UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2009

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________to____________

 

Commission file number: 1-3247

 

CORNING INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

New York

 

16-0393470

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

One Riverfront Plaza, Corning, New York

 

14831

(Address of principal executive offices)

 

(Zip Code)

 

607-974-9000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

x

 

No

o

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes

x

 

No

o

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Large accelerated filer

x

 

Accelerated filer

o

 

 

Non-accelerated filer

o

 

Smaller reporting company

o

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes

o

 

No

x

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of July 15, 2009

Corning’s Common Stock, $0.50 par value per share

 

1,554,586,219 shares

 


INDEX

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Page

Item 1. Financial Statements

 

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2009 and 2008

 

3

 

 

 

Consolidated Balance Sheets (Unaudited) at June 30, 2009 and December 31, 2008

 

4

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2009 and 2008

 

5

 

 

 

Consolidated Statements of Changes in Equity (Unaudited) for the six months ended June 30, 2009

 

6

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

35

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

54

 

 

 

Item 4. Controls and Procedures

 

54

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

Item 1. Legal Proceedings

 

55

 

 

 

Item 1A. Risk Factors

 

58

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

59

 

 

 

Item 4. Submission of Matters to a Vote of Security Holders

 

60

 

 

 

Item 6. Exhibits

 

61

 

 

 

Signatures

 

62

 

 

- 2 -

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited; in millions, except per share amounts)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

1,395 

 

$

1,692 

 

$

2,384 

 

$

 

Cost of sales

 

820 

 

 

840 

 

 

1,539 

 

 

1,613 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

575 

 

 

852 

 

 

845 

 

 

1,696 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

211 

 

 

260 

 

 

418 

 

 

502 

Research, development and engineering expenses

 

136 

 

 

163 

 

 

287 

 

 

314 

Amortization of purchased intangibles

 

 

 

 

 

 

 

Restructuring, impairment and other charges and (credits) (Note 2)

 

 

 

 

 

 

 

165 

 

 

(1)

Asbestos litigation charge (credit) (Note 3)

 

 

 

 

 

 

 

(318)

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

221 

 

 

417 

 

 

(39)

 

 

1,194 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of affiliated companies (Note 9)

 

361 

 

 

367 

 

 

556 

 

 

679 

Interest income

 

 

 

22 

 

 

12 

 

 

52 

Interest expense

 

(20)

 

 

(15)

 

 

(34)

 

 

(33)

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment (OTTI) losses:

 

 

 

 

 

 

 

 

 

 

 

Total OTTI losses

 

(14)

 

 

 

 

 

(14)

 

 

 

Portion of OTTI losses recognized in other comprehensive income (before taxes)

 

13 

 

 

 

 

 

13 

 

 

 

Net OTTI losses recognized in earnings

 

(1)

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

41 

 

 

39 

 

 

61 

 

 

41 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

607 

 

 

830 

 

 

555 

 

 

1,933 

Benefit for income taxes (Note 5)

 

 

 

2,381 

 

 

70 

 

 

2,307 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Corning Incorporated

$

611 

 

$

3,211 

 

$

625 

 

$

4,240 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share attributable to Corning Incorporated:

 

 

 

 

 

 

 

 

 

 

 

Basic (Note 6)

$

0.39 

 

$

2.05 

 

$

0.40 

 

$

2.71 

Diluted (Note 6)

$

0.39 

 

$

2.01 

 

$

0.40 

 

$

2.65 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

$

0.05 

 

$

0.05 

 

$

0.10 

 

$

0.10 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Certain amounts from the prior periods were reclassified to conform to the 2009 presentation.

 

- 3 -

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited; in millions, except per share amounts)

 

 

 

June 30,
2009

 

December 31,
2008

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

2,234 

 

$

1,873 

Short-term investments, at fair value (Note 7)

 

841 

 

 

943 

Total cash, cash equivalents and short-term investments

 

3,075 

 

 

2,816 

Trade accounts receivable, net of doubtful accounts and allowances - $21 and $20

 

790 

 

 

512 

Inventories (Note 8)

 

647 

 

 

798 

Deferred income taxes (Note 5)

 

128 

 

 

158 

Other current assets

 

388 

 

 

335 

Total current assets

 

5,028 

 

 

4,619 

 

 

 

 

 

 

Investments (Note 9)

 

3,168 

 

 

3,056 

Property, net of accumulated depreciation - $5,311 and $5,070 (Note 10)

 

7,885 

 

 

8,199 

Goodwill and other intangible assets, net (Note 11)

 

299 

 

 

305 

Deferred income taxes (Note 5)

 

3,080 

 

 

2,932 

Other assets

 

144 

 

 

145 

 

 

 

 

 

 

Total Assets

$

19,604 

 

$

19,256 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt

$

80 

 

$

78 

Accounts payable

 

502 

 

 

846 

Other accrued liabilities (Notes 3 and 12)

 

949 

 

 

1,128 

Total current liabilities

 

1,531 

 

 

2,052 

 

 

 

 

 

 

Long-term debt (Note 4)

 

1,938 

 

 

1,527 

Postretirement benefits other than pensions

 

766 

 

 

784 

Other liabilities (Notes 3 and 12)

 

1,517 

 

 

1,402 

Total liabilities

 

5,752 

 

 

5,765 

 

 

 

 

 

 

Commitments and contingencies (Note 3)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock – Par value $0.50 per share; Shares authorized: 3.8 billion;
Shares issued: 1,613 million and 1,609 million

 

807 

 

 

804 

Additional paid-in capital

 

12,619 

 

 

12,502 

Retained earnings

 

2,409 

 

 

1,940 

Treasury stock, at cost; Shares held: 63 million and 61 million

 

(1,204)

 

 

(1,160)

Accumulated other comprehensive loss (Note 17)

 

(828)

 

 

(643)

Total Corning Incorporated shareholders’ equity

 

13,803 

 

 

13,443 

Noncontrolling interests

 

49 

 

 

48 

Total equity

 

13,852 

 

 

13,491 

 

 

 

 

 

 

Total Liabilities and Equity

$

19,604 

 

$

19,256 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Certain amounts from the prior period were reclassified to conform to the 2009 presentation.

