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Text: These factors are detailed in the company's financial reports.
You should also note that we will be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data.
Our core performance measures are non-GAAP measures used by management to analyze the business.
Reconciliation of core results to comparable GAAP value can be found in the investor relations section of our website at corning.com.
You may also access core results on our website with downloadable financials in the interactive analyst center.
We encourage you to follow along.
They're also available on our website for downloading.
Today, we reported third quarter results demonstrating that the company is strong, financially healthy and well positioned for growth.
Sales were $3 billion, up 16% sequentially.
EPS grew 72% sequentially to $0.43, as higher sales and strong manufacturing execution resulted in operating margin expanding to 18.3%, up 710 basis points sequentially and 20 basis points year-over-year.
We generated $518 million of free cash flow and finished the quarter with $2.5 billion in cash.
Our financial performance has improved significantly since April, and we expect a strong fourth quarter.
Nevertheless, we remain vigilant and continue to adapt appropriately to multiple disruptive forces playing out around the world from the pandemic, the civil unrest to recession and geopolitical struggles.
We've been rising to the challenges since day one, and our priorities remain clear.
First, we must make our values evident in our actions.
Our commitment to the health, safety, and well-being of our employees underlines every facet of our operations.
We're dedicating resources and providing leadership to support our communities around the world.
We've launched Unity campaigns as well as racial and social equality programs targeting the multitude of hardships people are confronting right now.
And when it comes to the global health fight, we're all in, mobilizing our capabilities to combat the virus directly.
We must also safeguard our financial health.
Our third-quarter results show that our decisive actions are providing clear benefits as we leverage cost savings and increase efficiencies across the company.
Regardless of the depth or duration of global uncertainty, we're doing everything in our power to keep the company strong, and it's working.
Now to ensure that we emerge even stronger, we're continuing to invest to create additional revenue streams.
We're inventing new-to-the-world materials and manufacturing processes as well as co-innovating new solutions in partnership with our customers.
The relevance of our portfolio puts Corning at the heart of ongoing innovation with industry leaders, and we continue to solve our customers' toughest technology challenges.
You may have seen Apple's recent promotion of ceramic shield for the iPhone 12.
Their featuring are new-to-the-world material, which is the world's first, highly transparent color-free glass ceramic with performance that meets the rigorous demands put on smartphone cover materials.
This latest innovation with Apple exemplifies our ongoing strategy of consistent, long-term value creation by combining our deep expertise in glass science, ceramic science and optical physics with our unparalleled manufacturing and engineering capabilities.
Ceramic shield melds the attributes that we love about glass, create optics and retain strength with the attributes we love about ceramics, most notably, it's toughness.
Ceramics shield consist of ceramic crystals within a glass matrix.
There were two big inventions here.
The first was keeping the best damage-resistant attributes of both glass and ceramics.
The second was ensuring high optical transparency by growing index-matched nanocrystals inside the glass matrix that are one-tenth the wavelength of late.
As you recall, Apple made two investments in Corning, totaling $450 million, as part of their advanced manufacturing fund and their commitment to foster innovation among American manufacturers.
We could not be prouder to be a key component in the iPhone 12.
Now, it's important to note the iPhone 12, and many other flagship phones that we are also proud to be part of, support 5G.
5G matters to us.
The density of fiber necessary to deliver its promise is yet another example.
You've seen us illustrate that up to 100x more fiber is required to deploy 5G in a city than 4G.
This week, we announced a new product design to help operators dramatically boost the speed and reduce the cost of their outdoor deployments.
And we're embarking on new work to support Verizon's efforts to extend 5G indoors.
The relevance of our portfolio and our deep customer relationships, as illustrated by these advancements, keep us at the center of the inexorable shift to optical.
Stepping back, in all the industries we serve, important market trends offer new challenges.
The Corning is uniquely qualified to address and new opportunities to integrate more Corning content into products.
This is an especially powerful value creation lever in times of economic uncertainty, because we aren't exclusively relying on people buying more stuff.
We're putting more Corning into the products that people are already buying.
We are clearly seeing the benefits of this lever in today's results as innovation adoption drove specialty materials sales up 23% year-over-year despite a declining smartphone market.
