Corning’s (GLW) Broken Glass

Corning Inc (GLW). Chief Executive Wendell Weeks is on the hot seat with investors after the glassmaker lowered earnings guidance because of lower-than-expected shipments of LCD glass. Even bigger problems may lay on the horizon for the Corning, New York,-based company over the next few years.

According to Corning’s latest 10-Q,  several of its customers entered into long-term purchase and supply agreements with its Display Technologies business in 2004 and 2005 for periods of as long as six years.  Between 2004 and 2007, Corning received $937 million in deposit from these clients.

"We received our last deposit of $105 million in July 2007 and do not expect to receive additional deposits related to these agreements," the filing says. "During the six months ended June 30, 2008 and 2007, we issued $137 million and $66 million, respectively, in credit memoranda."

Exactly who paid the deposits is not clear. Corning admits that in the three months ended June 30 sales to AU Optronics Corporation (AUO) and Chi Mei Optoelectronics Corporation (Chi Mei), two customers of the Display Technologies segment, represented 13% and 10%, respectively of its consolidated net sales.

There is no mention in the filing about any plans to renew these contracts. Usually such discussions are done well in advance of the termination date. You have to wonder about whether such a deal would be advantageous to the TV companies if they continue to hold back on orders.

Display Technologies is Corning’s largest business, accounting for $809 million of its $1.69 billion in sales during the latest quarter.  The company is planning to spend the lion’s share of its $1.8 billion to $2 billion in capital spending this year on the business as well.

The lowered guidance of 43 cents to 45 cents a share versus 48 to 51 cents on sales of $1.58 billion to $1.62 billion compared with the company’s previous forecast of $1.65 billion to $1.72 billion wouldn’t be as big of an issue if Corning’s other businesses were doing well.

Sales in the Environmental Technologies segment, which manufactures ceramic substrates and filters for automotive and diesel applications are now expected to be down 10 percent versus previous guidance of flat growth because of weakness in the automotive and heavy duty truck industries. Silcon orders have also been week, according to the company.

Even the Telecommunications business, whose sales rose 9 percent in the second quarter, is showing signs of slowing. The company expects third quarter sales to be flat to up 5 percent compared with the second quarter.

Jonathan Berr