 

- 4 -

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in millions)

 

 

 

Six months ended
June 30,

 

 

2009

 

2008

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

$

625 

 

$

4,240 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

359 

 

 

319 

Amortization of purchased intangibles

 

 

 

Asbestos litigation

 

 

 

(318)

Restructuring, impairment and other charges (credits)

 

165 

 

 

(1)

Stock compensation charges

 

67 

 

 

78 

Undistributed earnings of affiliated companies

 

(137)

 

 

(400)

Deferred tax benefit

 

(139)

 

 

(2,473)

Restructuring payments

 

(54)

 

 

(10)

Customer deposits, net of (credits) issued

 

(165)

 

 

(137)

Employee benefit payments less than (in excess of) expense

 

34 

 

 

(37)

Changes in certain working capital items:

 

 

 

 

 

Trade accounts receivable

 

(281)

 

 

(46)

Inventories

 

138 

 

 

(73)

Other current assets

 

(42)

 

 

(52)

Accounts payable and other current liabilities, net of restructuring payments

 

(21)

 

 

(89)

Other, net

 

69 

 

 

(21)

Net cash provided by operating activities

 

632 

 

 

985 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Capital expenditures

 

(491)

 

 

(864)

Net proceeds from sale or disposal of assets

 

15 

 

 

Short-term investments – acquisitions

 

(405)

 

 

(1,194)

Short-term investments – liquidations

 

516 

 

 

1,140 

Net cash used in investing activities

 

(365)

 

 

(916)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Net repayments of short-term borrowings and current portion of long-term debt

 

(66)

 

 

(12)

Proceeds from issuance of long-term debt, net

 

346 

 

 

 

Principal payments under capital lease obligations

 

(9)

 

 

 

Proceeds from issuance of common stock, net

 

12 

 

 

15 

Proceeds from the exercise of stock options

 

 

 

74 

Repurchase of common stock

 

 

 

 

(125)

Dividends paid

 

(156)

 

 

(158)

Other, net

 

 

 

 

Net cash provided by (used in) financing activities

 

134 

 

 

(206)

Effect of exchange rates on cash

 

(40)

 

 

96 

Net increase (decrease) in cash and cash equivalents

 

361 

 

 

(41)

Cash and cash equivalents at beginning of period

 

1,873 

 

 

2,216 

 

 

 

 

 

 

Cash and cash equivalents at end of period

$

2,234 

 

$

2,175 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Certain amounts from the prior period were reclassified to conform with the 2009 presentation.

 

- 5 -

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited; in millions)

 

 

 

Common
stock

Additional
paid-in
capital

Retained
earnings

Treasury
stock

Accumulated
other
comprehensive
loss

Total Corning
Incorporated
shareholders’
equity

Non-
controlling
interests

Total

Balance, December 31, 2008

$804 

$12,502 

$1,940 

$(1,160)

$(643)

$13,443 

$48

$13,491 

 

 

 

 

 

 

 

 

 

Net income

 

 

625 

 

 

625 

1

626 

Foreign currency translation adjustment

 

 

 

 

(217)

(217)

 

(217)

Amortized postretirement benefit plan losses and prior service costs

 

 

 

 

(10)

(10)

 

(10)

Net unrealized gain on investments without credit losses

 

 

 

 

16 

16 

 

16 

Unrealized gain on investments with credit losses *

 

 

 

 

3

3

 

3

Unrealized gain on cash flow hedges

 

 

 

 

54 

54 

 

54 

Reclassification adjustments on cash flow hedges

 

 

 

 

(32)

(32)

 

(32)

Total comprehensive income

 

 

 

 

 

439 

1

440 

 

 

 

 

 

 

 

 

 

Shares issued to benefit plans and for option exercises

2

115

 

(34)

 

83 

 

83 

Dividends on shares

 

 

(156)

 

 

(156)

 

(156)

Other, net

1

2

 

(10)

(6)

 

(6)

Balance, June 30, 2009

$807

$12,619

$2,409 

$(1,204)

$(828)

$13,803 

$49

$13,852 

 

* Line item includes $1 million of credit loss recognized in earnings.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

- 6 -

 


CORNING INCORPORATED AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.

Significant Accounting Policies

 

Basis of Presentation

 

In these notes, the terms “Corning,” “Company,” “we,” “us,” or “our” mean Corning Incorporated and subsidiary companies.

 

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed. These interim consolidated financial statements should be read in conjunction with Corning’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K). In accordance with Statement of Financial Accounting Standards (SFAS) 165 “Subsequent Events,” Corning evaluates all events or transactions that occur after the balance sheet date through the date of issuance of our financial statements. For the period ending June 30, 2009, subsequent events were evaluated through July 29, 2009.

 

The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. Certain amounts for prior periods have been reclassified to conform to the 2009 presentation. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.

 

Effective January 1, 2009, the Company adopted SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). A noncontrolling interest, previously called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Under SFAS 160, noncontrolling interests in subsidiaries are now included as a component of equity in the consolidated statements of financial position. SFAS 160 also provides the required accounting treatment for changes in ownership of noncontrolling interests. As required, the presentation and disclosure provisions of SFAS 160 have been applied retrospectively. For the three and six months ended June 30, 2009, and 2008, net income attributable to noncontrolling interests was not significant (approximately $1 million in each period presented) and therefore, was not presented separately on the consolidated statements of income.

 

Effective January 1, 2009, the Company changed the presentation of equity in earnings of affiliated companies in the Consolidated Statements of Income from below benefit for income taxes to above income before income taxes. The change in presentation reflects the strategic nature and economic importance of the Company’s investments accounted for under the equity method of accounting. There was no effect on the Company’s consolidated results of operation, financial condition, or cash flows as a result of this change.

