Corning, Inc. (GLW)

[chmcnfunds]

Corning's Q2 Shows Positive Trends - Analyst Blog

By Zacks.com, July 31, 2013, 10:22:41 AM EDT

Corning's ( GLW )second-quarter 2013 earnings beat the Zacks Consensus Estimate by a penny, or 3.2%%. Earnings have been adjusted for currency, pension-related accounting adjustments and other items net of tax.

Revenue
Corning reported revenue of $1.98 billion, which was up 9.3% sequentially and 3.9% year over year, roughly in line with our expectations.

Revenue by Segment
The Display Technologies segment generated around 32% of total revenue. The segment was down 2.9% sequentially and 1.6% year over year.
Samsung Precision ("SCP") LCD glass volumes were up low single-digits sequentially and flat with the year-ago quarter (better than guided). Volumes in the wholly-owned business were up mid-to-high single digits sequentially, but up 40% from the year-ago quarter (better than guided) Glass price declines continues to moderate as expected.
However, inventory in the channel and at retailers is on the rise, as the TV industry moves to larger screen sizes and moves to build initial stock levels.
Telecommunications (30% of revenue) grew 27.9% sequentially and 7.5% from the year-ago quarter. The sequential increase was much better than Corning's guidance of a 20% increase.
As expected, the NBN project ramp is Australia was the most significant driver of year-over-year growth, which was helped by growth in wireless, fiber & cable and data center projects in China and offset by softness in Europe. The sequential increase was fairly broad-based (FTTH in North America, fiber & cable in China and an acquisition in Brazil).
Management did not break down sales by category.
Specialty Materials generated 15% of revenue, up 16.7% sequentially and 15.2% year over year. Management was looking for a 15-20% sequential increase due to strength in touch-based notebooks and smartphones, so results were within the guided range. Gorilla Glass (GG) remains a primary revenue driver.
The Environmental Technologies segment generated 12% of revenue, flat sequentially and down 8.4% year over year. Revenue missed expectations of a slight sequential increase, with the heavy duty segment (trucks) pulling down segment performance. The light vehicle segment was up slightly, in line with expectations.
The Life Sciences business accounted for 11% of revenue. The business was up 5.8% sequentially and 35.2% from a year ago. Corning attributed the increase to contributions from the Discovery Labware acquisition, which closed on Oct 31.

Margins
The gross margin was 44.6%, up 210 bps from 42.4% reported in the previous quarter, up 220 bps from last year and 2 points better than guided. Management stated that gross margins continue to improve across all except the all-important Display business, which remains slightly impacted by price declines. However, the increasing demand, improved efficiencies especially in GG production and move to thinner glass remain positives for overall gross margin improvement.
The operating expenses of $486 million were up 9.5% sequentially and 2.3% year over year. But all expenses declined as a percentage of sales from both the previous and year-ago quarters. R&D declined 78 bps and 66 bps from the two periods, respectively, while SG&A declined 86 bps and 157 bps, respectively.

Net Income
Corning's pro forma net income was $469 million or 23.7% of sales compared to $445 million or 24.5% in the previous quarter and $388 million or 20.3% of sales in the year-ago quarter. The pro forma estimate 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 $638 million ($0.43 per share), compared to $494 million ($0.33 per share) in the previous quarter and $474 million (0.31 per share) in the year-ago quarter.

Balance Sheet
Inventories were up 5.9% during the quarter, with inventory turns declining from 3.6X to 3.5X. DSOs were up from 55 to 63. Corning ended the quarter with $5.47 billion in cash and short term investments, down $304 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 $61 million at the end of the quarter, down $230 million during the quarter.
Cash generated from operations was $395 million, of which $244 million was spent on capex, $106 million on acquisitions net of cash, $232 million on share repurchases and $147 million on dividends.

Guidance
Management stated that the third quarter would mark Corning's fourth straight quarter of year-over-year earnings growth. Moderating LCD price declines will help the Display business, while the other three segments will grow.
Management did not mention the expected growth in the Display business but stated that volumes in the wholly-owned and SCP businesses together would be flat to slightly up sequentially. Price declines are expected to be similar to the second quarter.
Telecom segment sales are expected to be up 20% year over year driven by FTTH demand in North America, Australia and Europe. The U.S. and China are expected to be up on an increased number of data center projects and Brazil is expected to be driven by the recent acquisition.
Specialty Materials revenue is expected to be up 10% on a sequential basis, driven by continued strength in GG. The new products, particularly GG NBT, which is being used by Dell ( DELL ) in their new product line, will help revenues.
Environmental segment sales are to be up slightly over the prior-year level, as a stronger heavy-duty diesel business in North America is supported by tighter regulations in Europe and China.
The Life Sciences business is expected to be up 40-45% year over year on account of the acquisition completed last year.
Corning expects the core gross margin to be up 1% sequentially. SG&A and R&D are expected to be up year over year as a percentage of sales.
Equity earnings from Dow Corning were lowered, with the company now expecting a sequential decline of 50% and year-over-year decline of 20% in its silicon business (both in Europe and China) due to competitive pressures. The tax rate for the core business is expected to be 16% and core earnings down 25% year over year (roughly 22 cents, which is well below the Zacks Consensus Estimate of 34 cents).

Our Take
Corning's second-quarter results were slightly 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 and has some new products ramping in the back half of the year. With important product ramps in the telecom segment, recovery in the environmental markets and acquisition-driven growth in the life sciences segment, things look positive for Corning. However, Dow Corning will continue to weigh on the shares.


Read more: http://www.nasdaq.com/article/cornings-q2-shows-positive-trends-analyst-blog-cm262864#ixzz2aeEgobir
______________________________________________________________

GLW