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Corning’s (GLW - Analyst Report) fourth-quarter 2013 earnings beat the Zacks Consensus Estimate by a couple of cents, or 7.4%. Earnings have been adjusted for asbestos litigation charges, currency, pension-related accounting adjustments and other items net of tax.

Revenue

Corning reported revenue of $2.00 billion, which was down 3.0% sequentially, 6.6% year over year but better than we expected.

The Display Technologies segment generated around 32% of total revenue. The segment was down 4.9% sequentially and down 23.0% year over year. Overall volumes were up 2% sequentially and 5% year over year. Corning stated that LCD demand remained strong and LCD prices mostly stable (as guided).

Optical Communications (31% of revenue) declined 6.9% sequentially and grew 12.0% from the year-ago quarter, much better than Corning’s guidance of a low single-digit decline from the year-ago quarter. The year-over-year surprise was due to carrier sales growth in North America. Pricing was weak.   

Specialty Materials generated 15% of revenue, down 12.6% sequentially and down 28.6% year over year. Management was looking for flattish revenue on a sequential basis. Segment results were hugely disappointing because Gorilla Glass (GG) volumes were 10% below expectations.

While inventories continued to be burned down in the last quarter, GG demand was also hit by weaker demand for touch-based notebooks. Strength in advanced optics was an offsetting factor.

The Environmental Technologies segment generated around 12% of revenue, up 5.8% sequentially and 8.7% year over year. A stronger U.S. heavy-duty trucking market and slight bump-up in European light-duty diesel sales drove the increase from last year.

The Life Sciences business accounted for around 11% of revenue. The business was down 2.3% sequentially and up 13.5% from a year ago. The increase was due to the Discovery Labware acquisition, which closed on Oct 31 2012.

Margins

The gross margin was 39.6%, down 399 bps sequentially and 43 bps from last year. Volume pressures in the GG segment and pricing pressures in the Display segment were negatives for the gross margin in the last quarter.  

The operating expenses of $488 million were up 9.2% sequentially and 2.7% year over year. The increase was largely driven by SG&A, which increased 269 bps sequentially and 209 bps year over year (as a percentage of sales). R&D was flattish sequentially but down nicely from last year.

Net Income

Corning’s pro forma net income was $410 million or 20.4% of sales compared to $487 million or 23.6% in the previous quarter and $413 million or 19.2% 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 $421 million ($0.30 per share), compared to $408 million ($0.28 per share) in the previous quarter and $155 million (0.10 per share) in the year-ago quarter.

Balance Sheet

Inventories were down 0.4% during the quarter, with inventory turns increasing from 3.7X to 3.8X. DSOs were down from 61 to 57. Corning ended the quarter with $5.24 billion in cash and short-term investments, down $211 million during the quarter. However, the company has a huge debt balance. Including long term liabilities and short term debt, the net debt position was $307 million at the end of the quarter, down from a net cash balance of $85 million at the beginning of the quarter.

Cash generated from operations was $1.28 billion, of which $337 million was spent on capex, $1.08 billion on share repurchases and $140 million on dividends.

Guidance

Corning has bought Samsung Corning Precession (SCP), which will now be included in its Display business raising Display sales by roughly $2 billion for the year. Following the consolidation, there will be significant synergies on the COGS and SG&A lines although overall opex will of course increase. The tax rate will also move up from around 17% to around 22%.

Optical Communications are expected to be up at mid-teen percentage rates (compared to the year-ago quarter) Environment sales are expected to be up mid single-digits, Specialty Materials to be flat and Life Sciences also consistent.

Equity earnings are expected to be down in the next quarter due to unfavorable comps. The gross margin will be 45% and opex lower than the year-ago quarter (as a percentage of sales). The tax rate for the year is expected to be 22%.

Recommendation

Corning’s fourth-quarter results were not too bad, barring the GG business, which was impacted by weaker-than-expected demand for touch-screen computing devices. Also, since Display remains the largest contributor to its revenue, any weakness in either volumes or prices here also has a significant impact on Corning’s revenues. In this respect, the acquisition of SCP should generate synergies that work in Corning’s favour.

Corning shares carry a Zacks Rank #2 (Buy), similar to peer Envivo Inc (ENVI - Snapshot Report), which has a Zacks Rank #2. Other technology companies that look attractive right now include Baidu (BIDU - Snapshot Report), with a Zacks Rank #1 and Facebook (FB - Analyst Report) with a Zacks Rank #2.

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