 

Effective April 1, 2009, the Company adopted the following:

FASB Staff Position (FSP) FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” which changes the method for determining whether an other-than temporary impairment exists for debt securities and for determining the amount of an impairment charge to be recorded in earnings;

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” which provides guidance addressing the determination of (a) when a market for an asset or a liability is active or inactive and (b) when a particular transaction is distressed; and

FSP FAS 107-1 and APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments” which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements.

The impact of adopting these fair value standards was not significant.

 

- 7 -

 


Equity Method Investments

 

Our equity investments are accounted for under the equity method of accounting for investments as required by Accounting Principles Board Opinion 18 “The Equity Method of Accounting for Investments in Common Stock.”

 

Our equity method investments are reviewed for impairment on a periodic basis or if an event occurs or circumstances change that indicate the carrying amount may be impaired. This assessment is based on a review of the equity investments’ performance and a review of indicators of impairment to determine if there is evidence of a loss in value of an equity investment. Factors we consider include:

 

Absence of our ability to recover the carrying amount;

Inability of the equity affiliate to sustain an earnings capacity which would justify the carrying amount of the investment; and

Significant litigation, bankruptcy or other events that could impact recoverability.

 

For an equity investment with impairment indicators, we measure fair value on the basis of discounted cash flows or other appropriate valuation methods, depending on the nature of the company involved. If it is probable that we will not recover the carrying amount of our investment, the impairment is considered other-than-temporary and recorded in earnings, and the equity investment balance is reduced to its fair value accordingly. We require our equity method affiliates to provide audited financial statements in accordance with GAAP. Consequently, required assessments of asset recoverability are included in their results. We also include these financial statements in our recoverability assessment.

 

Property, Net of Accumulated Depreciation

 

Land, buildings, and equipment are recorded at cost. Depreciation is based on estimated useful lives of properties using the straight-line method. Except as described in Note 2 (Restructuring, Impairment and Other Charges and (Credits)) related to accelerated depreciation arising from restructuring programs and Note 10 (Property, Net of Accumulated Depreciation) related to the depletion of precious metals, the estimated useful lives range from 10 to 40 years for buildings and 3 to 20 years for equipment.

 

Included in the subcategory of equipment are the following types of assets:

Asset type

Range of useful life

 

 

Computer hardware and software

3 to 7 years

Manufacturing equipment (excluding precious metals)

2 to 15 years

Furniture and fixtures

5 to 10 years

Transportation equipment

5 to 20 years

 

Manufacturing equipment includes certain components of production equipment that are coated with or constructed of precious metals. Precious metals are not held for trading purposes because they are integral to many of our glass production processes. These assets are classified as having an indefinite useful life and are not depreciated because they have very low physical losses and can be reclaimed and repeatedly reused in our manufacturing process in perpetuity. We account for the low physical loss of metals in the manufacturing and reclamation processes as a period expense based on actual units lost.

 

Fair Value Measurements

 

The company applies SFAS No. 157, “Fair Value Measurements” (SFAS 157) and related Financial Accounting Standards Board (FASB) staff positions to all assets and liabilities that are measured and reported on a fair value basis. Major categories of financial assets and liabilities, including short-term investments, other assets and derivatives are measured at fair value on a recurring basis. Certain assets and liabilities including long-lived assets, goodwill, asset retirement obligations, and cost and equity investments are measured at fair value on a nonrecurring basis.

 

- 8 -

 


SFAS 157 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

 

Other Income, Net

 

“Other income, net” in Corning’s consolidated statements of income includes the following (in millions):

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

Royalty income from Samsung Corning Precision

$

61 

 

$

50 

 

$

103 

 

$

93 

Foreign currency exchange and hedge (losses) / gains, net

 

(16)

 

 

(6)

 

 

(35)

 

 

(34)

Net income attributable to noncontrolling interests

 

(1)

 

 

 

 

 

(1)

 

 

Other, net

 

(3)

 

 

(5)

 

 

(6)

 

 

(19)

Total

$

41 

 

$

39 

 

$

61 

 

$

41 

 

New Accounting Standards

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (SFAS 166). SFAS 166 amends the guidance on transfers of financial assets in order to (1) eliminate the qualifying special-purpose entity concept, (2) creates a new unit of account definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, (3) clarifies and makes changes to the derecognition criteria for a transfer to be accounted for as a sale, (4) makes changes to the amount of recognized gain or loss on a transfer of financial assets accounted for as a sale when beneficial interests are received by the transferor, and (5) requires extensive new disclosures. SFAS 166 is required to be applied prospectively to new transfers of financial assets and is effective for fiscal years beginning after November 15, 2009. Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46 (R)” (SFAS 167). SFAS 167 revises the consolidation guidance for variable interest entities. SFAS 167 modifies the approach for determining the primary beneficiary of a variable interest entity (VIE). Under SFAS 167, the primary beneficiary is the variable interest holder that has (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. In addition, SFAS 167 provides guidance on shared power and joint venture relationships, removes the scope exemption for qualified special purpose entities, revises the definition of a VIE, and requires additional disclosures. SFAS 167 is effective for fiscal years beginning after November 15, 2009. Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.

 

2.

Restructuring, Impairment and Other Charges (Credits)

 

2009 Activities

 

In the first quarter of 2009, we recorded a charge of $165 million associated with a corporate-wide restructuring plan to reduce our global workforce in response to anticipated lower sales in 2009. The charge included costs for severance, special termination benefits, outplacement services, and the impact of a $30 million curtailment loss for postretirement benefits. Total cash expenditures associated with this plan are expected to be approximately $105 million with the majority of spending completed by early 2010.