This type of outperformance is not unique.
From 2016 to 2019, we added $500 million in sales, or 42% cumulatively, while smartphone sales actually went down.
And we're extending that growth streak this year.
In environmental technologies, we grew sales 16% in 2019, much faster than the underlying unit demand as automakers added gas particulate filters to cars.
And we, again, saw outperformance this quarter with sequential sales up 68%.
These are additional examples of the more Corning strategy at work and why the content story is so powerful for us.
I want to stress one additional point.
You often hear us say that our core technologies enable life-changing capabilities.
In these times, we're increasing focus on life-saving innovations.
Safe widespread vaccine delivery is one of society's top priorities, and glass packaging is critical.
Our Valor innovation will help enable faster filling line speeds and increased patient safety.
Right now, we're expanding capacity and supplying glass vials for vaccines as part of operation work speed, all while leveraging our leadership in life sciences to help support COVID diagnostic testing and virus research efforts.
Additionally, reduced fine particulate pollution, the objective of our filtration products, appears to be helpful for reducing infection rates.
And we're excited about recent university lab test, showing that our guardian antimicrobial glass particles, kill bacteria and viruses, including SARS-COV2.
We're also well-positioned to contribute as consumers continue to adapt to a world with social distancing.
For example, fiber increases the capacity and performance of networks, and glass provides the primary window to information and entertainment.
We're confident that we can bring further innovations to bear in many vital areas as the world addresses and recovers from these current challenges.
Overall, we had a very strong quarter on almost every dimension.
From an innovation perspective, I just reviewed our significant advancements.
Financially, we grew sales at double-digit rate sequentially and expanded margins to grow profitability even faster.
Operationally, we performed well, and I'd like to share a few examples.
In the midst of the pandemic, we deployed expert engineering teams to start-up our Gen 10.5 melting operations in both Wuhan and Guangzhou.
These facilities are positioning on us well to capture the fast-growing demand for large TVs.
In mobile consumer electronics, we successfully scaled up a new-to-the-world manufacturing process and product to meet Apple's iPhone launch.
In automotive, we flexed our operations to adjust to the fast pace ramp-up at OEMs after they significantly reduced production in Quarter 2.
In optical communications, we successfully adjusted our cost to the current market environment, resulting in significant profitability expansion, despite flattish sales, on a quarter-over-quarter basis.
We also remain vigilant in our actions to safeguard the company's financial strength.
We're proud of our execution, especially given the current global uncertainties.
Clearly, our employees around the world are dedicated to living our values and giving their best every day.
We had a very strong third quarter.
As Wendell highlighted, we executed effectively, and we bolstered our healthy balance sheet despite the ongoing macroeconomic challenges.
Sales growth and cost actions led to strong sequential margin expansion, further demonstrating that our operational adjustments are working.
We've made significant adjustments to align our cost and operating plan with the lower anticipated sales.
In total, Corning continues to demonstrate that it has the resources to deliver on our commitments and extend our leadership as we continue to focus on operational excellence, cash flow generation, and prudent capital allocation.
Before I get into the details of our performance and results, I want to call out the changes at Hemlock during Q3 and cover the differences between GAAP and core results.
On September 9, Hemlock Semiconductor group redeemed DuPont's 40.25% ownership interest in the company, which transformed Corning's longtime ownership in Hemlock into a majority position.
In the second transaction, Hemlock purchased certain manufacturing assets from DuPont and gained control of a critical raw material, thereby becoming a leading, low-cost producer of ultra-pure polysilicon to the semiconductor industry.
Hemlock's leadership position is backed by attractive the long-term take-or-pay customer contracts with upfront payments.
Now, we're very excited about these transactions.
They are good for Hemlock, good for Corning, and good for our shareholders.
We didn't put any money into the transaction, and Hemlock generates a lot of cash so its debt is mostly paid back in one year.
Corning improves its financials by adding sales and earnings.
In the third quarter, we recognized $31 million of sales from the newly consolidated Hemlock.
And Hemlock will add approximately $150 million in annual cash flow.
Please see our web disclosure for helpful consolidation details.
Now on to GAAP.
