Corning Incorporated 2021 Q3 Form 10-Q Summary
Business context and reporting period
Corning Incorporated filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company operates through Display Technologies, Optical Communications, Specialty Materials, Environmental Technologies, Life Sciences, and All Other. All Other includes the consolidated Hemlock Semiconductor Group (HSG) business beginning September 9, 2020.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $3.615 billion | $3.001 billion | $10.406 billion | $7.953 billion |
| Gross margin | $1.321 billion; 37% | $1.001 billion; 33% | $3.792 billion; 36% | $2.318 billion; 29% |
| Operating income | $552 million; approximately 15.3% of sales | $257 million; approximately 8.6% | $1.629 billion; approximately 15.7% | $33 million; approximately 0.4% |
| Net income attributable to Corning | $371 million | $427 million | $1.419 billion | $260 million |
| Diluted EPS | $0.43 | $0.48 | $0.71 | $0.24 |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $2.389 billion | $1.406 billion |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $1.014 billion | $986 million |
- Reported sales increased 20% in Q3 and 31% for the first nine months. Core sales increased 21% and 28%, respectively, excluding foreign currency and other adjustments.
- Core net income increased to $485 million in Q3 from $380 million, and to $1.346 billion for the nine months from $775 million. Core diluted EPS was $0.56 in Q3 and $1.53 for the nine months.
- Nine-month operating cash flow less capital expenditures was approximately $1.375 billion, compared with approximately $420 million in the prior-year period.
- At September 30, 2021, cash and cash equivalents were $2.212 billion, compared with $2.672 billion at December 31, 2020. Working capital was $3.342 billion and the current ratio was 1.8:1.
- Total debt was $7.069 billion, down from $7.972 billion at year-end 2020. Long-term debt was $7.019 billion, and no commercial paper was outstanding.
- Debt-to-total-capital was 36%, versus 37% at December 31, 2020. Corning had access to a $1.5 billion revolving credit agreement and was in compliance with its 60% maximum leverage covenant.
Material changes versus the prior comparable period
- Sales growth was broad-based. Q3 segment sales increased 24% in Optical Communications, 37% in Life Sciences, 16% in Display Technologies, 2% in Environmental Technologies, and 209% in All Other; Specialty Materials declined 2%.
- For the nine months, segment sales increased 18% in Display Technologies, 21% in Optical Communications, 11% in Specialty Materials, 33% in Environmental Technologies, 27% in Life Sciences, and 297% in All Other, primarily because HSG was consolidated for a larger portion of the period.
- Q3 GAAP net income declined 13% despite higher operating performance because the prior-year quarter included a $498 million pretax, approximately $387 million after-tax, gain on Corning’s previously held HSG investment.
- Gross margin improved by four percentage points in Q3 and seven percentage points for the nine months. Improvement reflected higher sales and the absence of substantial 2020 restructuring, impairment, and capacity-realignment charges, partly offset by higher freight, logistics, inflation, and raw-material costs.
- There was no material restructuring, impairment, or other charges activity in the first nine months of 2021, compared with $733 million in such charges in the first nine months of 2020.
- Corning completed the conversion of its Series A preferred stock into 115 million common shares and repurchased 35 million of those shares for approximately $1.5 billion. The transaction reduced retained earnings and net income available to common shareholders by $803 million and created approximately $1.0 billion of remaining payment obligations.
- Nine-month financing cash outflows increased to $1.990 billion, driven by debt repayments, the preferred-stock-related payment, dividends, and other financing uses.
Guidance, outlook, commentary, and risks
Management expects core net sales of approximately $3.5 billion to $3.7 billion for the fourth quarter of 2021. Management stated that it expects to maintain a strong cash balance and generate positive free cash flow, and believes liquidity is sufficient to fund operations, acquisitions, capital expenditures, debt repayments, and dividends.
- Management continues to emphasize its Strategy & Growth Framework, with approximately 80% of research, development and engineering investment and capital spending directed toward three core technologies, four manufacturing and engineering platforms, and five market-access platforms.
- COVID-19-related uncertainty, supply-chain disruption, semiconductor and automotive component shortages, inflation, freight and logistics costs, foreign-exchange volatility, customer demand, geopolitical and trade risks, and commodity-price changes remain key operating risks.
- Foreign currency movements adversely affected Q3 consolidated net income by approximately $19 million and the nine-month result by approximately $20 million versus the prior-year periods. The company uses extensive foreign-exchange hedging.
- Corning had approximately $1.3 billion of customer deposits and $932 million of deferred revenue at September 30, 2021, primarily related to long-term supply agreements and HSG contracts.
- Corning had accrued approximately $60 million for environmental cleanup and related litigation, $38 million for asbestos claims, and $35 million for asbestos and other litigation in non-current liabilities. Management considers a materially adverse outcome from disclosed contingencies remote.
- Corning is appealing South Korean tax assessments and refund claims; non-current receivables related to the appeals totaled $350 million. Management believes it is more likely than not that the company will prevail.
- Third-quarter core adjustments included a $20 million bond-redemption loss, facility-related write-offs and charges associated with power outages, and other restructuring, legal, acquisition, currency, and accounting items. The company is pursuing applicable property-insurance recoveries.
Important facts for investors to verify
- Reconcile GAAP results with core net income and core EPS, particularly the HSG-related gain in 2020 and the preferred-stock transaction in 2021.
- Assess the sustainability of gross-margin improvement after excluding the favorable comparison from 2020 restructuring and impairment charges.
- Monitor Optical Communications and Life Sciences demand, Display Technologies pricing and volumes, and Environmental Technologies exposure to automotive semiconductor shortages.
- Review the timing and funding of the approximately $1.0 billion of remaining payments related to the Samsung Display share repurchase agreement.
- Verify foreign-exchange sensitivity, hedging results, and the potential earnings impact of yen, won, yuan, euro, and Taiwan dollar movements.
- Track customer deposits, deferred revenue, working-capital trends, and cash conversion as capital spending remains approximately $1 billion annually.
- Review tax appeals, environmental and asbestos claims, HSG contractual obligations, and other legal contingencies for changes in reserve requirements.