 

- 9 -

 


The following table summarizes the restructuring, impairment and other charges (credits) as of and for the six months ended June 30, 2009 (in millions):

 

Reserve at
Jan. 1,
2009

 

Charges

 

Non-Cash
Settlements

 

Cash
Payments

 

Reserve at
June 30,
2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee related costs

$

17

 

$

148

 

$

(46)

 

$

(49)

 

$

70

Other charges (credits)

 

17

 

 

5

 

 

 

 

 

(2)

 

 

20

Total restructuring charges

$

34

 

$

153

 

$

(46)

 

$

(51)

 

$

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment of long-lived assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets to be disposed of

 

 

 

$

12

 

 

 

 

 

 

 

 

 

Total impairment charges

 

 

 

$

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total restructuring, impairment and other charges and (credits)

 

 

 

$

165

 

 

 

 

 

 

 

 

 

 

The cost of this plan for each of our reportable operating segments was as follows (in millions):

Operating segment

Employee-
related
and other
costs

Display Technologies

$

34

Telecommunications

 

15

Environmental Technologies

 

19

Specialty Materials

 

18

Life Sciences

 

7

Corporate and All Other

 

72

Total restructuring, impairment and other charges

$

165

 

Cash payments for employee-related costs will be substantially complete by early 2010, while payments for exit activities will be substantially complete by the end of 2011.

 

2008 Activities

 

The following table summarizes the restructuring activity as of and for the six months ended June 30, 2008 (in millions):

 

Reserve at
January 1,
2008

 

Revisions
to existing
plans

 

Cash
Payments

 

Reserve at
June 30,
2008

 

 

 

 

 

 

 

 

Restructuring activity:

 

 

 

 

 

 

 

 

 

 

 

Employee related costs

$

12

 

$

(1)

 

$

(6)

 

$

5

Other charges

 

22

 

 

 

 

 

(4)

 

 

18

Total restructuring activity

$

34

 

$

(1)

 

$

(10)

 

$

23

 

 

- 10 -

 


3.

Commitments and Contingencies

 

Asbestos Litigation

 

Pittsburgh Corning Corporation. Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of Pittsburgh Corning Corporation (PCC). Over a period of more than two decades, PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos. On April 16, 2000, PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania. At the time PCC filed for bankruptcy protection, there were approximately 11,800 claims pending against Corning in state court lawsuits alleging various theories of liability based on exposure to PCC’s asbestos products and typically requesting monetary damages in excess of one million dollars per claim. Corning has defended those claims on the basis of the separate corporate status of PCC and the absence of any facts supporting claims of direct liability arising from PCC’s asbestos products. Corning is also currently involved in approximately 10,300 other cases (approximately 42,800 claims) alleging injuries from asbestos and similar amounts of monetary damages per case. Those cases have been covered by insurance without material impact to Corning to date. As described below, several of Corning’s insurance carriers have filed a legal proceeding concerning the extent of any insurance coverage for these claims. Asbestos litigation is inherently difficult, and past trends in resolving these claims may not be indicators of future outcomes.

 

On March 28, 2003, Corning announced that it had reached agreement with the representatives of asbestos claimants for the resolution of all current and future asbestos claims against it and PCC, which might arise from PCC products or operations (the 2003 Plan). The 2003 Plan would have required Corning to relinquish its equity interest in PCC, contribute its equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, contribute 25 million shares of Corning common stock, and pay a total of $140 million in six annual installments (present value $131 million at March 2003), beginning one year after the plan’s effective date, with 5.5 percent interest from June 2004. In addition, the 2003 Plan provided that Corning would assign certain insurance policy proceeds from its primary insurance and a portion of its excess insurance.

 

On December 21, 2006, the Bankruptcy Court issued an order denying confirmation of the 2003 Plan for reasons it set out in a memorandum opinion. Several parties, including Corning, filed motions for reconsideration. These motions were argued on March 5, 2007, and the Bankruptcy Court reserved decision.

 

On January 10, 2008, some of the parties in the proceeding advised the Bankruptcy Court that they had made substantial progress on an amended plan of reorganization (the Amended PCC Plan) that resolved issues raised by the Court in denying the confirmation of the 2003 Plan and that would therefore make it unnecessary for the Bankruptcy Court to decide the motion for reconsideration. On March 27, 2008 and May 22, 2008, the parties further informed the Bankruptcy Court on the progress toward the Amended PCC Plan. The parties filed a partial tentative plan on August 8, 2008. The parties continued to inform the Bankruptcy Court of the status of their discussions on the Amended PCC Plan. The complete proposed Amended PCC Plan and its ancillary documents were filed with the Bankruptcy Court on January 29, 2009.

 

As a result, Corning believes the Amended PCC Plan now represents the most probable outcome of this matter and expects that such a proposed Amended PCC Plan will be confirmed by the Court. At the same time, Corning believes the 2003 Plan no longer serves as the basis for the Company’s best estimate of liability. Key provisions of the proposed Amended PCC Plan address the concerns expressed by the Bankruptcy Court. Accordingly, in the first quarter of 2008, Corning adjusted its asbestos litigation liability to reflect components of the Amended PCC Plan. The proposed resolution of PCC asbestos claims under the Amended PCC Plan requires Corning to contribute its equity interests in PCC and PCE and to contribute a fixed series of payments, recorded at present value. Corning will have the option to use its shares rather than cash to make these payments, but the liability is fixed by dollar value and not the number of shares. The proposed Amended Plan would require Corning to make one payment of $100 million one year from the date the Amended PCC Plan becomes effective and certain conditions are met and five additional payments of $50 million each on subsequent anniversaries of the first payment, subject to credits applicable under certain circumstances to Corning’s final $50 million payment.

 

- 11 -

 


The Amended PCC Plan does not include non-PCC asbestos claims that may be or have been raised against Corning. Corning has recorded an additional $150 million for such claims in its estimated asbestos litigation liability. The liability for non-PCC claims was estimated based upon industry data for asbestos claims since Corning does not have recent claim history due to the injunction issued by the PCC Bankruptcy Court. The estimated liability represents the undiscounted projection of claims and related legal fees over the next 20 years. The amount may need to be adjusted in future periods as more Company-specific data becomes available.

 

The liability for the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $671 million at June 30, 2009, compared with an estimate of liability of $662 million at December 31, 2008. In the three and six months ended June 30, 2009, Corning recorded asbestos litigation expense of $5 million and $9 million, respectively. The entire obligation is classified as a non-current liability as installment payments for the cash portion of the obligation are not planned to commence until more than 12 months after the Amended PCC Plan becomes effective and the PCE portion of the obligation will be fulfilled through the direct contribution of Corning’s investment in PCE (currently recorded as a non-current other equity method investment).

