Corning (GLW - Analyst Report) has reported first-quarter core earnings of 35 cents, ahead of the Zacks Consensus Estimate of 33 cents. The Optical segment was the high point of the quarter, benefiting from a recent acquisition and strong demand.

Revenue

Reported revenue of $2.23 billion, dropped 5.8% sequentially, 1.0% year over year and were 8.6% below the Zacks Consensus Estimate. Core revenues were higher at $2.43 billion.

The Display Technologies segment generated around 40% of total revenue. Segment revenue was down 13.4% sequentially and up 0.6% year over year. LCD glass volumes increased at a high-teens percentage rate from last year, with a greater-than-expected moderation in glass price declines.

Optical Communications (29% of revenue) grew 3.1% sequentially and 17.5% from the year-ago quarter. The results were driven by continued strength in FTTH sales in North America as well as the contribution from the recent acquisition of TR Manufacturing.

The Environmental Technologies segment generated around 12% of revenue, up 12.8% sequentially and 2.5% year over year. The strength was attributed to continued strength in Corning’s heavy-duty diesel emissions products.

Specialty Materials generated 11% of revenue, down 14.7% sequentially and up 4.2% year over year. Sales came ahead of expectations, driven by increased demand for the new Gorilla Glass (GG). GG volumes grew more than 20%, but the strength was partially offset by weakness in advanced optics sales.

The Life Sciences business accounted for around 8% of revenue. The business was down 8.4% sequentially and 6.2% from a year ago.

Margins

The gross margin was 47.2%, down 114 bps sequentially and up 635 bps from last year.

The operating expenses of $530 million were up 64.1% sequentially and down 11.8% year over year. R&D was down as a percentage of sales from both previous and year-ago quarters. SG&A increased 1,020 bps sequentially, but was down 273 bps from last year. As a result, the operating margin shrank 1,110 bps sequentially while expanding 921 bps from the year-ago quarter.

Net Income

Corning’s core net earnings were $484 million, or 21.4% of sales compared to $630 million or 26.2% in the previous quarter and $320 million, or 14.0% in the year-ago quarter. Net income on a GAAP basis was $407million ($0.29 a share) compared to $988 million ($0.70) in the previous quarter and $301 million ($0.22 a share) in the Mar quarter of 2014.

Balance Sheet and Cash Flow

Inventories were up 0.7% during the quarter, with inventory turns going from 3.8X to 3.6X. DSOs went down from 57 to around 60. Corning ended the quarter with $5.07 billion in cash and short-term investments, down $1.00 billion during the quarter.

However, the company has a huge debt balance. Including long-term liabilities and short-term debt, the net debt position was $1.10 billion at the end of the quarter, which increased significantly from the net debt balance of $55 million at the beginning of the quarter.

Cash generated from operations was $601 million, with the main uses of cash being $333 million on capex, $531 million on acquisitions, $477 million on share repurchases and $177 million on dividends.

Guidance

The first and second quarters are seasonally slower for the glass business, although Corning is expected to grow sales from the respective year-ago quarters. Second quarter glass volumes are expected to increase in the low single-digit percentage rate with price declines moderating further.

Optical Communications sales are expected to grow at a mid-teens percentage rate year over year due to continued strength in carrier and enterprise networks, Environmental to be down mid-single digits impacted by a weaker euro, Specialty Materials to decline at a mid-single digit rate due to advanced optics weakness and Life Sciences to be also decline slightly on account of currency.

Corning didn’t mention any change in the effective tax rate for the year, which may be assumed to remain at 18% and full-year capex $1.3-1.4 billion.

Recommendation

Corning’s first-quarter earnings were ahead of expectations, sending shares up. All major segments exceeded expectations and integration of CPM is also yielding desired results.

Currency remains a major headwind, however, because of the strengthening dollar versus the yen, but Corning has hedge contracts in place that are expected to protect its results. Management has said that 100% of 2015 earnings, 80% of 2016 earnings and 70% of 2017 earnings have been hedged under the new program.

The company is also returning cash to investors both as share repurchases and dividends, increasing the dividend by 20% last December and authorizing a new share repurchase program of $1.5 billion.

Corning shares carry a Zacks Rank #4 (Sell). Safer bets in the technology sector are Analog Devices (ADI - Analyst Report), which carries a Zacks Rank #1 (Strong Buy), Apple (AAPL - Analyst Report), with a Zacks Rank #2 (Buy) or Facebook (FB - Analyst Report), which also has a Zacks Rank #2.