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Corning 2Q Earnings Beat Estimates, FX Concerns Remain

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Corning (GLW - Free Report) reported second-quarter core earnings of 38 cents, ahead of the Zacks Consensus Estimate of 37 cents. The Optical segment was the high point of the quarter, benefiting from stronger demand and recent acquisitions.

Revenue

Reported revenue of $2.34 billion, grew 3.4% sequentially, dropped 5.6% year over year and was 8.3% below the Zacks Consensus Estimate of $2.56. Core revenues were higher at $2.52 billion but stilled the Zacks Consensus Estimate.

The Display Technologies segment generated around 34% of total revenue. Segment revenue was down 18.8% sequentially and 20.1% year over year. LCD glass volumes increased at a low single-digit percentage rate from last year, so was not enough to offset the impact of expected glass price declines.

Optical Communications (34% of revenue) grew 14.8% sequentially and 16.6% from the year-ago quarter, in line with expectations. The results were driven by continued strength in FTTH sales in North America as well as the contribution from recent acquisitions.

The Environmental Technologies segment generated around 11% of revenue, down 7.8% sequentially and 8.8% year over year, worse than expected. This was mainly on account of unfavorable currency impact that management mentioned on the last earnings call.

Specialty Materials generated 12% of revenue, flat sequentially and 8.7% year over year, slightly worse than expected. Gorilla Glass volumes grew at a mid-teens percentage rate but, similar to last quarter, the strength was partially offset by weakness in advanced optics.

The Life Sciences business accounted for around 9% of revenue. The business was up 7.1% sequentially but down 5.4% from a year ago, impacted by curency.

Margins

The gross margin was 47.8%, up 61 bps sequentially and 622 bps from last year.

The operating expenses of $552 million were up 4.2% sequentially and 6.4% year over year. R&D was down as a percentage of sales from both previous and year-ago quarters. SG&A increased 20 bps sequentially and 191 bps from last year. The net result was an operating margin of 24.2%, which expanded 45 bps sequentially and 357 bps from the year-ago quarter.

 

 

Net Income

Corning’s core net earnings were $522 million, or 22.3% of sales compared to $484 million or 21.4% in the previous quarter and $487 million, or 20.8% in the year-ago quarter. Net income on a GAAP basis was $496 million ($0.36 a share) compared to $407 million ($0.29) in the previous quarter and $169 million ($0.12 a share) in the Jun quarter of 2014.

Balance Sheet and Cash Flow

Inventories were up 4.1% during the quarter, with inventory turns going from 3.6X to 3.5X. DSOs are flat at around 60. Corning ended the quarter with $5.47 billion in cash and short term investments, up $406 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 $1.44 billion at the end of the quarter, which increased from the net debt balance of $1.10 billion at the beginning of the quarter.

Cash generated from operations was $547 million, with the main uses of cash being $308 million on capex, $286 million on acquisitions, $616 million on share repurchases and $173 million on dividends.

Guidance

Third quarter glass volumes are expected to increase in the low single-digit percentage rate with price declines remaining moderate. Optical Communications sales are expected to grow at a mid-teens percentage rate year over year due to continued strength in FTTH and data center, Environmental to be down slightly impacted by a weaker euro and Specialty Materials to decline at a high single-digits percentage due to a cyclical slowdown in the semiconductor industry (GG volumes will be up high single digits sequentially and flat year over year).

Recommendation

Corning’s second-quarter earnings were ahead of expectations, but all except the optical communications business did worse than expected. As a result, shares slid lower as soon as the markets opened.

Currency remains a major headwind, accounting for the below-expectations performance in three of the segments. Corning has hedge contracts in place that partially protect its results. Management has said that 100% of 2015 earnings, 80% of 2016 earnings and 70% of 2017 earnings have been hedged under the new program.

The company is also returning cash to investors both as share repurchases and dividends, increasing the dividend by 20% last December and authorizing a new share repurchase program of $2 billion last week.

Corning shares carry a Zacks Rank #4 (Sell). Safer bets in the technology sector are Maxim Integrated Products (MXIM - Free Report) , Apple (AAPL - Free Report) or Google (GOOGL - Free Report) , all of which carry a Zacks Rank #2 (Buy).

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