 

In the first quarter of 2008, Corning recorded a credit to asbestos settlement expense of $327 million as a result of the increase in likelihood of a settlement under the Amended PCC Plan and a corresponding decrease in the likelihood of a settlement under the 2003 Plan. In the second quarter of 2008, Corning recorded a charge of $9 million to reflect the change in value of the estimated liability under an Amended PCC Plan.

 

The Amended PCC Plan is subject to a number of contingencies. Payment of the amounts required to fund the Amended PCC Plan from insurance and other sources are subject to a number of conditions which may not be achieved. The approval of the Amended PCC Plan by the Bankruptcy Court is not certain and may face objections by some parties. Any approval of the Amended PCC Plan by the Bankruptcy Court is subject to appeal. The proposed Amended PCC Plan will also be subject to a vote of PCC’s creditors. For these and other reasons, Corning’s liability for these asbestos matters may be subject to changes in subsequent quarters. The estimate of the cost of resolving the non-PCC asbestos claims may also be subject to change as developments occur. Management continues to believe that the likelihood of the uncertainties surrounding these proceedings causing a material adverse impact to Corning’s financial statements is remote.

 

Several of Corning’s insurers have commenced litigation for a declaration of the rights and obligations of the parties under insurance policies, including rights that may be affected by the potential resolutions described above. Corning is vigorously contesting these cases. Management is unable to predict the outcome of this insurance litigation and therefore cannot estimate the range of any possible loss.

 

Other Commitments and Contingencies

 

In the normal course of our business, we do not routinely provide significant third-party guarantees. When provided, these guarantees have various terms, and none of these guarantees are individually significant. Generally, third party guarantees provided by Corning are limited to certain financial guarantees including stand-by letters of credit and performance bonds, and the incurrence of contingent liabilities in the form of purchase price adjustments related to attainment of milestones.

 

We have also agreed to provide a credit facility to Dow Corning Corporation (Dow Corning). The funding of the Dow Corning $125 million credit facility is subject to events connected to the Dow Corning Bankruptcy Plan. Refer to Note 13 (Commitments, Contingencies, and Guarantees) to the consolidated financial statements in our 2008 Form 10-K for a discussion of contingent liabilities associated with Dow Corning.

 

As of June 30, 2009, contingent guarantees totaled a notional value of $268 million, compared with $292 million at December 31, 2008. We believe a significant majority of these contingent guarantees will expire without being funded. We also were contingently liable for purchase obligations of $94 million and $126 million, at June 30, 2009 and December 31, 2008, respectively.

 

Product warranty liability accruals at June 30, 2009 and December 31, 2008 were $22 million and $18 million, respectively.

 

- 12 -

 


Corning is a defendant in various lawsuits, including environmental, product-related suits, the Dow Corning and PCC matters, discussed in Note 7 (Investments) to the consolidated financial statements in our 2008 Form 10-K and in Part II – Item 1, Legal Proceedings, and is subject to various claims which arise in the normal course of business. In the opinion of management, the likelihood that the ultimate disposition of these matters will have a material adverse effect on Corning’s consolidated financial position, liquidity, or results of operations, is remote.

 

Corning has been named by the Environmental Protection Agency (the Agency) under the Superfund Act, or by state governments under similar state laws, as a potentially responsible party for 21 active hazardous waste sites. Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by such Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise. It is Corning’s policy to accrue for its estimated liability related to Superfund sites and other environmental liabilities related to property owned by Corning based on expert analysis and continual monitoring by both internal and external consultants. At June 30, 2009, and December 31, 2008, Corning had accrued approximately $24 million and $21 million, respectively, for the estimated liability for environmental cleanup and related litigation. Based upon the information developed to date, management believes that the accrued reserve is a reasonable estimate of the Company’s liability and that the risk of an additional loss in an amount materially higher than that accrued is remote.

 

4.

Debt

 

Second Quarter

In the second quarter of 2009, we issued $250 million of 6.625% senior unsecured notes and $100 million of 7% senior unsecured notes for net proceeds of approximately $248 million and $98 million, respectively. The 6.625% notes mature on May 15, 2019 and the 7% notes mature on May 15, 2024. We may redeem these debentures at any time.

 

Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $2.0 billion at June 30, 2009 and $1.5 billion at December 31, 2008.

 

First Quarter

In the first quarter of 2009, we recorded the impact of a capital lease obligation associated with a manufacturing facility in our Display Technologies segment. The balance of this obligation at March 31, 2009 was $141 million and is included in our long-term debt balance. Corning repaid $72 million of debt which included the redemption of $54 million principal amount of our 6.3% notes due March 1, 2009. There were no other significant debt transactions in the first quarter of 2009.

 

There were no significant debt transactions in the first and second quarters of 2008.

 

5.

Income Taxes

 

Our benefit for income taxes and the related effective income tax rates were as follows (in millions):

 

Three months ended

June 30,

 

Six months ended

June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Benefit for income taxes

$

(4)  

 

$

(2,381)   

 

$

(70)   

 

$

(2,307)   

Effective tax (benefit) rate

 

(0.6)%

 

 

(286.9)%

 

 

(12.6)%

 

 

(119.3)%

 

For the three months ended June 30, 2009, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

Rate differences on income/(losses) of consolidated foreign companies.

The impact of equity in earnings of affiliated companies.

The benefit of tax holidays and investment credits in foreign jurisdictions.

 

- 13 -

 


In addition to the items noted above, the tax provision for the six months ended June 30, 2009, reflected the impact of discrete items, including a restructuring charge of $165 million and $29 million for our share of Dow Corning’s restructuring charge. Refer to Note 2 (Restructuring, Impairment and Other Charges (Credits)) for additional information about Corning’s restructuring charge. Discrete items decreased our effective rate by 14.2 percentage points.

