UPDATE 2-Corning slashes outlook in glass glut, shares drop

Tue Nov 29, 2011 7:00pm EST

* Corning cuts outlook as TV demand sputters

* Plans to mothball capacity

* Major customer will not honor contract

By Edwin Chan

Nov 29 (Reuters) - Corning Inc slashed its fourth-quarter profit outlook and warned that a major South Korean client was reneging on its contract as LCD glass supply outstrips demand, triggering an 11 percent share price plunge.

Corning, struggling to cope with a glut of display glass as global TV sales sputter, now expects consolidated-equity earnings to dive 30 percent quarter-on-quarter, compared with a 5 percent decline anticipated previously.

The U.S. company has tried, along with joint-venture partner Samsung Electronics Co Ltd , to take back market share in South Korea by cutting prices.

But in an abrupt move one analyst called "unheard of," an unidentified customer told Corning recently it would not honor its obligations through the rest of the year, meaning the joint venture will miss volume targets this quarter.

Corning and partner Samsung now intend to mothball capacity worldwide. The overall reduction - which encompasses delays in the start-up of new capacity, as well as the postponement of production resumptions - will translate into a loss of a quarter of Corning's global capacity.

Executives said those manufacturing capabilities should be restarted further down the road as demand comes back. Corning will take a one-time charge of $25 million to $50 million related to capacity shutdowns in South Korea.

Analysts say that scale-back was overdue in the face of dwindling demand.

"Corning was simply kicking the can down the road and ultimately would need to cut back capacity," Ticonderoga Securities analyst Brian White said in a research note. "The can became too heavy for Corning to kick down the road any further."

Corning shares closed at $13.19 after plunging as much as 14 percent to $12.64.

MYSTERY CUSTOMER

The U.S. company did not name the South Korean customer, saying only the Asian company did "not expect to honor the contract for the remainder of the quarter."

Samsung, Corning's partner, and LG Display Co Ltd are major screen manufacturers in that market.

"This has never happened before," senior vice president and corporate controller Tony Tripeny told attendees at the Credit Suisse Technology Conference on Tuesday.

"We will work over the next few weeks and the rest of this year to see what we can do about it."

Corning also said it was reducing its forecast on sales of Gorilla Glass, used in tablets and smartphones. It now saw a 25 percent sequential decline in sales this quarter, compared with a previous expectation for a fall of 15 percent.

Corning blamed lower than expected global demand for tablet computers.

Apple Inc's iPad currently controls more than three quarters of the fledgling but booming market for tablet computers. The industry has seen a number of high-profile products fail or underperform this year, notably from Hewlett Packard Co and Research in Motion Ltd .

Corning is sticking to its long-term target of hitting $10 billion in sales no later than 2014. Executives argued on Tuesday that demand will bounce back as consumer move toward larger screens. Corning sells glass by the square foot.

And analysts remain bullish tablets will continue to erode market share now occupied by lower-end laptop computers, with some seeing impact on more powerful PCs as well.

"We remain confident that demand will continue to grow over the long term, that consumers who put off buying a new TV will still eventually buy a new TV, and that Corning will remain the premier vendor for high-end display glass," Morningstar analyst Grady Burkett wrote.

FILED UNDER: