Corning Incorporated — Q3 2023 Form 10-Q Summary
Business context and reporting period
Corning Incorporated designs and manufactures specialty glass, ceramics, optical communications products, display substrates, environmental technologies, life sciences products, and polysilicon-related products. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods. Reportable segments are Optical Communications, Display Technologies, Specialty Materials, Environmental Technologies, and Life Sciences, with Hemlock and Emerging Growth Businesses reported separately.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $3.173 billion | $3.488 billion | $9.594 billion | $10.783 billion |
| Gross margin | $1.004 billion; 32% | $1.062 billion; 30% | $3.020 billion; 31% | $3.591 billion; 33% |
| Operating income | $236 million | $292 million | $812 million | $1.352 billion |
| Net income attributable to Corning | $164 million | $208 million | $621 million | $1.352 billion |
| Diluted EPS | $0.19 | $0.24 | $0.72 | $1.58 |
| Core net income | $386 million | $438 million | $1.124 billion | $1.392 billion |
| Core diluted EPS | $0.45 | $0.51 | $1.31 | $1.62 |
- Q3 operating margin was approximately 7.4%, versus approximately 8.4% in the prior-year quarter. Nine-month operating margin was approximately 8.5%, versus approximately 12.5% in 2022.
- Q3 net margin attributable to Corning was approximately 5.2%; nine-month net margin was approximately 6.5%.
- Net cash provided by operating activities was $1.292 billion for the nine months, down from $1.998 billion. Capital expenditures were $1.111 billion, compared with $1.201 billion.
- Cash and cash equivalents were $1.639 billion at September 30, 2023, compared with $1.671 billion at December 31, 2022.
- Total debt was $7.507 billion, including $7.210 billion of long-term debt, versus $6.911 billion and $6.687 billion, respectively, at year-end 2022. Debt-to-total-capital was 39%, compared with 36%.
- Working capital was $3.013 billion and the current ratio was 1.7:1. Available credit capacity included a $1.5 billion U.S. revolving facility, approximately $167 million of Japanese yen liquidity capacity, and approximately $404 million of Chinese yuan facilities. No commercial paper was outstanding.
- Corning issued approximately $918 million of net proceeds from euro-denominated notes in May 2023, consisting of 3.875% notes due 2026 and 4.125% notes due 2031.
Material changes versus the prior comparable period
- Q3 sales declined 9% and nine-month sales declined 11%, primarily due to lower Optical Communications, Life Sciences, and Hemlock and Emerging Growth Businesses sales. Foreign exchange reduced reported sales by $92 million in Q3 and $287 million for nine months.
- Optical Communications sales decreased 30% in Q3 and 19% for nine months as carriers reduced orders while drawing down inventory. Segment net income fell 50% in Q3 and 27% for nine months.
- Display Technologies sales increased 42% in Q3 and 6% for nine months, driven by higher volumes and recovery of panel-maker utilization. Segment net income increased 81% in Q3 and 2% for nine months.
- Environmental Technologies sales increased 6% in Q3 and 12% for nine months, supported by automotive demand and gasoline particulate filter adoption in China. Segment net income rose 14% and 29%, respectively.
- Life Sciences sales declined 26% in Q3 and 23% for nine months due to lower COVID-related demand in China and customer inventory reductions. Segment net income declined 70% and 73%, respectively.
- Gross margin percentage improved in Q3 because of pricing, productivity, and inventory-normalization actions, but declined for the nine-month period because of inflationary and production costs and unfavorable foreign exchange.
- Foreign currency translation losses in other comprehensive income were $191 million in Q3 and $593 million for nine months, compared with losses of $685 million and $1.535 billion in the prior-year periods.
- Severance charges were $86 million for the first nine months of 2023, versus $8 million in 2022. Disposal of assets and other charges were $184 million, primarily related to asset write-offs.
Guidance, outlook, commentary, risks, and unusual items
- Management expects fourth-quarter 2023 core net sales of approximately $3.25 billion.
- Management stated that pricing, productivity restoration, and inventory normalization improved profitability and cash generation during 2023. Full-year 2023 capital expenditures are expected to be slightly below 2022 levels.
- Management described liquidity as strong and expects operating cash flow, existing cash, and debt capacity to fund operations, capital expenditures, debt repayments, dividends, and potential share repurchases.
- Management cited risks from global economic conditions, inflation, interest rates, foreign exchange, customer demand and inventory levels, carrier spending, semiconductor and consumer electronics cycles, commodity and utility costs, supply-chain disruption, geopolitical tensions and trade restrictions, cybersecurity, intellectual property, litigation, tax audits, regulation, and the timing of capital spending.
- Corning had approximately $1.2 billion of customer deposits and $854 million of deferred revenue at September 30, 2023, primarily associated with long-term supply agreements. These balances may support future product deliveries but also create performance obligations.
- Corning is involved in environmental and other legal matters. Environmental cleanup and related litigation reserves were approximately $90 million at September 30, 2023. Management considers the likelihood of a material adverse effect from disclosed contingencies to be remote.
- Corning Precision Materials had approximately $255 million deposited with the South Korean government in connection with disputed tax assessments and refund claims. Management believes it is more likely than not to prevail in the appeals.
- The Board declared a $0.28-per-share dividend payable December 15, 2023. Approximately $3.3 billion remained available under the 2019 share repurchase authorization; no open-market repurchases occurred during the first nine months of 2023.
Most important facts for investors to verify
- Whether carrier inventory reductions in Optical Communications reverse and whether the segment returns to growth.
- Whether pricing and productivity initiatives offset inflation, production costs, and foreign-exchange pressure without weakening demand.
- Progress toward the approximately $3.25 billion fourth-quarter core-sales outlook and the relationship between core and GAAP results.
- Free-cash-flow conversion after capital expenditures, dividends, customer-receivable factoring, and debt-service requirements.
- The sustainability of the 39% debt-to-capital ratio following the 2023 euro note issuance and the effect of higher interest expense.
- Exposure to customer concentration, long-term supply-agreement deposits, inventory normalization, and potential changes in customer demand.
- Status and ultimate resolution of South Korean tax appeals, environmental matters, litigation, and asset-write-off or severance activity.