 

For the three months ended June 30, 2008, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

The release of $2.4 billion of valuation allowances resulting from a change in judgment about the realizability of deferred tax assets in future years, described below.

The impact of not recording net tax expense on income generated in the U.S.

The benefit of tax holidays and investment credits in foreign jurisdictions.

The impact of discrete items for which no tax benefit was recorded, including litigation-related items totaling $21 million. Refer to Note 3 (Commitments and Contingencies) for additional information about asbestos settlement litigation. Discrete items and the valuation allowance release decreased our effective tax rate by 295.4 percentage points.

 

In addition to the items noted above, the tax provision for the six months ended June 30, 2008, reflected the impact of additional discrete items for which no tax expense was recorded including an asbestos settlement credit of $327 million in the first quarter of 2008. For the six months ended June 30, 2008, discrete items and the valuation allowance release decreased our effective tax rate by 128.3 percentage points.

 

As more fully described in Note 6 (Income Taxes) to the consolidated financial statements in our 2008 Form 10-K, all of our U.S. deferred tax assets had full valuation allowances until the second quarter of 2008. At that time, we concluded that it was more likely than not that we would realize substantially all of our U.S. deferred tax assets because we expect to generate sufficient levels of income in the U.S. As a result, we released $2.4 billion of valuation allowances on our U.S. deferred tax assets in the second quarter of 2008. We considered all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance was needed.

 

The evaluation of the realizability of deferred tax assets is inherently subjective. Following are the key items that provided positive evidence to support the release of the valuation allowance for a large portion of our deferred tax assets in the second quarter of 2008:

Positive pre-tax income in the U.S. for the first half of 2008 and the preceding year;

The impact of positive results in the Display Technologies operating segment and the royalty income generated from the foreign locations in this segment;

The number of years remaining to utilize our net operating loss carryforwards; and

Increased confidence in our longer-term forecasted income levels which were supported by detailed sensitivity analyses.

 

At June 30, 2008, the following items were considered as negative evidence in our valuation allowance assessment, but were less heavily weighted than our positive evidence:

Uncertainty of future taxable earnings;

Historical utilization of deferred tax assets caused largely by non-recurring items; and

Economic and consumer demand uncertainty.

 

Deferred tax liabilities totaled $26 million at December 31, 2008, and therefore, were not a significant factor in our assessment of the realizability of deferred tax assets.

 

U.S. profits of approximately $8.3 billion dollars will be required to fully realize the deferred tax assets as of December 31, 2008. Of that amount, $3.9 billion of U.S. profits will be required over the next 18 years to fully realize the deferred tax assets associated with federal net operating loss carry forwards.

 

For the three and six months ended June 30, 2008, we recorded tax expense on income generated in the U.S. of $51 million and $223 million, respectively, which was fully offset by releases of valuation allowance. These amounts include the impact of discrete items described above.

 

- 14 -

 


Certain foreign subsidiaries in China and Taiwan are operating under tax holiday arrangements. The nature and extent of such arrangements vary, and the benefits of such arrangements phase out through 2013 according to the specific terms and schedules of the relevant taxing jurisdictions. The impact of the tax holidays on our effective tax rate is a reduction in the rate of 5.4 and 5.8 percentage points for the three months ended June 30, 2009 and 2008, respectively, and a reduction in the rate of 8.0 and 4.5 percentage points for the six months ended June 30, 2009 and 2008, respectively.

 

Corning is currently reviewing its eligibility for a U.S. tax credit for research and experimentation expenses incurred from 2005 to 2008. As a result, it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase within the next 12 months. The amount or range of increase cannot be estimated at June 30, 2009.

 

6.

Earnings per Common Share

 

The reconciliation of the amounts used in the basic and diluted earnings per common share computations follows (in millions, except per share amounts):

 

Three months ended June 30,

 

2009

 

2008

 

Net
Income
Attributable
to Corning
Incorporated

 

Weighted-
Average
Shares

 

Per
Share
Amount

 

Net
Income
Attributable
to Corning
Incorporated

 

Weighted-
Average
Shares

 

Per
Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

611

 

1,550

 

$

0.39

 

$

3,211

 

1,569

 

$

2.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and other dilutive securities

 

 

 

17

 

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

$

611

 

1,567

 

$

0.39

 

$

3,211

 

1,600

 

$

2.01

 

 

Six months ended June 30,

 

2009

 

2008

 

Net
Income
Attributable
to Corning
Incorporated

 

Weighted-
Average
Shares

 

Per
Share
Amount

 

Net
Income
Attributable
to Corning
Incorporated

 

Weighted-
Average
Shares

 

Per
Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

625

 

1,549

 

$

0.40

 

$

4,240

 

1,567

 

$

2.71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and other dilutive securities

 

 

 

14

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

$

625

 

1,563

 

$

0.40

 

$

4,240

 

1,599

 

$

2.65

 

 

- 15 -

 


The following potential common shares were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive. In addition, the following performance-based restricted stock awards have been excluded from the calculation of diluted earnings per common share because the number of shares ultimately issued is contingent on our performance against certain targets established for the performance period (in millions):

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

Potential common shares excluded from the calculation of diluted earnings per share:

 

 

 

 

 

 

 

Employee stock options and awards

51

 

38

 

65

 

38

Performance-based restricted stock awards

4

 

2

 

4

 

2

Total

55

 

40

 

69

 

40

 

7.

Available-for-Sale Investments

 

The following is a summary of the fair value of available-for-sale investments (in millions):

 

Amortized Cost

 

Fair Value

 

June 30,
2009

 

December 31,
2008

 

June 30,
2009

 

December 31,
2008

Bonds, notes and other securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

661

 

$

733

 

$

665

 

$

737

Asset-backed securities

 

1

 

 

6

 

 

1

 

 

5

Other debt securities

 

174

 

 

210

 

 

175

 

 

201

Total short-term investments

$

836

 

$

949

 

$

841

 

$

943

Asset-backed securities

$

81

 

$

87

 

$

35

 

$

40

Total long-term investments

$

81

 

$

87

 

$

35

 

$

40

 

The long-term investment securities are comprised of asset-backed securities with a fair value of $35 million at June 30, 2009. We do not intend to sell, nor do we believe it is more likely than not that we would be required to sell, the $81 million amortized cost-basis of these asset-backed securities classified as long-term before recovery of their amortized cost basis. It is possible that a significant degradation in the delinquency or foreclosure rates in the underlying assets could cause further temporary or other-than-temporary impairments in the future.

