Corning Incorporated — Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed this Form 10-Q for the quarter and six months ended June 30, 2022. Its principal businesses include Optical Communications, Display Technologies, Specialty Materials, Environmental Technologies, Life Sciences, and Hemlock and Emerging Growth Businesses.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $3,615 million | $3,501 million | $7,295 million | $6,791 million |
| Gross margin | $1,246 million; 34% | $1,315 million; 38% | $2,529 million; 35% | $2,471 million; 36% |
| Operating income | $490 million | $575 million | $1,060 million | $1,077 million |
| Net income attributable to Corning | $563 million | $449 million | $1,144 million | $1,048 million |
| Diluted EPS | $0.66 | $(0.42) | $1.33 | $0.27 |
| Core net income | $489 million | $459 million | $954 million | $861 million |
| Core diluted EPS | $0.57 | $0.53 | $1.11 | $0.97 |
- Six-month operating cash flow was $1,292 million, compared with $1,494 million in the prior-year period. The decrease was primarily attributable to higher inventories.
- Capital expenditures were $736 million in the first half of 2022, compared with $613 million in the prior-year period. Management expected full-year 2022 capital expenditures to be consistent with 2021.
- Cash and cash equivalents were $1,629 million at June 30, 2022, down from $2,148 million at December 31, 2021. Approximately 64% of cash was held outside the United States.
- Total debt was $6,798 million, including $6,677 million of long-term debt. Debt-to-total-capital was 36%, versus a 60% maximum covenant level.
- Working capital was $2,353 million and the current ratio was 1.4:1, compared with $2,853 million and 1.6:1 at year-end 2021.
- Corning had no outstanding commercial paper and no borrowings under its $1.5 billion revolving credit facility or approximately $184 million Japanese yen liquidity facility.
- Dividends paid during the first half were $462 million, and common-stock repurchases were approximately $204 million.
Material changes versus the prior comparable period
- Reported sales increased 3% in the quarter and 7% year to date. Core sales, which exclude currency effects, increased 7% and 11%, respectively.
- Optical Communications sales increased 22% in the quarter and 25% year to date, driven by carrier and enterprise demand for 5G, broadband, and cloud products. Segment net income increased 23% and 34%, respectively.
- Hemlock and Emerging Growth Businesses sales increased 45% in the quarter and 42% year to date, primarily because of strong solar-product demand. The group moved from a $15 million loss to $25 million of income in the quarter and from a $39 million loss to $17 million of income year to date.
- Display Technologies sales declined 6% in the quarter because of lower volumes but increased 2% year to date. Segment quarterly net income decreased 8%.
- Environmental Technologies sales declined 13% in the quarter and 10% year to date, primarily because of automotive production constraints related to semiconductor shortages, the Russia-Ukraine war, and COVID-19 lockdowns in China. Segment net income declined 23% and 12%, respectively.
- Life Sciences sales were flat in the quarter and increased 2% year to date, while segment net income declined 29% and 21%, respectively, due largely to lower COVID-related product demand and supply-chain disruptions.
- Gross margin declined four percentage points in the quarter and one percentage point year to date. Management cited higher production, material, and freight costs; foreign-exchange translation also adversely affected gross margin.
- Net income benefited from translated earnings contract gains of $196 million in the quarter and $325 million year to date, as well as translation gains on Japanese yen-denominated debt of $153 million and $237 million, respectively.
- The prior-year quarter and first half included an $803 million reduction in income available to common shareholders related to the repurchase and retirement of converted preferred-stock shares, which caused negative second-quarter 2021 EPS. This makes reported EPS comparisons unusually favorable in 2022.
Guidance, outlook, commentary, and risks
- Management projected third-quarter 2022 core net sales of approximately $3.65 billion to $3.85 billion.
- Management stated that its growth framework, key growth drivers, operating cash flow generation, and investments in core technologies and manufacturing platforms remained intact.
- Management expected to maintain a strong cash balance, generate positive free cash flow, and have sufficient liquidity to fund operations, acquisitions, capital expenditures, debt repayments, dividends, and share repurchases.
- Key risks include COVID-19 impacts, global economic and geopolitical conditions, supply-chain and logistics disruption, semiconductor shortages, commodity and energy costs, foreign-exchange volatility, customer demand and concentration, competition and pricing, regulatory and legal matters, cyberattacks, intellectual-property risks, and the timing and returns of capital spending.
- Environmental cleanup reserves were approximately $86 million at June 30, 2022, compared with $55 million at December 31, 2021. Management considered the risk of a materially higher loss remote.
- Corning was appealing certain South Korean tax assessments and refund claims and had recorded non-current receivables of $342 million related to the appeals. Management believed it was more likely than not to prevail.
- Customer deposits were approximately $1.2 billion and primarily represented non-refundable amounts under long-term supply agreements. Deferred revenue was approximately $892 million, primarily related to Hemlock contracts.
- The filing states that there were no material changes to the risk factors, off-balance-sheet arrangements, or contractual obligations disclosed in the 2021 Form 10-K.
Important facts for investors to verify
- Reconcile GAAP results with core results, particularly the $196 million quarterly translated-earnings contract gain, $153 million yen-debt translation gain, and other excluded items.
- Assess whether higher production, material, freight, repair, and non-operational costs continue to pressure gross and operating margins.
- Monitor Optical Communications and Hemlock growth against weakness in Environmental Technologies, Display Technologies volumes, and Life Sciences demand.
- Evaluate working-capital trends, especially the $354 million increase in inventories from year-end and the decline in operating cash flow.
- Confirm execution of the third-quarter core-sales outlook and the expectation that full-year capital expenditures will remain consistent with 2021.
- Review foreign-exchange exposure and hedge performance, including translated-earnings contracts with aggregate gross notional value of approximately $9.1 billion.
- Track environmental liabilities, South Korean tax appeals, legal and regulatory costs, customer deposits, and the remaining obligations related to the Samsung Display share repurchase agreement.