Corning Incorporated — 2023 First-Quarter Form 10-Q Summary
Business context and reporting period
Corning is a technology and materials company serving optical communications, display, specialty materials, environmental technologies, life sciences, and emerging growth markets. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Amounts are in millions unless otherwise stated.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $3,178 | $3,680 | Down 14% |
| Gross margin | $1,003; 32% | $1,283; 35% | Down $280; margin down 3 points |
| Operating income | $297 | $570 | Down 48% |
| Income before taxes | $228 | $783 | Down 71% |
| Net income attributable to Corning | $176 | $581 | Down 70% |
| Diluted EPS | $0.20 | $0.68 | Down $0.48 |
| Operating cash flow | $(49) | $534 | Down $583 |
| Capital expenditures | $382 | $383 | Approximately flat |
| Cash and equivalents at period-end | $1,146 | $2,016 | Down $870 year over year |
Core net sales, a non-GAAP measure, were $3,367, down 10% from $3,744. Core net income was $350, or $0.41 per diluted share, compared with $465, or $0.54 per diluted share. Core results exclude items including currency effects, translated earnings contracts, acquisition-related costs, restructuring and impairment charges, pension mark-to-market adjustments, and other unusual items.
Revenue and segment performance
| Segment | Q1 2023 sales | Year-over-year change | Q1 2023 segment net income |
|---|---|---|---|
| Optical Communications | $1,125 | Down 6% | $159 |
| Display Technologies | $763 | Down 20% | $160 |
| Specialty Materials | $406 | Down 18% | $39 |
| Environmental Technologies | $431 | Up 5% | $82 |
| Life Sciences | $256 | Down 17% | $9 |
| Hemlock and Emerging Growth Businesses | $386 | Up 3% | $16 |
Reported consolidated sales declined primarily because of lower Display Technologies, Specialty Materials, Optical Communications, and Life Sciences volumes. Foreign exchange movements reduced consolidated sales by approximately $116 and gross margin by approximately $75 compared with Q1 2022.
Liquidity, debt, and cash flow
- Working capital was $2,104, with a current ratio of 1.4:1.
- Total debt was $6,851, including $6,654 of long-term debt; debt represented approximately 36% of total capital.
- Corning had no commercial paper outstanding and no borrowings under its $1,500 revolving credit facility or approximately $188 Japanese yen liquidity facility.
- Available credit capacity also included approximately $333 of Chinese yuan facilities. Borrowings under Chinese yuan loan facilities totaled $343.
- Management stated that liquidity was sufficient to fund operations, acquisitions, capital expenditures, debt repayments, dividends, and share repurchases through 2023.
- Operating cash flow was negative, primarily because of lower earnings and working-capital outflows. Corning accelerated collection of $435 of receivables through factoring and supply-chain finance programs during the quarter.
- Cash used in financing activities was $248, including $239 of dividends. No open-market share repurchases occurred during the quarter, although approximately $3.3 billion remained available under the repurchase authorization.
- Capital expenditures were $382, and management expected full-year 2023 capital expenditures to be slightly below 2022 levels.
Material changes versus the prior comparable period
- Sales fell 14%, with the largest segment decline in Display Technologies due to lower panel-maker utilization and volumes.
- Gross margin declined from 35% to 32%, reflecting lower volumes, higher production costs, inflation, and unfavorable currency effects.
- GAAP net income attributable to Corning declined by $405, while diluted EPS declined from $0.68 to $0.20.
- Translated earnings contracts produced an $8 loss versus a $129 gain in Q1 2022, a $137 unfavorable pretax change.
- The translation gain on Japanese yen-denominated debt declined to $18 from $84.
- Environmental Technologies was the strongest reportable segment, with sales up 5% and segment net income up 11%.
- Operating cash flow changed from $534 of inflow to $49 of outflow.
- Corning paid no open-market share repurchases in Q1 2023, compared with $151 of purchases in Q1 2022.
Guidance, commentary, risks, and unusual items
Management expected core net sales of approximately $3.4 billion to $3.6 billion for the second quarter of 2023. Management stated that pricing actions, productivity improvements, and inventory normalization were beginning to improve profitability and cash generation and were expected to provide further benefits during 2023.
- Key demand risks include slow recovery in display-panel utilization, weaker smartphone, tablet, and notebook demand, lower COVID-related life-science demand, and customer inventory reductions.
- Material risks include inflation, interest rates, foreign exchange volatility, supply-chain disruption, geopolitical and trade tensions, customer concentration and creditworthiness, technology changes, cybersecurity, intellectual-property loss, litigation, regulatory developments, and changes in tax laws.
- Corning had approximately $1.2 billion of customer deposits and $863 of deferred revenue at March 31, 2023, principally related to long-term supply agreements.
- Environmental reserves were approximately $101 for 19 hazardous-waste sites. Management considered the likelihood of a material adverse effect from legal proceedings remote.
- Corning reported a $358 receivable for disputed South Korean tax amounts deposited while appeals proceed; management believed it was more likely than not to prevail.
- The remaining approximately $507 payment related to the Samsung Display share repurchase agreement was made in April 2023, after the reporting date.
- Other unusual items affecting Q1 2023 included $66 of restructuring, impairment, and other charges, $34 of acquisition-related costs, $20 of gains on asset sales, and $10 of pension mark-to-market adjustments in the core reconciliation.
- Disclosure controls were effective as of March 31, 2023, and the company reported no material change in internal control over financial reporting.
Facts investors should verify
- Whether the stated Q2 core sales outlook of $3.4 billion to $3.6 billion was achieved and whether demand recovered in Display Technologies, Optical Communications, and Life Sciences.
- Whether pricing, productivity, and inventory actions improved gross margin and operating cash flow in subsequent quarters.
- The sustainability of liquidity after the April 2023 $507 payment, dividends, capital expenditures, and any future share repurchases.
- The extent to which negative operating cash flow was affected by temporary working-capital timing and receivables factoring.
- Foreign exchange exposure, translated earnings contract results, and the impact of Japanese yen and South Korean won movements on reported earnings.
- Developments in the South Korean tax appeals, environmental matters, and other commitments and contingencies.
- Reconciliations between GAAP results and management’s non-GAAP core measures when assessing underlying performance.