Corning (GLW)

Q4 2011 Earnings Call

January 25, 2012 8:30 am ET


James B. Flaws - Vice Chairman, Chief Financial Officer, Member of Finance Committee and Member of Executive Committee

Kenneth Sofio -


Simona Jankowski - Goldman Sachs Group Inc., Research Division

Wamsi Mohan - BofA Merrill Lynch, Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Ehud Gelblum - Morgan Stanley, Research Division

George C. Notter - Jefferies & Company, Inc., Research Division

Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division

Jim Suva - Citigroup Inc, Research Division

Amir Rozwadowski - Barclays Capital, Research Division

Rod B. Hall - JP Morgan Chase & Co, Research Division

Steven B. Fox - Cross Research LLC

Mark Sue - RBC Capital Markets, LLC, Research Division




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Ladies and gentlemen, welcome to the Corning Incorporated Fourth Quarter Earnings Results. It's my pleasure to turn the call over to Mr. Ken Sofio, Vice President of Investor Relations. Please go ahead.

Kenneth Sofio

Good morning, and welcome to Corning's fourth quarter conference call. This morning we have Jim Flaws, our Vice Chairman, Chief Financial Officer, to read some prepared remarks before we move to the Q&A. And those remarks do contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995. They involve a number of risks, uncertainties and other factors that could cause our actual results to differ materially, and these risks are detailed in the company's SEC reports. Jim?

James B. Flaws

Thanks, Ken. Good morning, everyone. Hopefully, you had a chance to read the press release we issued this morning and our fourth quarter and full year results. If you haven't, a copy can be found on our Investor Relations website.

Looking back at 2011, it was a year when the company achieved many milestones but encountered significant headwinds. From a financial standpoint, Corning had an outstanding year. In 2011, the company set records for sales, gross margin and operating income without specials. All of our businesses achieved increased sales year-over-year, sales of Corning Gorilla Glass almost tripled. We achieved our eighth year in a row of positive free cash flow, we maintained our very strong balance sheet, raised our dividend and initiated a sizable share repurchase program. We also brought significant new innovations to the market as our patient investments in research are paying off. Newer products, such as Lotus Glass for OLEDs and now a new, much thinner cover glass in Gorilla Glass 2 have been very well-received by customers. We believe this is an outstanding list of achievements, despite less-than-robust growth in the developed economies around the world. However, it does not tell the entire story.

We also encountered significant challenges in the second half of the year. In the third quarter, the display supply industry began a significant contraction. Ultimate results in the first year in LCD's history, where the supply chain inventory at the end of the year was lower than the amount at the beginning of the year. Our customers, panel makers, continue to operate on unhealthy financial levels. And in the fourth quarter, we experienced significant pricing pressure and a dispute of one of SCP's largest customers.

Lastly, we witnessed significant upheaval in the solar industry, which impacted demand and price for polysilicon at Dow Corning. So while we're proud of our accomplishments we face and continue to face significant challenges. We're taking action to mitigate the impact of these challenges by reducing costs and adjusting capacity. Nevertheless, our profitability will be lower.

This reset in the display industry, as well as the pressure at Dow Corning had us feeling like the company is approaching a new floor in terms of profitability. It is our plan to grow profits from this level. In short, we expect strong growth in sales and profits form Telecom, Environmental, Specialty Materials and Life Science segments over the next several years. Our confidence is high for these businesses based on their achievements in 2011. With their collective sales up 31% and earnings before special items up 136%, and also due to our market leadership in these businesses.

Now our Display segment is likely not to grow but will generate strong profits and cash flow. In fact, investors should anticipate significant cash flow generation over the next several years. We anticipate using this free cash flow to fund the acquisitions to supplement organic growth, for dividends and for share repurchases. We'll discuss some of those plans this morning in our outlook for Q1 in 2012 and at our Annual Investor Meeting next Friday or in New York City we'll share our growth plans for the next several years.

So with that intro, I'd like to walk you through our Q4 results and are Q1 outlook. Fourth quarter sales were $1.9 billion, a 9% decrease sequentially and in line with our expectations. Compared to last year, sales were up 7%. Gross margin was 43.7%, down from the third quarter of 47.1% and in line with our expectations. The lower gross margin was due to higher price declines in Display, lower volumes in Gorilla Glass product line and seasonally lower volume in Telecom.

SG&A and R&D were higher sequentially, but in line with our expectations. As a reminder, operating expenses in Q3 were materially lower due to us lowering compensation accruals and also onetime credit. Equity earnings were $321 million, but that included a significant onetime gain at Dow Corning. Excluding that gain, equity earnings were $241 million or 26% lower sequentially, which was slightly better than our guidance.

Equity earnings also included a $12 million charge for an asset write off, which we did not count as a special item. Earnings per share, excluding special items was $0.33 and substantially lower versus Q3 and a year ago. Both equity earnings and EPS, as stated here are non-GAAP measures, our reconciliation to GAAP can be found on our website.

For the year, sales grew 19% and reached $7.9 billion, the highest level in our 160-year history. All segments grew year-over-year. Gross margin dollars achieved an all-time high reaching $63.6 billion, an increase of 17% over the prior year. Operating margin, excluding special items was also an all-time record of $1.8 billion. So from a consolidated standpoint, we achieved significant financial milestones.

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