Edward A. Schlesinger
Executive Vice President & Chief Financial Officer at Corning
Thanks, Wendell. Good morning, everyone. Let me start by emphasizing that we're executing well in a challenging environment. Our performance in the third quarter was a proof point of the inherent balance of our cohesive portfolio and the fact that our More Corning approach is working. We're built to be resilient even in a downturn.
Now, let's look at our financial results for the third quarter. Sales were $3.7 billion, up 1% from a strong third quarter in 2021. Optical Communications, Environmental Technologies, Life Sciences and Hemlock and Emerging Growth Businesses all delivered year-over-year growth.
In September, Display Technologies experienced the lowest panel maker utilization levels since 2008, resulting in a 28% year-over-year decline in sales for the segment in the third quarter.
In Specialty Materials, we outperformed the smartphone market, which was down double digits year-over-year.
Turning to profitability. Gross margin was 36.1%, and operating margin was 16.9%, down sequentially 140 and 190 basis points respectively, driven by the lower volume in display technologies. In the third quarter, free cash flow was $255 million, and year-to-date, it was $866 million, keeping us on pace for another year of healthy cash generation. And despite the challenging environment during the quarter, we were able to offset significantly lower volume in display technologies, and we outperformed our underlying markets overall.
Now, let's turn to the segment results. In Optical Communications, sales grew 16% year-over-year, reaching $1.3 billion. Our year-over-year growth was driven by network operator investments in 5G, broadband and the cloud. Net income was $183 million, up 32% and year-over-year, driven by leverage from strong incremental volume. Passive optical networks continue to experience a large multiyear wave of growth. We believe that this demand is strongly supported by private and public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the population. We continue to secure customer commitments, and we're investing to appropriately scale production to serve our incremental demand from current and new customers. And we're also taking further pricing actions to more appropriately share recent cost increases in energy and certain raw materials with our customers. As we've mentioned in the past, this business can be lumpy from quarter to quarter, and you'll see that play out in the fourth quarter as we expect optical sales to be down sequentially and based on the timing of customer projects.
Now moving to Display. As we updated you in September, panel makers reduced their production levels below our already low expectations. The lower volume resulted in display sales declining 28% year-over-year and 22% sequentially, and we saw a 46% year-over-year and 41% sequential decline in net income due to the high fixed cost nature of glass manufacturing. In the third quarter, glass price was once again consistent sequentially. And we believe the glass pricing environment will remain favorable, and factors that continue to drive that favorable pricing include glass supply-demand balance. As panel makers reduced production, Corning and other glass makers took additional tanks offline for maintenance and repairs after an extended period of glass tightness. And we're also taking this opportunity to upgrade some of our fleet with our latest technology, which enables us to reduce cost and extend the life of new tanks. As we continue to work through these upgrades, we are actively managing restarts to align our supply to demand.
Another factor is glass maker profitability. It is challenging for glass makers who have high fixed costs to maintain profitability during periods of low volume, and the current inflationary environment amplifies that challenge. We expect fourth quarter glass prices to be consistent with the third quarter and glass prices to be stable or up in subsequent quarters.
So, overall, we continue to operate from a position of strength in the display market. And as Wendell noted, while we believe that panel maker utilization reached the bottom in September, we would like to see more evidence before we got a significant recovery in glass demand. But when glass demand grows, we expect our volume to increase and our profitability to improve.
In Specialty Materials, the market for smartphones was down 14%, and tablets and notebooks were down 17%. We outperformed the market with sales down only 7% year-over-year, driven by strong demand for premium glasses and strength in semiconductor materials. Third quarter sales were up 7% sequentially, driven by demand for our premium cover materials to support customer product launches.
And adding to our resilience in the segment, Advanced Optics delivered record sales for the second quarter in a row, and we are bringing additional capacity online at our facilities in Fairport and Canton, New York. Net income for the segment was $96 million, down 10% year-over-year due to lower volume and continued development expense related to next-generation products.
The weakness in the smartphone, tablet and notebook markets intensified in the quarter, and we expect fourth quarter sales and profitability to be down sequentially and year-over-year. Long term, we expect to outperform the market as we continue to develop and launch new premium glasses and optical treatments.
Turning to Environmental Technologies. In the third quarter, sales were $425 million, up 10% year-over-year and 19% sequentially. Automotive production improved from a very low second quarter as China demand recovered after second quarter COVID lockdowns. However, vehicle production remains constrained due to the continued component shortages. In addition to our sales growth, we improved profitability with net income up 45% year-over-year. Our content-driven strategy is working. Gasoline particulate filters remain a critical component of that strategy, driving revenue even in a weakened market. Our next-generation filters are now shipping to customers as emission standards reach near-zero levels and require enhanced filtration performance.
In Life Sciences, sales were $312 million, consistent sequentially and up 2% year-over-year. Lower demand for COVID-related products was offset by growth in research products. Net income was $43 million. We continue to commercialize innovations including the new cell and gene therapy production platform. And looking ahead, we expect to see continued growth in both research and bio process.
Finally, in Hemlock and Emerging Growth Businesses, sales were $407 million, up 33% year-over-year and down 3% sequentially. We continue to see increased demand for semiconductor-grade polysilicon and strong demand for solar materials, and we continue to ramp solar capacity and sign up new customers with long-term take-or-pay contracts.
In September, Corning Pharmaceutical Technologies announced that it was awarded $104 million in additional funding from BARDA to support our planned capacity expansion for advanced, high-quality pharmaceutical glass tubing and vials. These expansions are designed to help the healthcare industry rapidly scale manufacturing to address current and future public health challenges.
Now, I want to take a minute to talk about currency exchange rates. As you know, the dollar has been strengthening over the past year. As a reminder, we have actively hedged our foreign currency exposure over the past decade. This serves as an effective tool to reduce earnings volatility, protect our cash flow, enhance our ability to invest and provide shareholder returns. Our largest exposure is the yen, and we have most of next year hedged. We expect our core rate to remain the same in 2023. We're very pleased with our hedging program and the economic certainty it provides. We've received more than $2 billion in cash under our hedge contracts since their inception.
Now, let's turn to the outlook for the fourth quarter. We expect sales in the range of $3.45 billion to $3.65 billion and EPS in the range of $0.41 to $0.47. Now, our fourth quarter guidance reflects several factors. In Optical Communications, pacing of customer projects will impact sales for the quarter. In Specialty Materials, we expect a sequential decline driven by lower demand in the smartphone, notebook and tablet markets. And of course, the biggest element in our guidance is Display. As I noted, we do not yet have enough positive evidence to guide significant improvement in glass demand from September levels. We expect free cash flow to be strong in the fourth quarter. And for the full year, we expect free cash flow in the range of $1.3 billion to $1.5 billion.
Now, I'd like to wrap up with a few key takeaways. As I noted at the opening of my remarks, we're executing well. And because of our inherent balance of our cohesive portfolio and our More Corning approach, we're built to be resilient even in a downturn as evidenced by the performance of Specialty Materials and Environmental Technologies this quarter. Our long-term growth drivers all remain intact, and we're well positioned to continue capturing growth tied to key secular trends such as Optical Communications and solar. In the meantime, we will continue to maintain our strong balance sheet and employ a highly disciplined approach to capital allocation. Given the external environment, we're taking actions to preserve profitability, tightly manage capital expenditures and prioritize cash flow.
With that, I'll turn it back over to Ann for Q&A.