Mr. Market wasn't pleased with Corning's (NYSE:GLW) Q2 earnings report. Ever since the news broke Wednesday, the stock has fallen, maxing out at a 10% decline before this morning's rebound. (Let's hope the resurgence sticks.) What's got investors seeing streaks and smears at the glass maker? That's what we're here to find out.

First, a rundown of the highlights:

  • Corning earned $0.30 per share in Q2. It would have earned $0.34, but for a charge to earnings. (The value of the stock the company had contributed to an asbestos litigation settlement fund rose more quickly than expected.) That worked out to a 6% decline in earnings per share.
  • Sales grew 12.4%, and the firm earned a record 46.5% gross margin on those sales.
  • Operating margin dropped precipitously -- but illusorily, since the asbestos litigation charge mentioned above combined with a nearly equal-and-opposite benefit in last year's Q2 to magnify the difference in operating margin. Likewise with the net margin, with dropped to 34.5% from last year's 40.8%. (Speaking of which, if you're wondering why Corning nets nearly as much as it grosses, its gross margin does not include profit from the firm's equity interests in other companies, including Dow Corning and Samsung Corning Precision Glass.)

These contradictory signals, required by GAAP accounting standards, are one of the reasons why I prefer to judge companies not by their "accounting profits," but by their "cash profits" -- free cash flow. As mentioned in last week's Foolish Forecast, we had high hopes that Corning's free cash flow would look good this quarter. After all, CEO Wendell Weeks expressed confidence in his firm's ability to "generate positive free cash flow in the future."

So how'd that work out?
A heck of a lot better than last year, actually ... if not quite as well as we'd been led to expect. Compared to Q2 2006, operating cash flow surged nearly 150% year over year, to $475 million. However, that sum still didn't top Corning's $489 million in net profit. Moreover, once you subtract out capital expenditures for the quarter, you see that free cash flow was a measly $271 million.

Maybe it's wrong to quibble about this. After all, Weeks was as good as his word in producing free cash flow this quarter, compared to negative free cash flow a year ago. Still, the firm has only generated $202 million worth of the green stuff year to date. If the rest of the year tracks this performance, that means Corning's stock sells for roughly 93 times its cash profit production. Call me stingy, but that seems like a mighty pricey pane of glass.

Track Corning's progress in recent quarters here:

And did you miss our interview with Wendell Weeks? Catch it now, in two bite-size segments:

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.