 

The following table provides the fair value and gross unrealized losses of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2009 (in millions):

 

Period Ended June 30, 2009

 

Less Than 12 Months

 

12 Months or Greater

 

Total

 

Fair
value

 

Unrealized
losses

 

Fair
value

 

Unrealized
losses

 

Fair
value

 

Unrealized
losses

Bonds, notes and other securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and agencies

$

72

 

 

 

 

 

 

 

 

 

 

$

72

 

 

 

Asset-backed securities

 

 

 

 

 

 

$

1

 

 

 

 

 

1

 

 

 

Other debt securities

 

8

 

$

 

 

 

96

 

$

(1)

 

 

104

 

$

(1)

Total short-term investments

$

80

 

$

 

 

$

97

 

$

(1)

 

$

177

 

$

(1)

Asset-backed securities

 

 

 

 

 

 

$

35

 

$

(46)

 

$

35

 

$

(46)

Total long-term investments

 

 

 

 

 

 

$

35

 

$

(46)

 

$

35

 

$

(46)

 

Gross unrealized and realized gains and losses for the three and six months ended June 30, 2009 were not significant.

 

- 16 -

 


A reconciliation of the changes in credit losses recognized in earnings for the three months ended June 30, 2009 (in millions):

Beginning balance of credit losses, April 1, 2009

$ 0

Additions for credit losses not previously recognized in earnings

1

Ending balance of credit losses, June 30, 2009

$ 1

 

The $1 million loss represents management’s estimate of credit losses inherent in the securities considering projected cash flows using assumptions of delinquency rates, loss severities, and other estimates of future collateral performance. These credit losses are limited to asset-backed securities in our investment portfolio.

 

8.

Inventories

 

Inventories comprise the following (in millions):

 

June 30,
2009

 

December 31,
2008

Finished goods

$

227

 

$

293

Work in process

 

129

 

 

197

Raw materials and accessories

 

112

 

 

120

Supplies and packing materials

 

179

 

 

188

Total inventories

$

647

 

$

798

 

9.

Investments

 

Investments comprise the following (in millions):

 

Ownership
Interest (1)

 

June 30,
2009

 

December 31,
2008

Affiliated companies accounted for by the equity method

 

 

 

 

 

 

 

Samsung Corning Precision Glass Co., Ltd.

50%

 

$

2,223

 

$

1,965

Dow Corning Corporation

50%

 

 

716

 

 

866

All other

20%-50%

 

 

225

 

 

221

 

 

 

 

3,164

 

 

3,052

Other investments

 

 

 

4

 

 

4

Total

 

 

$

3,168

 

$

3,056

 

(1)

Amounts reflect Corning’s direct ownership interests in the respective affiliated companies. Corning does not control any of these entities.

 

Related party information for these investments in affiliates follows (in millions):

 

Three months ended
June 30,

 

Six months ended
June 30,

 

2009

 

2008

 

2009

 

2008

Related Party Transactions:

 

 

 

 

 

 

 

 

 

 

 

Corning sales to affiliates

$

17

 

$

8

 

$

21

 

$

23

Corning purchases from affiliates

$

8

 

$

9

 

$

12

 

$

22

Dividends received from affiliates

$

16

 

$

76

 

$

419

 

$

279

Royalty income from affiliates

$

62

 

$

51

 

$

105

 

$

94

Corning transfers of assets, at cost, to affiliates

$

42

 

$

51

 

$

42

 

$

99

 

 

- 17 -

 


As of June 30, 2009, balances due to and due from affiliates were $3 million and $125 million, respectively. As of December 31, 2008, balances due to and due from affiliates were $2 million and $20 million, respectively.

 

We have contractual agreements with several of our equity affiliates which include sales, purchasing, licensing, financing and technology agreements.

 

Summarized results of operations for our two significant investments accounted for by the equity method follow:

 

Samsung Corning Precision Glass Co., Ltd. (Samsung Corning Precision)

Samsung Corning Precision is a South Korea-based manufacturer primarily of liquid crystal display (LCD) glass for flat panel displays.

 

Samsung Corning Precision’s results of operations follow (in millions):

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations:

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

1,069

 

$

960

 

$

1,825

 

$

1,815

Gross profit

$

781

 

$

682

 

$

1,291

 

$

1,251

Net income

$

589

 

$

505

 

$

960

 

$

954

Corning’s equity in earnings of Samsung Corning Precision

$

294

 

$

253

 

$

481

 

$

469

 

 

 

 

 

 

 

 

 

 

 

 

Related Party Transactions:

 

 

 

 

 

 

 

 

 

 

 

Corning purchases from Samsung Corning Precision

$

4

 

$

5

 

$

4

 

$

14

Corning sales to Samsung Corning Precision

$

9

 

 

 

 

$

9

 

$

7

Dividends received from Samsung Corning Precision

 

 

 

 

 

 

$

181

 

$

151

Royalty income from Samsung Corning Precision

$

61

 

$

50

 

$

103

 

$

93

Corning transfers of machinery and equipment to Samsung Corning Precision at cost (1)

$

42

 

$

51

 

$

42

 

$

99

 

(1)

Corning purchases machinery and equipment on behalf of Samsung Corning Precision to support its capital expansion initiatives. The machinery and equipment are transferred to Samsung Corning Precision at our cost basis, with no gain or loss recognized on the transaction.

 

Corning owns 50% of Samsung Corning Precision. Samsung Electronics Co., Ltd. owns 43% and three other shareholders own the remaining 7%.

 

As of June 30, 2009 and December 31, 2008, balances due from Samsung Corning Precision were $40 million and $17 million, respectively.

