Corning Inc. (GLW) reported first quarter 2010 results than beat the Zacks Consensus Estimate by 6 cents, or 14.3%. The earnings surprise was the result of stronger-than-expected demand for LCD panels used in TVs and computing devices.
Revenue
Revenue of $1.55 billion was up 1.4% sequentially, 57.0% year over year and 1.9% over the Zacks Consensus expectations. The sequential increase was small, since strength in the display and environment segments were almost totally offset by weakness in telecom and specialty materials.
The year-over-year increase, on the other hand, was driven by triple-digit growth in display, and double-digit growth in the environment, specialty materials and life sciences segments that were partially offset by softness in telecom. This was the second straight quarter that the company saw double-digit year-over-year revenue growth.
Revenue by Segment
The Display Technologies segment generated over 50% of total revenue. The segment grew 9.1% sequentially and 119.0% year over year. Segment volumes were up 12% sequentially and 127% year over year, better than management expectations of an 8-10% sequential increase.
The Samsung Precision LCD glass business (which the company reports as equity earnings) saw a 64% volume increase from the year-ago quarter, although it was flat sequentially (in-line with guidance). Overall pricing was down slightly. We think the company faced some supply constraints in the quarter due to the very strong demand. With the domestic market for LCD TVs being quite mature, the significant growth is most likely coming out of Asia (particularly China), which is growing in leaps and bounds.
Telecommunications (23% of revenue) was down 10.1% sequentially and 5.5% from the year-ago quarter. Fiber & cable products were particularly weak, declining both sequentially and year over year. However, there was slight improvement in hardware & equipment, which was flat sequentially after a couple of quarters of decline. However, the product line continued to decline on a year-over-year basis, albeit at a lower rate.
The Environmental Technologies segment, which generated 12% of revenue, grew 6.1% sequentially and 74.5% year over year. The very strong growth in this segment was a rebound in the automotive market in North America and China, which drove a sequential increase of 8.3% and an 82.8% increase from the year-ago quarter. Diesel products also did well, although growth was slightly less than the auto product line.
Specialty Materials generated around 6% of revenue, down 12.7% sequentially and up 60.0% year over year. The stronger-than-expected growth in the Dec 2009 quarter made for difficult sequential comparisons. The company stated that growth from the prior-year quarter was driven by Gorilla Glass, a special quality glass pioneered by the company and now designed into 80 consumer devices across 17 brands.
The Life Sciences business accounted for around 8% of revenue, representing sequential and year-over-year increases of 0.9% and 55.3%, respectively.
The pro forma gross margin was 47.1%, up 471 bps from 42.4% reported in the Dec 2009 quarter. The main reason for the gross margin improvement was the higher volumes, which spread out fixed costs over a larger sales base. Production efficiencies that resulted from previously implemented restructuring actions also contributed.
The operating expenses of $380 million were down 2.3% sequentially. As a result, the operating margin of 22.6% jumped 563 bps higher than the 17.0% reported in the Dec 2009 quarter. The higher gross margin was the primary reason for the increase, although both R&D and SG&A also declined as a percentage of sales.
Net Income
The pro forma net income was $745 million or 48.0% of sales compared to $698 million or 45.6% in the Dec 2009 quarter and $153 million or 15.5% of sales in the Mar quarter of 2009. Our pro forma estimate excludes restructuring gains, intangibles amortization charges and asbestos litigation gains on a tax-adjusted basis in the last quarter.
Including these special items, the GAAP net income was $797 million ($0.50 per share), compared to $740 million ($0.47 per share) in the previous quarter and $14 million (0.01 per share) in the year-ago quarter.
Balance Sheet
Inventories were up 4.3% during the quarter, yielding inventory turns of 5.4X, up from 6.1X at the end of the Dec 2009 quarter. DSOs increased from 45 to 51.
Corning ended the quarter with $3.08 billion in cash and short-term investments, up $290 million during the quarter. However, the company has a huge debt balance. Including long-term liabilities, the net debt position at quarter-end was $223 million, down from $578 million at the start of the quarter. Cash generated from operations was $643 million, of which $173 million was spent on capex, $224 million on acquisitions and $78 million on dividends.
Guidance
In the second quarter, management expects display glass volumes to be up in the mid-single-digits for both the wholly owned and SCP businesses. Glass price declines are expected to similar to the first quarter. Telecom segment sales are expected to be up 10-15% sequentially, with optical fiber, hardware equipment and private network products all contributing to the growth. Environmental Technologies are expected to come in flat sequentially, Specialty Materials up 15-25% and Life Sciences up 5%.
Management has raised the capex guidance for the year in an attempt to better serve the growing demand. Accordingly, capex is now expected to be around $1 billion for the year ($600-700 million previous expectation). The company intends to use these funds to expand its Taichung LCD glass facility in Taiwan and also retrofit a section of its facility in Shizuoka (Japan).
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