Corning on the Cutting Edge, Part 2

Corning (NYSE:GLW) is a $30 billion firm with 150 years of history, including supplying the glass for Thomas Edison's light bulb. Originally known as Corning Glass Works (that's where the ticker symbol comes from), today it operates in four segments: display technologies, environmental technologies, telecommunications, and life sciences. As you'll read below, the fastest-growing area is display technologies, the division that manufactures the glass substrates used in LCD televisions. Its main competitors are large conglomerates such as3MandTyco (NYSE:TYC), although many smaller companies compete with the individual segments.See part 1 of the interview here.

Rich Smith: When you mention Corning to a layperson, not necessarily an investor, I suspect the first thing they'd think of is Corningware. In other words, your name is practically synonymous with the idea of ceramics. Your smaller competitor Ceradyne (Nasdaq: CRDN  ) is raking in the bucks producing ceramic plates for body armor. How is it that Corning doesn't have a piece of this booming business -- or does it?

Corning CEO Wendell Weeks: Our research and development group regularly explores new market opportunities for our technology innovations. While I can't go into details at this time, we are experimenting with a number of possible solutions in this area, including the use of flexible glass and ceramics.

RS: We haven't seen your 10-Q for the quarter just ended yet, but over each of the past seven quarters, your capital expenditures have far exceeded your depreciation costs, with the result that free cash flow is often less than reported profits. What are you spending all the cash on, and how long do you expect this trend to persist?

WW: As a technology innovation company that focuses on materials conversion, Corning is a capital-intensive company. We plan to spend about $1.5 billion in capital this year with about three-quarters directed toward LCD glass manufacturing capacity expansions in our display technologies segment. We are also investing in diesel substrate products capacity in our environmental technologies segment. Our expansions in both display and diesel will be paced with market growth.

RS: Most clients buying your mother glass are located in Southeast Asia -- are you concerned that Chinese firms, with their lower labor costs and lower costs of shipment to local manufacturers, will ultimately take over this glass-making market?

WW: Corning has a strategy of locating manufacturing capacity close to our customers. The LCD business began in Japan and we opened our first non-U.S. LCD glass facility in Shizuoka, Japan, to meet this customer need. We have since established a joint venture with Samsung -- Samsung Corning Precision Glass -- to serve the Korean market, and we also have two large Corning facilities in Taiwan. As the Chinese LCD market and customer base develops, our strategy for serving that market will evolve, and we may build some local manufacturing capacity.

RS: Television display technology seems to be advancing and changing nearly every year. Peer into the future with us for a moment. Do the Organic Light Emitting Diode (OLED) technologies being worked up by Cambridge Display (Nasdaq: OLED  ) and Universal Display (Nasdaq: PANL  ) pose a threat to your display glass business, and if so, how far away is this threat?

WW: In the near term, we do not see any emerging display technologies as a significant threat to our LCD business. Conversely, our CRT glass equity company, Samsung Corning, is experiencing the impact of LCD TV technology on the more mature CRT TV market. OLED is a promising new technology that is just beginning limited production and will, we believe, be most applicable for smaller display applications for some time to come. In the meantime, Corning is exploring a number of advanced technologies in this area, including OLED.

RS: Give us the view from your unique position as the largest producer of LCD mother glass. Among your direct and indirect customers, who has the best businesses in flat-panel manufacture, flat-panel TV manufacture, and retailing of flat panels?

WW: It is important to note that Corning is the only U.S. company producing LCD glass substrates. We supply LCD substrates to panel and color filter makers, who then supply panels to computer and set manufacturers, some of whom sell under their own brand name, while others serve as contract manufacturers for other brand names. The final end product is, of course, sold to consumers through a wide range of retail channels. Our customer base includes leaders within the LCD panel industry. We provide glass substrates to AU Optronics (NYSE: AUO  ) , Chi Mei Optoelectronics, HannStarDisplay, Dai Nippon Printing, Sharp, and Toppan CFI. Through our Samsung Corning equity venture, we supply to a number of Korean LCD panel makers including Samsung, LG Philips LCD (NYSE: LPL  ) , and BOE Hydis Technology.

RS: According to a recent research report I've read, Corning's Optical Fiber & Cable, Hardware & Equipment, Environmental Technologies, and Advanced Materials businesses combined to provide roughly two-thirds of the company's revenues last year, but yielded essentially no profits. Give us the CEO's point of view -- how do you decide when to sell or close a money-losing or marginally profitable business, as opposed to keeping it afloat with another division's profits?

WW: Well the answer to your question is as much about cash flow as it is about reported profits. Corning is a technology company with a commitment to sustained investment in technology and innovation. Our technology development cycles are long, and our businesses are capital-intensive. So our portfolio must include mature cash-generating businesses to fund the investment required in our growth businesses. Telecommunications is a good example. Despite the fact that this segment reported a P&L loss in 2004, it played an important role in helping the company generate positive cash flow despite significant capital investment in both display and diesel. We obviously continue to focus on improving the profitability of telecommunications ... but even during the downturn it remained cash-positive.

RS: One of your less profitable divisions, environmental technologies, seems likely to benefit in the near future from toughened diesel emissions standards in the U.S., Europe, and Japan. These standards apply to both heavy-duty vehicles and passenger vehicles, but are there similar mandates being imposed on other users of lower grade diesel -- ships, power-generating stations, industrial boilers, and similar industrial diesel users?

WW: In general, there are three categories where emissions will be reduced. Boilers, power generators, and other similar diesel applications fall into non-road rules to be implemented in 2011 for particulate filters. A second phase of regulations will occur in 2014 for larger diesel engines. Also, larger units fall under stationary provisions and these regulations will take effect at the end of the decade and early next decade. For marine applications, the U.S. EPA intends to generate a proposal by end of this year. Timing for implementation of these rules could be in the 2011 to 2014 timeframe.

RS: Who are your primary competitors in the diesel emissions control market, and how does market share currently break down among Corning and these competitors?

WW: For worldwide automotive ceramic substrate products, Corning has a leading market position that has remained relatively stable over the past years. In the heavy duty and light duty diesel vehicle market, these opportunities are just now emerging as stronger emission standards and regulations go into effect around the world. Our competitors in this emerging market include NGK, Denso, Ibiden, and Emitec. Corning is the only U.S. company in this market today.

Corning provides us a glimpse of what a true rule-breaking company can become (light from a hollow glass ball? Really?). Throughout its century-and-a-half history, it's never stopped innovating. And as a result, this 19th-century glass-maker has evolved into a $30 billion giant. AtMotley Fool Rule Breakers, we're looking to find the Cornings of tomorrow while they're still fiddling with light bulbs. Join us in our quest with the click of a button.

Fool contributor Rich Smith does not own shares of any company named above. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that. Universal Display is a Rule Breakers recommendation; 3M is an Inside Value pick.


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