Corning 1Q earns slip, revenue surges
BEN DOBBIN, AP Business Writer
Updated 10:48 p.m., Thursday, April 28, 2011
ROCHESTER, N.Y. (AP) — Specialty glass maker Corning Inc. said Wednesday its first-quarter profit fell 8 percent, largely because of a higher tax rate. But its revenue surged 24 percent on robust sales of glass for flat-screen televisions, computers and mobile devices.
The results beat Wall Street expectations. Its shares rose 1.5 percent in afternoon trading.
The world's largest maker of liquid-crystal-display glass said its net income fell to $748 million, or 47 cents per share, in the January-March period from $816 million, or 52 cents per share, a year ago.
The company attributed the decline mainly to an increase in its tax rate to 13 percent from 3 percent last year. The earnings were still 3 cents a share higher than analysts surveyed by FactSet had expected.
Revenue jumped to $1.92 billion from $1.55 billion a year ago. Analysts expected $1.8 billion.
Corning saw year-over-year and sequential growth in all five of its business units — from LCD-TV and Gorilla cover glass to ceramic auto-pollution filters, research labware, and optical fiber and cable.
"We are succeeding at building a bigger, more balanced company," Corning's chief financial officer, Jim Flaws, said in a conference call with analysts. "We strongly believe that every one of our segments will have significant growth this year and over the next several years."
Revenue from Corning's display technologies segment, its biggest business, edged up 1 percent to $790 million, with LCD glass volume rising 5 percent as predicted. The company expects glass volume to be similar in the April-June quarter, then rise markedly in the seasonally stronger second half.
DisplaySearch, a market-research firm in Austin, Texas, estimates that 217 million LCD-TVs will be shipped worldwide in 2011, up 13.2 percent from 2010. In North America, shipments are expected to rise 5.8 percent to 40.5 million units.
In the United States and Europe, "economic improvement helps a little bit but TV demand is relatively robust even in down economies," DisplaySearch analyst Paul Gagnon said.
In contrast, the vigorous growth seen in emerging markets such as China, India and Eastern Europe "mainly has to do with prices having fallen to an absolute level that's attractive enough to encourage swapping of CRTs (traditional cathode-ray-tube TVs) for LCD TVs," he said.
While Corning commands more than 60 percent of the LCD glass market, the 159-year-old company is also the world's largest producer of optical fiber and cable. Based in western New York, it employs 26,000 people.
Revenue in Corning's telecommunications unit jumped 30 percent to $474 million on higher demand for fiber-to-the-home products in North America and Europe. The company said it churned out more optical fiber in March than in any month in its history.
Propelled by ultra-strong Gorilla glass, which is now migrating from handheld and tablet devices to high-end TVs, specialty materials revenue more than doubled to $254 million.
Corning has said sales of Gorilla glass could surge to $1 billion this year from $250 million in 2010. Sony Corp. is incorporating Gorilla glass in a new line of Bravia TVs this spring. Invented in 1962, Gorilla found commercial use only in 2008. LG Display Co. and Asahi Glass Co. make competing products.
Environmental technologies revenue jumped 35 percent to a record $259 million, driven by an 81 percent jump in sales of diesel-vehicle filters.
Life-sciences revenue rose 21 percent to $144 million, reflecting Corning's acquisition of Axygen BioScience Inc. as it shifts beyond a heavy focus on display glass. It bought the maker of plastic labware and liquid handling products for research labs for about $400 million in September 2009.
Corning shares rose 31 cents to $20.91 in afternoon trading but had traded as high as $22.05 earlier in the day. It is still closer to the upper end of a 52-week range of $15.45 to $23.43.
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Corning Reports Strong Revenue Growth
5/2/2011
Corning Inc’s (GLW) first quarter 2011 earnings beat the Zacks Consensus Estimate by 4 cents, or 9.1%. Revenue growth was also strong, exceeding the Zacks Consensus by 5.3%. The revenue growth and margin expansion helped offset a higher tax rate to deliver the results in the last quarter.Revenue
Corning reported revenue of $1.92 billion, which was up 9.0% sequentially and 23.8% year over year. Corning stated that the crisis in Japan did not affect its operations or supply chain in the last quarter and those suppliers that had been affected had made arrangements for second sourcing.
Second quarter results will however be impacted by an inventory correction at Sharp, which intends to lower utilization rates for the purpose. Corning currently does not expect the inventory correction to continue into the third quarter.
Revenue by Segment
The Display Technologies segment generated around 41% of total revenue. The segment increased 5.3% sequentially and 1.0% year over year. The wholly-owned business saw a high single-digit increase in volumes, driven by increased demand at Japanese and Taiwanese panel makers. Samsung Precision (“SCP”) volumes were flattish sequentially.
Corning had guided to mid single-digit volume increase at both businesses, so while the wholly-owned business exceeded expectations, SCP fell slightly short. Management stated that Corning’s overall volume increase of 5% from the December quarter was better than the market growth rate of 2%, indicating that the company was probably gaining back some share that it lost in 2009. Glass price declines also moderated in line with expectations.
Corning stated that the increase in demand for LCD TVs and monitors we re in line with expectations, while demand for notebooks had taken a hit. This is consistent with reports from other companies, such as Microsoft Corp (MSFT) and Intel Corp (INTC) that also cater to the notebook market.
Retail sales of LCD TVs in China, other emerging Asian countries, South America and Europe were up double-digits in January. February sales moderated across most regions other than the emerging markets. Japan was not as strong, as government regulations impacted results in the quarter.
