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Corning Incorporated Q1 2010 Earnings Call Transcript

Corning Incorporated Q1 2010 Earnings Call Transcript

Corning Incorporated (GLW)

Q1 2010 Earnings Call

April 28, 2010 8:30 am ET


Ken Sofio – VP IR

Wendell Weeks – CEO

James Flaws – CFO


CJ Muse – Barclays Capital

Nikos Theodosopoulos - UBS

Simona Jankowski - Goldman Sachs

George Notter – Jefferies & Company

Analyst for Jim Suva - Citigroup

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Welcome to the Corning Incorporated first quarter 2010 results. (Operator Instructions) I would now like to turn the conference over our host, Ken Sofio, Division Vice President of Investor Relations. Please go ahead.

Ken Sofio

Thank you. Good morning. Welcome to Corning's fourth quarter conference call. James Flaws, Vice Chairman, and Chief Financial Officer will lead the discussion. Wendell Weeks, our Chairman and CEO, will join for the Q&A.

Today's remarks do contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause results to differ materially. These risks are detailed in our SEC reports. Jim?

James Flaws

Thanks Ken, good morning everyone. This morning we released our results for the first quarter which can be found on our Investor Relations website. We have posted accompanying slides on line as well.

In summary, we are very pleased with our first quarter results as they exceeded our most optimistic expectations. Before I get into details I want to walk you through the key points we will be covering this morning.

Number one, our first qtr performance was outstanding. Earnings per share were $0.52, up $0.08 or 18% from Q4 earnings per share excluding special items of $0.44. Q1 EPS was also up significantly from last year which was just $0.10. We are clearly pleased with the progress the company has made since that time.

Second, we had significant improvement in our gross margin in the first quarter. Quarter one gross margin was 47%, up from 42% in Q4 and 27% a year ago. The improvement was better than we expected and was driven by very strong manufacturing performance and higher volumes in our Display segment. I will have more on gross margin and Display performance in a few minutes.

Third, our first quarter earnings benefited from a much lower tax rate than we had previously forecast. Our effective tax rate was 2% in Q1 versus our expectation of 10%. We expect 2% to be the effective tax rate for the rest of 2010. The benefit of the lower tax rate versus our original expectation was worth roughly $0.04 per share in Q1. I will talk more on the drivers behind the lower tax rate in a moment.

Fourth, we had significant free cash flow in the first quarter. Free cash flow was $472 million. While we have been successful in generating substantial free cash flow on an annual basis, since 2004 our first quarter free cash flow was usually negative. This quarter was the first time in the last 10 years that we have changed that pattern.

Fifth, retail sales of LCD televisions and IT products during the first quarter were stronger than our forecast. As a result, we are raising our 2010 unit forecast for all LCD products. We are also increasing our glass market forecast from the previous range of 2.8-3 billion square feet to 2.9-3.1 billion square feet. This represents glass volume growth of between 18-27% over last year versus our previous estimate of 14-22%.

Sixth, we expect LCD glass volumes at our wholly owned business and SCP to be up in the mid single digits sequentially in the second quarter, separately and in the aggregate. Glass prices are expected to decline slightly.

Lastly, based on the strong retail data in Q1 and expectations for the remainder of the year we believe inventories in the supply chain are at appropriate levels heading into Q2. I will walk you through our model in our Display discussion.

Now to the details. Our first quarter sales were $1.55 billion, a 1% increase from the fourth quarter and a 57% increase from a year ago. Our Q1 sales were negatively impacted by changes in exchange rates by about $17 million versus Q4.

Moving down the income statement, gross margin was 47.1% in Q1 compared to 42.4% in Q4. This improvement was the result of very strong manufacturing and higher volumes in our display business. Gross margin also benefited from the non-repeat of the $10 million in one-time accelerated depreciation charges taken in the fourth quarter due to the Taiwan power outage.

Regarding operating expense we are very pleased with our level of spending this quarter. SG&A was $235 million or 15% of sales. R&D was $145 million or about 9% of sales. Other income was $64 million in Q1 and consistent with Q4. Equity earnings were $469 million in the first quarter compared to $461 million in the fourth. First quarter equity earnings include a special item totaling $21 million relating to a manufacturing tax credit at Dow Corning. As a reminder, Q4 earnings at Dow Corning also had included a tax valuation gain of $29 million.

Now onto our tax rate. During the first quarter we made the decision to repatriate approximately $1 billion in cash from foreign subsidiaries. We plan on repatriating this cash to the United States later this year. As a result of this decision we are able to use excess foreign tax credits which have the impact of lowering our full-year effective tax rate in 2010 from our previous estimate of around 10% to around 2%. This was also in our tax rate for Q1 and the benefit for Q1 EPS was about $0.04. To be clear, this decision simply moves cash from overseas to the United States. It does not change the total cash balance for the company. I will have some additional comments on our longer-term tax rate in the outlook.

Net income excluding special items was $818 million in Q1 compared to $696 million in Q4. The impact from exchange rates was immaterial and more than offset by a balance sheet hedge gain in the quarter. We hedge our balance sheet against currency fluctuations. This resulted in a gain of about $7 million in Q1. We don’t expect this to repeat in Q2.

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