GLW Corning Inc

Corning’s (GLW) first-quarter 2013 earnings beat the Zacks Consensus Estimate by 4 cents, or 15.4%. Earnings have been adjusted for currency, pension-related accounting adjustments and other items net of tax.

Revenue

Corning reported revenue of $1.81 billion, which was down 15.5% sequentially and 5.5% year over year.

Revenue by Segment

The Display Technologies segment generated around 36% of total revenue. The segment was down 18.8% sequentially and 7.8% year over year.

Samsung Precision (“SCP”) LCD glass volumes were up slightly from the year-ago quarter (as guided), as its Korean customer maintained relatively steady utilization rates. Price continued to decline.

Volumes in the wholly-owned business were up strongly from last year (as guided), mainly on account of growth in the Chinese TV market. Glass price declines moderated as expected, helped by new agreements.

Telecommunications (26% of revenue) dropped 13.0% sequentially and 7.5% from the year-ago quarter. The sequential increase was much worse than Corning’s guidance of a sequentially flat quarter.

Weaker stimulus-driven spending in the U.S. and a delayed pickup in fiber and cable sales in China drove the decline from the year-ago quarter.

Management did not break down sales by category.

Specialty Materials generated 14% of revenue, down 35.3% sequentially and 10.4% year over year. Management was looking for a 30% sequential decline based on seasonality, as Gorilla Glass (GG) remains a primary revenue driver. The decline from last year was attributed to softness in advanced optics that was in turn impacted by softness in the semiconductor market.

The Environmental Technologies segment generated 13% of revenue, up 4.1% sequentially and down 13.3% year over year. Strong auto sales in Europe and heavy-duty truck sales in the U.S. in the year-ago quarter made for difficult comparisons in the last quarter.

The Life Sciences business accounted for over 11% of revenue. The business was up 11.9% sequentially and 33.5% from a year ago. Corning attributed the increase to contributions from the Discovery Labware acquisition, which closed on Oct 31.

Margins

The pro forma gross margin was 42.4%, up 18 bps from 42.3% reported in the Dec 2012 quarter, down 47 bps from last year and 2 points better than guided. This was mainly because of improvements in telecom and specialty materials margin that offset the price declines in the glass business.

The operating expenses of $444 million were down 13.9% sequentially and 3.9% year over year. Higher R&D (up 119 bps sequentially) was offset by lower SG&A (down 105 bps) and the slightly stronger gross margin resulted in the sequential improvement. All expenses increased as  a percentage of sales from the year-ago quarter.

Net Income

Corning’s pro forma net income was $445 million or 24.5% of sales compared to $630 million or 29.4% in the previous quarter and $397 million or 20.7% of sales in the year-ago quarter. The pro forma estimate reflects the core business as indicated by management and excludes acquisition-related charges, asbestos litigation and other charges on a tax-adjusted basis in the last quarter.

Including these special items, the GAAP net income was $494 million ($0.33 per share), compared to $155 million ($0.10 per share) in the previous quarter and $474 million (0.31 per share) in the year-ago quarter.

Balance Sheet

Inventories were up 11.4% during the quarter, with inventory turns declining from at 4.7X to 3.6X. DSOs were up from 55 to 63. The numbers are indicative of slowing sales and more difficult collections.

Corning ended the quarter with $5.78 billion in cash and short term investments, down $369 million during the quarter. However, the company has a huge debt balance. Including long term liabilities and short term debt, the net cash position was just $291 million, up $109 million during the quarter.

Cash generated from operations was $623 million, of which $194 million was spent on capex, $498 million on the retirement of long term debt and and $133 million on dividends.

Guidance

Corning provided guidance for the second quarter. Management did not mention the expected growth in the Display business but stated that volumes in both the wholly-owned and SCP segments would be consistent with the first quarter. Price declines are expected to moderate further with declines dropping to 2-3% sequentially. Customer agreements and a weaker yen (indirectly) are expected to help prices.

Telecom segment sales are expected to be up 20% sequentially remaining slightly above the year-ago level, driven by the NBN ramp.  

Specialty Materials revenue is expected to be up 15-20% on a sequential basis, or 5% year over year as touch-based notebooks and smartphones drive particular strength in GG.

Environmental segment sales are to be up slightly on a sequential basis, or flat to down from last year, with both the light and heavy duty segments remaining softer than the year-ago quarter.

The Life Sciences business is expected to be up 35-40% year over year on account of the acquisition completed last year.

Corning expects the gross margin to be flat sequentially. SG&A is expected to be down as a percentage of sales with R&D remaining consistent.

Equity earnings from Dow Corning are expected to be up 20%. The tax rate for the core business is expected to be 16% and core earnings down 15% year over year (roughly 23 cents, which is well below the Zacks Consensus Estimate of 30 cents).

Our Take

Corning’s first-quarter results were better than expected. Since Display remains the largest contributor to its revenue, the steadier volumes and improving prices in this business are encouraging. Additionally, GG should see continued strength as we move through the year, as the company is well positioned at several major players in the smartphone and mobile computing segments.

With important product ramps in the telecom segment and acquisition-driven growth in the life sciences segment, the environmental drag may not be enough to hold down share prices. Profitability should also improve as GG volumes pick up and the devaluation in the yen will support stronger pricing.

Corning shares carry a Zacks Rank #3 (Hold). However, analog component suppliers such as Texas Instruments (TXN), Intersil Corp (ISIL) and Maxim Integrated Products (MXIM), all of which carry a Zacks Rank #2 are likely to be better investments at the moment.

 
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