Corning also lowered its 2011 expectations for the notebook market from 212 million units to around 196 million units. Consequently worldwide glass demand for the year is now expected to be 100 million square feet lower at 3.5-3.7 billion square feet.
Telecommunications (25% of revenue) increased 7.0% sequentially and 30.2% from the year-ago quarter. Corning attributed the increase from the year-ago quarter to increased demand for fiber-to-the-home- technology, which grew 70% and enterprise networks, which grew 20%.
This resulted in an 8.3% sequential and 30.5% year-over-year increase in Corning’s fiber and cable products. Additionally, hardware and equipment sales jumped 5.6% and 29.9% from the previous and year-ago quarters, respectively.
The Environmental Technologies segment, which generated 14% of revenue grew 11.6% sequentially and 34.9% year over year. The diesel business was very strong, growing 18.3% sequentially and 81.3% from last year, fueled by a recovery in demand for heavy-duty filters.
Light-duty filters, which have become compulsory under Euro 5 regulations also remained strong in the last quarter. The automotive side of the business was slower, growing 5.1% from both the previous and year-ago quarters. The ceramic substrate business did relatively better in the last quarter.
Specialty Materials generated over 13% of revenue, up 26.9% sequentially and 164.6% year over year. The strong growth in the quarter was on account of increased demand for Gorilla Glass, a special quality glass pioneered by Corning that is currently being used by branded consumer electronics manufacturers across the world as cover material for handhelds, notebooks, tablets and TVs.
Gorilla Glass will be the major driver of Corning’s specialty materials sales this year, since sales of $150 million in the last quarter is expected to go up to $1 billion by year-end.
The Life Sciences business accounted for around 7% of revenue. The business was up 2.9% sequentially and 22.0% from a year ago.
Margins
The pro forma gross margin was 45.4%, up 199 bps from 43.5% reported in the December 2010 quarter, but down 162 bps from last year. Higher glass volumes and manufacturing efficiencies across the Display, Telecom and Environmental Technologies segments were responsible for the gross margin expansion. Prices, although stabilizing, remained a negative in the last quarter.
The operating expenses of $406 million were up 9.8% sequentially. The greatest contributor to the 638 bp expansion in the operating margin to 24.3% was the 309 bp decline in SG&A as a percentage of sales, which was helped by the 199 bp decline in cost of sales and the 129 bp decline in R&D expenses (as a percentage of sales).
Net Income
Corning’s pro forma net income was $754 million or 39.2% of sales compared to $727 million or 41.2% in the previous quarter and $745 million or 48.0% of sales in the year-ago quarter. Our pro forma estimate excludes intangibles amortization charges and asbestos litigation gains on a tax-adjusted basis. The tax rate increased substantially, as expected.
Including these special items, the GAAP net income was $748 million ($0.47 per share), compared to $1.04 billion ($0.66 per share) in the previous quarter and $797 million (0.50 per share) in the year-ago quarter.
Balance Sheet
Inventories were up 14.0% during the quarter, with inventory turns dropping from 5.4X to 5.0X. DSOs went from 50 to around 53 during the quarter.
Corning ended the quarter with $6.30 billion in cash and short term investments, down $47 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 $1.87 billion, flat from the start of the quarter. Cash generated from operations was $573 million, of which $532 million was spent on capex, $148 million on acquisitions and $79 million on dividends.
Guidance
In the second quarter, Corning expects Display glass volumes to be flat sequentially, the combined effect of higher demand from Korea, where utilization rates are expected to increase and softer demand from Taiwan and Japan, where utilization rates will be lowered.
This will result in a low-to-mid-teens percent volume decline in the wholly-owned business and a low-to-mid-teens percent volume increase at SCP. Glass price declines are expected to be even less than in the last quarter.
Telecom segment sales are expected to be up 20% and 30%, respectively from the previous and year-ago quarters. The Environmental business is expected to see a slight sequential decline, given the strength in the first quarter, although sales will be up 35% from the year-ago quarter.
Corning expects the Specialty Materials segment to increase 20% sequentially, again driven by Gorilla Glass. The Life Sciences segment is expected to be up slightly on a sequential basis and 20% from last year.
The gross margin is expected to be down slightly, due to lower glass volumes, R&D to be roughly 9% of sales and SG&A up slightly as a percentage of sales. The expiry of foreign tax credits will result in a tax rate similar to the first quarter. Management expects this to be around 15% for both the second quarter and for the rest of the year. All this is expected to result in a 10% sequential increase in earnings.
Our Take
Corning’s first quarter results were encouraging, as there was broad-based strength across all segments. However, management stated that the utilization rate at Taiwanese customers shot up in the last quarter, resulting in some excess inventory (Taiwan serves the Chinese market). Additionally, one of the company’s largest customers (Sharp) has decided to reduce utilization at its Japanese facilities. It is possible that the Chinese New Year and regulations in Japan resulted in significant builds in the last quarter, requiring the correction in the second quarter. In any case, this is expected to result in a temporary setback to the wholly-owned business.
We believe China will remain an important growth market (although possibly sluggish near-term). However, higher utilization rates in Korea are a positive, as they are indicative of strength in markets outside China.
We also like what Corning is doing with its Gorilla Glass and it looks as if this business will grow in leaps and bounds over the next few months. Similar to the last two quarters, we think that higher volumes would improve margins in this business.
Judging from management guidance, it appears that there will be more significant investment in the business, which will drive up costs. Also, the conversion of some LCD operations to Gorilla Glass will also impact costs. The higher costs and higher tax rate will negatively impact the bottom line.
Corning shares have a Zacks Rank of #3, which translates to a short-term Hold recommendation. Our longer-term (3-6 months) rating is also Neutral.
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