Corning's Q2 Earnings Beat, Specialty Materials Outlook Down

Corning (NYSE:GLW) reported second-quarter core earnings of 37 cents, beating the Zacks Consensus Estimate of 32 cents. The company saw the seasonal strength in Optical Communications. Shares started moving down however as management lowered guidance for the Specialty Materials segment citing lower-than-expected demand for mobile devices.

Revenue

Reported revenue of $2.36 billion, grew 15.3% sequentially and 0.7% year over year. Core revenue of $2.44 billion topped the Zacks Consensus Estimate of $2.36 billion.

The Display Technologies segment generated around 37% of total revenue. Segment revenue was up 6.2% sequentially and 11.5% year over year. The worldwide glass market and Corning’s volume increased in the high-single-digit percentage range (in line with guidance) with LCD glass prices continuing to moderate.

Optical Communications (33% of revenue) fell 28.4% sequentially and dropped 2.3% from the year-ago quarter.Strong demand for fiber-to-the-home and data center solutions drove the sequential strength. The production issues related to manufacturing software implementation that impacted sales by around $100 million profit by $40 million in the first quarter was resolved by the end of the quarter.

The Environmental Technologies segment generated around 11% of revenue, down 1.9% sequentially and 0.4% year over year, roughly in line with guidance of sales level with the year-ago quarter. The strength in Corning’s automotive light-duty substrates was partially offset by continued softness in heavy-duty truck demand in North America and China.

Specialty Materials generated 11% of revenue, up 17.2% sequentially and down 2.2% year over year. Lower smartphone and tablet demand due to adverse macroeconomic conditions, fewer major product launches and longer replacement cycles.

The Life Sciences business accounted for around 9% of revenue. The business was up 5.4% sequentially and 1.9% from a year ago.

Margins

The gross margin was 44.5%, expanding 373 bps sequentially while shrinking 331 bps from last year.

The operating expenses of $547 million were up 6.4% sequentially and 2.1% year over year. All expenses declined sequentially as a percentage of sales with only R&D dropping by a mere 2 bps from last year. COGS increased 331 bps and SG&A 45 bps. The net result was an operating margin of 21.3%, which expanded 422 bps sequentially and shrank 361 bps from the year-ago quarter.

Net Income

Corning’s core net earnings were $434 million, or 18.4% of sales compared to $340 million or 15.7% in the previous quarter and $522 million, or 22.3% in the year-ago quarter. Net income on a GAAP basis was $2.21 billion ($1.87 a share) compared to loss of $392 million ($0.36) in the previous quarter and income of $496 million ($0.36 a share) in the June quarter of 2015.

Balance Sheet and Cash Flow

Inventories were up 3.3% sequentially, with inventory turns going from 3.2X to 3.5X. DSOs went from 62 to 60. Corning ended the quarter with $7.14 billion in cash and short term investments, up $3.60 billion during the quarter. The company has a huge debt balance. The net debt position including long term liabilities and short term debt at quarter-end was $1.67 billion compared to a net debt balance of $4.38 billion going into the quarter.

Cash generated from operations was $526 million, with the main uses of cash being $263 million on capex, $279 million on acquisitions, $812 million on share repurchases and $167 million on dividends.

Guidance

Management provided the following outlook for the third quarter:

Corning expects glass volume to increase by a mid single-digit percentage rate sequentially with LCD glass price declines remaining consistent with the second quarter. Both these factors are positive for the Display business.

Optical Communications sales are expected to increase 10% year over year as demand is expected to remain strong.

Environmental Technologies sales will decline slightly on a year-over-year basis, impacted by foreign exchange rates. Light-duty auto products will continue to be offset by heavy-duty truck market in North America and China.

Specialty Materials sales are expected to be consistent with the year-ago quarter. New product launches in the second half of this year will be positive for Gorilla Glass demand. Segment sales are currently expected to be flat to down slightly in 2016.

The Life Sciences business will grow low-single digits from last year.

Recommendation

Corning shares are being offloaded this morning and are down more than 2% as of this writing. The shares carry a Zacks Rank #1 (Strong Buy).

Other bets in the technology sector are Intel Corp (NASDAQ:INTC) , which has a Zacks Rank #2 or NVIDIA Corp (NASDAQ:NVDA) , which has a Zacks Rank 1 (Strong Buy).