis details trends in Corning’s Expenses over the years along with our forecast for 2019 and 2020 in an interactive dashboard, parts of which are highlighted below.

 

A Quick Overview of Corning’s Expenses And Its Key Expense Components:

  • Corning’s total revenues grew at an annual average rate of 7.2% from $9.4 billion in 2016 to $11.4 billion in 2019, and they are estimated to grow at an average annual rate of 3.8% between 2019 and 2020.
  • Total Expenses as a % of Revenues stood at 90.6% in 2018, and is expected to have risen to 92.5% by 2019. Thereafter it is likely to increase slightly to 92.8% in 2020.

Cost of Sales:

  • Cost of Sales, which accounted for 66.8% of the company’s total expense in 2018, includes cost of procurement of material, depreciation & amortization of tangible goods, repairs & maintenance.
  • Cost of Sales as % of revenue has been hovering from 59.9% in 2016 to 60.5% in 2018. Trefis estimates the metric to increase to around 63% in the near term – contributing the most to our estimated reduction in Corning’s net income margin figure for the year

 

Selling & Administrative Costs:

  • Selling and administrative accounted for 17.6% of the company’s total expenses in 2018, which made it the second-highest expense category.
  • This category includes expenses such as salaries, wages & benefits, travel, professional fees, utilities & rent of administrative facilities.
  • It increased from 14.6% of revenues in 2017 to 15.9% in 2018, and we expect it to swell to be 16.6% of revenues in 2020

Additional details about trends in Corning’s Selling & Administrative Costs are available in our interactive dashboard.

 

Research & Development and Engineering Expenses:

  • R&D & Engineering expenses includes employee compensation paid to the research, development and engineering team.
  • It accounted for 9.7% of the company’s total expenses in 2018.
  • The figure has steadily increased from being 7.8% of revenues in 2016 to 8.8% of revenues in 2018, and we expect it to increase further to 9.2% of revenues by 2020.

 

Income Tax Expense:

  • Income Tax figure saw a sharp increase in 2017 due to the impact of the tax reform.
  • The effective tax rate stood at 29.1% in 2018
  • However we estimate it to decrease to 27.1% in the near term.

 

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