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26 Apr 2006
Corning's first quarter results of 2006 exceeded the company's expectations, helped by strong sales into the LCD sector, among others. However, various extraordinary costs restrained the company's full potential, this quarter.
Corning Inc this week announced first-quarter 2006 (Q1) sales of $1.26 billion, which generated income of $257 million. The results exceeded the company's expectations of $1.20 to $1.25 billion.
"We are pleased with the growth in our display technologies segment", Wendell P. Weeks, president and CEO, said. "We have seen improved performance in our telecommunications, life sciences and environmental technologies segments compared with the fourth quarter, 2005."
"We believe the LCD market will continue to be strong over the course of the year, driven primarily by the growing acceptance of LCD technology in the television market", added Weeks. "We have not changed our view that the LCD industry will grow between 40 and 50% this year and that the display segment will grow at a rate faster than the industry."
Corning's first-quarter results were affected by several non-cash items:
• A $185 million pre- and after-tax net charge reflecting the increase in value of Corning common stock to be contributed to settle the asbestos litigation related to the Pittsburgh Corning Corporation;
• A $38 million reduction in income tax expense related to the release of the valuation allowance on certain deferred tax assets in Germany; and
• A $21 million reduction in equity earnings related to the impairment of long-lived assets at Samsung Corning Company, Ltd., Corning's 50%-owned equity venture in Korea, which manufactures glass panels and funnels for cathode ray tubes for TVs and monitors.
First-Quarter Operating Results
Corning's first-quarter sales of $1.26 billion increased 5% over last year's fourth-quarter sales of $1.20 billion, and increased 20% on last year's Q1 sales of $1.05 billion. Gross margin of 45% for Q1 2006 was consistent with last year's Q4.
Equity earnings for Q1 were $200 million, including the $21 million impairment charge at Samsung Corning. This charge aside, equity earnings reflect strong operating results at Dow Corning Corp. and Samsung Corning Precision Glass Co., Corning's 50%-owned equity venture in Korea, which manufactures LCD glass substrates.
Corning's equity earnings from Dow Corning were $69 million in Q1, a 38% increase on Q4 results. Q1 equity earnings include about $15 million of non-recurring gains.
Corning's display technologies segment enjoyed sales of $547 million, a 71% increase over 2005's Q1 sales. First-quarter year-on-year LCD glass volumes more than doubled. Sequentially, first-quarter sales increased 6% on Q4 sales of $518 million. Stronger-than-expected volume growth of 15% was partially offset by expected price declines of 5 to 10%.
Samsung Corning Precision's first-quarter volume increased 10% sequentially and 87% year-on-year. Equity earnings from SCP were $140 million in Q1, compared to $129 million in the previous quarter.
Total volume in the display technologies segment, including both Corning's wholly owned business and SCP, increased 13% sequentially in Q1. Net income for the display technologies segment was $417 million, up 13% compared to $368 million in Q4, 2005.
Corning's environmental technologies segment had sales of $155 million in Q1, compared to $142 million in Q4 of last year, a 9% increase. The increase was driven by an improvement in global automotive sales. The company also saw a 14% sequential sales increase in its life sciences segment of $72 million against $63 million in the previous quarter.
Cash Flow & Liquidity
Corning ended Q1 with $2.48 billion in cash and short-term investments, an increase from $2.4 billion in the previous quarter. The company's debt level remained at $1.8 billion. "We were delighted that Standard & Poor's Rating Services raised its credit rating on Corning to BBB from the previous grade of BBB minus in April", said James B. Flaws, vice chairman and CFO. "We remain on track to be free cash flow positive for the full year."
Corning management and its audit committee have concluded that the company will restate its historical financial statements to reflect the appropriate accounting. The primary impact of this restatement will be to increase the asbestos settlement liability by $94 million pre-tax, ($50 million after-tax) in Q1 of 2003, and to increase the deferred tax valuation allowance recorded in the third quarter of 2004 by about $50 million. The restatement will have no impact on 2005 reported earnings per share. Corning will continue to recognize changes in the fair value of all components of the liability until a settlement occurs.
"We would like to emphasize to investors that this restatement is non-cash and solely relates to our accounting for the asbestos settlement liability and our investment in Pittsburgh Corning Europe," Flaws said.
"Additionally, there has been no change to the accounting for our contribution of Corning common stock as part of the proposed settlement. We are awaiting the bankruptcy court's ruling on the proposed settlement." The company said that it will continue to have full access to its $975 million revolving credit agreement.
Second-Quarter Outlook
Corning expects Q2 2006 sales to be in the range of $1.29 billion to $1.33 billion, and EPS in the range of $0.24 to $0.26. The gross margin percentage for Q2 is expected to be in the range of 42 to 44%.
In the display technologies segment, Corning anticipates that its Q2 sequential volume growth will be in the range of flat to a 5% increase following strong Q1 volume growth. Year-on-year volume growth for Q2 is expected to be greater than 60%. Samsung Corning Precision expects sequential volume growth in a range from flat to up 5% and year-on-year volume growth greater than 50%.
Pricing declines in Q2 are expected to be lower than those in Q1 and the company expects its display segment sales to be consistent with Q1.
Corning's telecommunications segment Q2 sales growth is expected to be in the range of 10 to 15%, driven primarily by hardware and equipment sales. Second quarter sales in environmental technologies are expected to be down slightly from Q1. Any weakness in Q2 would be driven primarily by the U.S. auto market.
The company anticipates that Q2 equity earnings will be lower than in Q1, due primarily to the non recurring gains in Q1. Equity earnings from Dow Corning are expected to be consistent with the first quarter.
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