The largest differences between our third-quarter GAAP and core results are a noncash gain associated with the Hemlock transaction, ongoing restructuring charges, which are primarily noncash, and a mark-to-market adjustment for our currency hedge contracts.
Now with respect to the mark-to-market adjustments, GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be mark-to-market and recorded at current value at the end of each quarter even though those contracts will not be settled in the current quarter.
For us, this reduced GAAP earnings in Q3 by $103 million.
To be clear, this mark-to-market accounting has no impact on our cash flow.
Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth, and our future shareholder distributions.
Our non-GAAP or core results provide additional transparency into operations by using a constant-currency rate aligned with the economics of our underlying transactions.
We're very pleased with our hedging program and the economic certainty it provides.
We've received $1.7 billion in cash under our hedge contracts since our inception more than five years ago.
Now, I'll walk through our third quarter performance.
At the outset of the pandemic, we committed to preserving our financial strength and positioning the company to emerge even stronger.
In Q1 and Q2, we told you we were responding to economic uncertainty by making significant operational adjustments.
We said we reduced cost and capital spend to align with lower anticipated sales.
And while ramping down production and reducing inventory impacts margins, we said that when sales growth resumed, we expect improved profitability.
Now, looking at the third quarter, we grew 16% -- sales grew 16% sequentially to $3 billion, and our operating margin expanded by 710 basis points sequentially, to 18.3%.
This resulted in net income of $380 million and earnings per share of $0.43, up 72% sequentially.
We also said we would maintain a strong cash balance and generate positive free cash flow for the year.
In the third quarter, free cash flow grew to $518 million, cumulative free cash flow for the first three quarters was $484 million.
We ended the quarter with a cash balance of $2.5 billion and expect to generate additional positive free cash flow in the fourth quarter as we continue to reduce cost, control inventory and execute well overall.
As a result, I'm confident that we will succeed on our free cash flow goals.
These actions -- the actions we're taking are clearly working.
We have delivered great operational improvements, which started to show results in Q2, and really accelerated in Q3.
We expect the benefit of these actions to continue in Q4, contributing to another strong quarter.
Now, let's review the business segments.
In display technologies, third quarter sales were $827 million, up 10% sequentially, and net income was $196 million, up 29% sequentially.
Display glass volume grew approximately 10% sequentially, as panel makers increase utilization, resulting in strong incrementals.
Sequential price declines were moderate, as expected.
From an end-market perspective, it appears that the impact from COVID-19 has been a positive.
In developed markets, consumers are prioritizing in-home entertainment.
Globally, work and study from home trends are growing.
This is increasing demand for TV and IT products.
On the other hand, smartphone demand has been down.
In total, the retail market, as measured in square feet of glass, is up mid-single digits year-to-date through August.
Of course, the upcoming holiday retail season will be a big factor in how the market actually plays out for the full year.
Longer term, we remain confident that TV screen size will continue to grow.
TVs at 65 inches or larger grew 40% year-to-date through August.
And we are well positioned to capture the majority of that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing.
We continue to expect display pricing to decline by a mid-single-digit percentage in 2020.
We believe that three factors drive a favorable glass pricing environment: First, we expect glass supply/demand to be balanced to tight.
For Corning, we are ramping our Gen 10.5 tanks to align with panel makers' schedules.
Second, our competitors continue to face profitability challenges at current pricing levels.
And third, display glass manufacturing requires periodic investments in existing capacity to maintain operations.
Glass prices must support acceptable returns on those investments.
In optical communications, third-quarter sales grew 10% sequentially to $909 million, as carrier spending and deployments remain stable and enterprise sales grew slightly.
Net income grew by $34 million or 42% to $115 million, driven by improving cost performance.
Looking forward, demand on the network is at an all-time high, and we are seeing positive statements on capacity expansion from network operators.
Currently, COVID-related factors hampered the ability to invest broadly in networks, and operators are focusing efforts on addressing capacity bottlenecks.
We believe operators will begin additional investments to reestablish normal network headroom and expand offerings.
Large-carrier and enterprise capital projects are inevitable.
But as we've said before, it's always hard to predict the timing.
