Business Context and Reporting Period
Corning Incorporated filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2023. Corning operates through Optical Communications, Display Technologies, Specialty Materials, Environmental Technologies, Life Sciences, and Hemlock and Emerging Growth Businesses. Its products serve telecommunications, displays, consumer electronics, automotive emissions control, laboratory, solar, and semiconductor markets.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Net sales | $3.243 billion | $3.615 billion | $6.421 billion | $7.295 billion |
| Gross margin | $1.013 billion; 31% | $1.246 billion; 34% | $2.016 billion; 31% | $2.529 billion; 35% |
| Operating income | $279 million | $490 million | $576 million | $1.060 billion |
| Net income attributable to Corning | $281 million | $563 million | $457 million | $1.144 billion |
| Diluted EPS | $0.33 | $0.66 | $0.53 | $1.33 |
| Core net income | $388 million | $489 million | $738 million | $954 million |
| Core diluted EPS | $0.45 | $0.57 | $0.86 | $1.11 |
Calculated GAAP operating margin was approximately 8.6% in the second quarter and 9.0% for the first six months. GAAP net margin was approximately 8.7% and 7.1%, respectively. Core net income declined 21% in the quarter and 23% year to date.
- Second-quarter segment sales were led by Optical Communications at $1.066 billion, Display Technologies at $928 million, Environmental Technologies at $457 million, Specialty Materials at $423 million, Life Sciences at $231 million, and Hemlock and Emerging Growth Businesses at $377 million.
- Environmental Technologies was the strongest growth segment, with sales up 28% in the quarter and 16% year to date, driven by automotive products, including gasoline particulate filters, and heavy-duty diesel products.
- Optical Communications sales declined 19% in the quarter and 13% year to date, primarily because of the timing of carrier and enterprise customer projects.
- Life Sciences sales declined 26% in the quarter and 22% year to date because of lower COVID-related demand and customer inventory reductions.
- Research, development and engineering expense increased 10% in the quarter and 6% year to date, while selling, general and administrative expense declined 9% and 6%, respectively.
Cash Flow, Balance Sheet, Debt, and Liquidity
| Metric | June 30, 2023 | December 31, 2022 |
|---|---|---|
| Cash and cash equivalents | $1.538 billion | $1.671 billion |
| Working capital | $2.882 billion | $2.278 billion |
| Current ratio | 1.7:1 | 1.4:1 |
| Total debt | $7.624 billion | $6.911 billion |
| Long-term debt | $7.437 billion | $6.687 billion |
| Debt to total capital | 39% | 36% |
- Six-month operating cash flow was $570 million, down from $1.292 billion in the prior-year period, primarily due to lower net income and working-capital effects.
- Capital expenditures were $770 million, compared with $736 million in the prior-year period. Management expects full-year 2023 capital expenditures to be slightly lower than in 2022.
- Investing cash use was $515 million; financing cash use was $164 million. The company paid $495 million of dividends and approximately $507 million related to the remaining Samsung Display repurchase obligation.
- Corning issued euro-denominated notes totaling €850 million in May 2023, generating approximately $918 million of net proceeds. The notes mature in 2026 and 2031 and are designated as net investment hedges.
- Corning had no commercial paper outstanding and reported available credit capacity of $1.500 billion under its U.S. revolving facility, approximately $173 million under a Japanese yen facility, and approximately $369 million under Chinese yuan facilities. It was in compliance with its maximum 60% leverage covenant.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales fell 10%, and first-half sales fell 12%, reflecting weaker Optical Communications, Specialty Materials, Life Sciences, and, year to date, Display Technologies performance. Foreign exchange reduced sales by $79 million in the quarter and $195 million year to date.
- Gross margin declined three percentage points in the quarter and four percentage points year to date. Management cited inflationary and production costs, foreign exchange, and incremental severance, asset write-offs, and related charges of $36 million in the quarter and $65 million year to date versus the prior-year periods.
- Second-quarter net income attributable to Corning declined 50%, while first-half net income declined 60%. The reductions were amplified by lower translated earnings contract gains: $116 million versus $196 million in the quarter and $108 million versus $325 million year to date.
- Core segment net income declined 16% in the quarter and 18% year to date. Environmental Technologies partially offset declines in Optical Communications, Display Technologies, Specialty Materials, and Life Sciences.
- Cash from operations declined $722 million year to date, while total debt increased $713 million from year-end 2022, primarily reflecting the euro note issuance.
- Accumulated other comprehensive loss increased to $2.199 billion from $1.830 billion, primarily due to foreign currency translation losses.
Guidance, Outlook, Commentary, and Risks
- Management expects third-quarter 2023 core net sales of approximately $3.5 billion.
- Management stated that pricing actions, productivity improvements, staffing normalization, and inventory reductions began producing notable benefits in the first half of 2023 and are expected to improve profitability and cash flow during 2023.
- Management described liquidity as strong and expects operating cash flow, cash balances, debt capacity, and credit facilities to fund operations, capital expenditures, dividends, scheduled debt repayments, and potential acquisitions or repurchases.
- Key risks include global economic weakness, inflation and interest rates, foreign exchange volatility, especially involving the yen, won, yuan, euro, and Taiwan dollar, geopolitical and trade tensions, supply-chain disruptions, customer demand and concentration, technology and pricing competition, cyberattacks, intellectual-property protection, commodity and utility costs, litigation, regulatory developments, tax audits, and the ability to execute pricing and cost-reduction actions.
- Corning had approximately $1.2 billion of customer deposits and $840 million of deferred revenue at June 30, 2023, primarily associated with long-term supply agreements. These balances create future delivery and revenue-recognition obligations.
- Environmental cleanup and related litigation reserves were approximately $94 million. Management stated that the potential material adverse effect of outstanding legal matters is remote; a potential Dow-related environmental indemnity liability was considered probable but immaterially reserved.
- A South Korean tax dispute resulted in a $99 million refund during the second quarter. A further $256 million remained deposited with the South Korean government at June 30, 2023, and management believes it is more likely than not to prevail in the appeals.
Most Important Facts for Investors to Verify
- Whether the expected third-quarter core sales of approximately $3.5 billion are achieved and whether demand improves in Optical Communications, Display Technologies, and Life Sciences.
- Whether pricing, productivity, staffing, and inventory actions restore gross margins and operating cash flow.
- The sustainability and quality of core earnings versus GAAP earnings, given the material impact of foreign exchange hedges, currency translation, restructuring, asset charges, and other exclusions.
- Debt repayment capacity and leverage following the $918 million euro note issuance, including foreign exchange effects on the net investment hedges.
- Progress on the South Korean tax appeals and recovery of the remaining $256 million deposit.
- Customer demand, inventory normalization, customer deposits, deferred revenue, and the risk of cancellations or delayed deliveries under long-term supply agreements.
- Exposure to environmental, litigation, trade, geopolitical, cyber, supply-chain, and major-customer risks described in the filing.