) second quarter 2012 earnings were in line with the Zacks
Consensus Estimate. This was better than the Zacks Expected
Surprise Prediction (ESP) of -3.13% and worse than the positive
trend of 6.67% in the four preceding quarters.
While Corning's results were decent and its guidance indicated
improvement in the Display segment (roughly a third of its
business), investors discounted this positive amid growing concerns
about consumer spending and
) results. As a result, the shares plunged 7.71% during the day and
recovered just 0.45% after hours.
Corning reported revenue of $1.91 billion, which was down 0.6%
sequentially and 4.8% year over year. Display declined again and
Environmental took a turn for the worse, impacted by slowdown in
Revenue by Segment
segment generated around 34% of total revenue compared to 38% in
the year-ago quarter. The segment was down 9.1% sequentially and
15.7% year over year. While unit demand continued to pick up in the
U.S., declines moderated in China and Europe. Other regions
continued to grow strongly.
Corning gained from the increase in panel sizes, which appears
to have influenced consumer spending. Corning currently expects
desktops to be flat in 2012, with notebooks/netbooks growing 7% and
tablets 50%. While PC makers
Hewlett Packard Company
), and chipmakers
Advanced Micro Devices
) have all cited weaker consumer spending, Corning is better
positioned because its glass is used by multiple players across
Corning stated that lower utilization at major customers
impacted volumes more than expected and FX did not help. However,
price declines moderated, indicating better balance between demand
and supply. Samsung Precision ("SCP") glass volumes were up
mid-single-digits (better than guided), helped by a new
multi-quarter order. Corning's earnings from the LCD side of the
business went up 1%.
(29% of revenue) increased 10.0% sequentially and 2.0% from the
year-ago quarter. The sequential increase was below Corning's
guidance of a low to mid-teen percentage increase, attributable to
slightly softer hardware sales.
FTTH and infrastructure in emerging markets grew strongly
however. Cable was also up in North America and China. Fiber &
Cable revenue therefore increased 18.9% sequentially and 14.0% year
over year. In comparison, Hardware & Equipment sales increased
a mere 1.2% sequentially, while declining 9.2% from last year.
segment generated 13% of revenue, down 5.3% sequentially and 3.5%
year over year. Weakness in light-duty diesel filters and
substrates in Europe were responsible for the sequential decline.
Heavy-duty diesel declined slightly from the year-ago quarter.
Overall sales from the automotive segment were down 7.0%
sequentially, while staying more or less flat with the year-ago
quarter. The diesel business did slightly better, declining
3.7% sequentially and 5.8% year over year.
generated 16% of revenue, up 2.8% sequentially and 4.6% year over
year, significantly better than expected. Gorilla Glass (GG) growth
was less than expected, which is the main reason for the miss
versus guidance. GG remains the primary factor determining
Corning's performance in the specialty materials segment.
business accounted for around 9% of revenue. The business was up
4.5% from both the previous and year-ago quarters.
The pro forma gross margin was 41.8%, down 62 bps from 42.4%
reported in the March 2012 quarter and down 257 bps from last year.
The sequential decline was mainly on account of weaker prices that
more than offset margin improvements in the GG and diesel
The operating expenses of $479 million were up 2.8%
sequentially. The greatest contributor to the 146 bp sequential
contraction in the operating margin to 16.7% was the 174 bp
increase in SG&A, helped by the 62 bp increase in cost of sales
and an 11 bp increase in R&D (as a percentage of sales).
Corning's pro forma net income was $471 million or 24.7% of
sales compared to $468 million or 24.4% in the previous quarter and
$757 million or 37.8% of sales in the year-ago quarter. Our pro
forma estimate excludes intangibles amortization charges and
asbestos litigation charges in the last quarter.
Including these special items, the GAAP net income was $462
million ($0.30 per share), compared to $462 million ($0.30 per
share) in the previous quarter and $750 million (0.47 per share) in
the year-ago quarter.
Inventories were up 4.6% during the quarter, with inventory
turns going back to 4.4X from 4.6X. DSOs were up a couple of days
Corning ended the quarter with $6.35 billion in cash and short
term investments, down $491 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 just
$856 million, down from $1.47 billion at the beginning of the
quarter. Cash generated from operations was $570 million, with $441
million being spent on capex, $104 million on acquisitions, $314
million on share repurchases and $113 million on dividends.
Corning provided guidance for the third quarter. Accordingly,
the company expects much stronger results in the Display business,
with both wholly-owned and SCP volumes growing at low double-digit
percentage rates. The volume expectations are based on the
assumption of normal industry seasonality, particularly for tablets
and larger TV sizes. Price declines are expected to remain
Telecom segment sales are expected to be flat sequentially with
the Chinese optical fiber and cable business remaining strong.
Environmental Technologies segment sales are also expected to be
flat sequentially. Specialty Materials were expected to be the
strongest, growing 10-15%.
Corning expects the gross margin to increase one percentage
point, mainly on account of volume increases in Display. SG&A
and R&D will be consistent as a percentage of sales on a
Equity earnings related to Dow Corning excluding special items
will drop 10%. The tax rate is expected to be 19%.
Corning's second quarter results may be called decent and its
outlook also indicates stronger demand in key markets. We think
that investor reaction to Apple's results is overdone, particularly
since Apple has been supply-constrained for some time and Corning's
own customers are gearing up to increase production.
We think it is notable that Corning expects 50% growth in
tablets this year and is not limited to Apple alone. It has a solid
long-standing relation with Samsung, which is growing very strongly
in the tablet market. The current growth rates indicate that
Corning's expectations are reasonable.
The main negative at this point is the slowdown in Europe
impacting its environmental business. Europe has been at the
forefront of safety standards, so the current softness seems to
indicate a slowdown in automotive production. Corning also hinted
that the condition could worsen in the next quarter.
Corning's GG, Lotus, Willow Glass and other innovations have
ensured that it remains a major beneficiary of the move to mobile
computing and smart phones. Therefore, irrespective of the level of
competition in the market, it's specialty materials business is
likely to grow at least in line with overall market growth rates as
more and more companies adopt its technology.
However, we continue to think that there will be more investment
in the business (new technologies, China, India), which will drive
up costs, which will negatively impact the bottom line.
Additionally, the debt level remains quite high, which increases
the risk of investing in the shares.
Corning shares therefore carry a Zacks Rank of #3, implying a
Hold rating in the next 1-3 months. Our long term (3-6 month)
recommendation is also Neutral.
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