Environmental technology sales in the third quarter were $379 million, up 68% sequentially as markets recovered and OEMs continued to adopt GPS in Europe and China.
We effectively adjusted our operations to pace with the market recovery and delivered net income of $69 million, compared to breakeven in the second quarter.
The business team did a great job over the last six months in reacting to the rapid shutdown and restart of auto production by controlling cost and maintaining flexibility.
Automotive sales increased 1% year-over-year as continued strong adoption of GPS helped us exceed vehicle production, which declined 6% year over year.
In the quarter, we saw continued strong market performance in China, up slightly year over year.
North America and European OEMs more than doubled production sequentially, but declined 5% on a year-over-year basis.
Diesel sales improved 49% from the second quarter, but we're still down 15% year-over-year.
The North American heavy-duty truck market improved, but remains in a cyclical downturn with vehicle production down 46% year-over-year.
Third-quarter sales of heavy-duty vehicles in China, however, continue to exceed 2019 levels, and adoption of advanced content increased in preparation for China 6 regulations.
No doubt, this has been a challenging year for our automotive market access platform.
However, we are recovering faster than the market due to increasing content, primarily GPS and advanced heavy-duty products.
Our content-driven strategy continues to drive strong results.
Specialty materials sales were $570 million in the third quarter, up 23% year-over-year and in sharp contrast to the smartphone market, which declined.
Net income grew 59% year over year to $146 million.
Sales growth was driven by Ceramic Shield, our new-to-the-world glass ceramic on the iPhone 12 as well as premium glass sales, IT and tablet glass sales in support of work from home trends, and strength in our advanced optic products.
In brief, strong adoption and commercialization of our innovations produced strong year-over-year results for the third quarter for specialty materials, and we expect that to be true for full year 2020 as well.
In life sciences, North America lab utilization is increasing, and the pandemic is driving demand for laboratory diagnostic test in consumables.
As a result, we are seeing increased demand for our products.
In July, we carried out our long-term plan to ramp a new, larger distribution center needed to support our growth and enhance our ability to address our customers' increased needs around the world.
Starting up this center in the middle of a pandemic proved to be more difficult than we expected, which constrained third-quarter sales.
Sales declined 8% sequentially.
Net income declined 10%, in line with the lower volume.
We have added resources where required implemented recovery plans and are confident that operations will support the required output in Q4.
As a result, we expect strong sequential life science growth in the fourth quarter.
Now, I'll turn to our balance sheet and our dedication to financial stewardship.
As I mentioned at the outset of the pandemic, we committed to preserving our financial strength and positioning the company to emerge even stronger.
I've discussed the operational improvements we've implemented and our strong free cash flow generation.
It is also important to note that we continue to maintain a conservative balance sheet with a strong cash position that ended the quarter at $2.5 billion.
And we have a debt structure that is conservative by design and relatively unique.
Today, our average debt maturity is about 25 years, the longest in the S&P 500.
Over the next 15 months, we have under $70 million coming due.
Less than half of our total debt is due within the next 20 years.
And during this time, there is no single year with debt repayment over $500 million.
Our balance sheet is built for times like these.
As I've previously mentioned, we expect to generate positive free cash flow in the fourth quarter and for the year.
We also expect to maintain a strong cash position and to maintain our dividend.
We have the financial resources needed for the duration of the economic slowdown.
In closing, we demonstrated outstanding operational performance in the quarter with significant sequential improvement in sales, net income, earnings per share and free cash flow.
We are successfully carrying out the operational and financial goals we set up to stay strong during the crisis.
We expect another solid quarter to end the year.
We remain aware of potential impacts from the pandemic, the global recession, civil unrest, and geopolitical tensions.
Regardless of how long or what shape the recovery takes, Corning is effectively safeguarding its financial strength, our growth drivers are intact and we continue advancing important growth initiatives with leaders in industries we serve.
We are confident that our execution and market leadership positions us to emerge from the current global uncertainty even stronger.
With that, let's move to Q&A.
We're ready for our first question.

user
q3 core earnings per share $0.43.
qtrly display technologies net sales were $827 million versus $793 million.
qtrly optical communications net sales were $909 million versus $1,007 million.

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