 

On December 31, 2007, Samsung Corning Precision acquired all of the outstanding shares of Samsung Corning Co., Ltd. (Samsung Corning). After the transaction, Corning retained its 50% interest in Samsung Corning Precision. Samsung Corning Precision accounted for the transaction at fair value while Corning accounted for the transaction at historical cost.

 

- 18 -

 


Prior to their merger, Samsung Corning Precision and Samsung Corning Co. Ltd. (Samsung Corning) were two of approximately thirty co-defendants in a lawsuit filed by Seoul Guarantee Insurance Co. and thirteen other creditors (SGI and Creditors) for alleged breach of an agreement that approximately twenty-eight affiliates of the Samsung group (Samsung Affiliates) entered into with SGI and Creditors on August 24, 1999 (the Agreement). The lawsuit is pending in the courts of South Korea. Under the Agreement it is alleged that the Samsung Affiliates agreed to sell certain shares of Samsung Life Insurance Co., Ltd. (SLI), which had been transferred to SGI and Creditors in connection with the petition for court receivership of Samsung Motor Inc. In the lawsuit, SGI and Creditors allege a breach of the Agreement by the Samsung Affiliates and are seeking the loss of principal (approximately $1.95 billion) for loans extended to Samsung Motors Inc., default interest and a separate amount for breach. On January 31, 2008, the Seoul District Court ordered the Samsung Affiliates: to pay approximately $1.3 billion by disposing of 2,334,045 shares of SLI less 1,165,955 shares of SLI previously sold by SGI and Creditors and paying the proceeds to SGI and Creditors; to satisfy any shortfall by participating in the purchase of equity or subordinate debentures issued by them; and to pay default interest of 6% per annum. The ruling has been appealed. Due to the uncertainties around the financial impact to each of the respective Samsung affiliates, Samsung Corning Precision is unable to reasonably estimate the amount of potential loss, if any, associated with this case and therefore no provision for such loss is reflected in its financial statements. Other than as described above, no claim in these matters has been asserted against Corning or any of its affiliates.

 

In connection with an investigation by the Commission of the European Communities, Competition DG, of alleged anticompetitive behavior relating to the worldwide production of LCD glass, Corning and Samsung Corning Precision received a request on March 30, 2009, for certain information from the Competition DG. Corning and Samsung Corning Precision have responded to the requests for information.

 

Dow Corning Corporation (Dow Corning)

Dow Corning is a U.S.-based manufacturer of silicone products. Dow Corning’s results of operations follow (in millions):

 

Three months ended
June 30,

 

Six months ended
June 30,

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations:

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

1,191

 

$

1,384

 

$

2,216

 

$

2,659

Gross profit

$

376

 

$

470

 

$

658

 

$

879

Net income

$

115

 

$

188

 

$

125

 

$

348

Corning’s equity in earnings of Dow Corning

$

58

 

$

94

 

$

62

 

$

174

 

 

 

 

 

 

 

 

 

 

 

 

Related Party Transactions:

 

 

 

 

 

 

 

 

 

 

 

Corning purchases from Dow Corning

$

4

 

$

4

 

$

8

 

$

8

Dividends received from Dow Corning

 

 

 

$

52

 

$

222

 

$

103

 

Balances due to Dow Corning were $2 million and $1 million as of June 30, 2009 and December 31, 2008, respectively.

 

In response to recent economic challenges, Dow Corning incurred restructuring charges associated with a global workforce reduction in the first quarter of 2009. Our share of these charges was $29 million.

 

At June 30, 2009, Dow Corning’s marketable securities included approximately $1.1 billion of auction rate securities, net of a temporary impairment of $84 million. As a result of the temporary impairment, unrealized losses of $65 million, net of $19 million for a minority interest’s share, were included in accumulated other comprehensive income in Dow Corning’s consolidated balance sheet. Corning’s share of this unrealized loss was $33 million and is included in Corning’s accumulated other comprehensive income.

 

Dow Corning has borrowed the full amount under its $500 million revolving credit facility and believes it has adequate liquidity to fund operations, its capital expenditure plan, breast implant settlement liabilities, and shareholder dividends.

 

- 19 -

 


Corning and The Dow Chemical Company (Dow Chemical) each own 50% of the common stock of Dow Corning. In May 1995, Dow Corning filed for bankruptcy protection to address pending and claimed liabilities arising from many thousands of breast implant product lawsuits. On June 1, 2004, Dow Corning emerged from Chapter 11 with a Plan of Reorganization (the Plan) which provided for the settlement or other resolution of implant claims. The Plan also includes releases for Corning and Dow Chemical as shareholders in exchange for contributions to the Plan.

 

Under the terms of the Plan, Dow Corning has established and is funding a Settlement Trust and a Litigation Facility to provide a means for tort claimants to settle or litigate their claims. Inclusive of insurance, Dow Corning has paid approximately $1.6 billion to the Settlement Trust. As of June 30, 2009, Dow Corning had recorded a reserve for breast implant litigation of $1.6 billion and anticipates insurance receivables of $26 million. As a separate matter arising from the bankruptcy proceedings, Dow Corning is defending claims asserted by a number of commercial creditors who claim additional interest at default rates and enforcement costs, during the period from May 1995 through June 2004. As of June 30, 2009, Dow Corning has estimated the liability to commercial creditors to be within the range of $80 million to $235 million. As Dow Corning management believes no single amount within the range appears to be a better estimate than any other amount within the range, Dow Corning has recorded the minimum liability within the range. Should Dow Corning not prevail in this matter, Corning’s equity earnings would be reduced by its 50% share of the amount in excess of $80 million, net of applicable tax benefits. In addition, the London Market Insurers (the LMI Claimants) have claimed a reimbursement right with respect to a portion of insurance proceeds previously paid by the LMI Claimants to Dow Corning. This claim is based on a theory that the LMI Claimants overestimated Dow Corning’s liability for the resolution of implant claims pursuant to the Plan. The LMI Claimants offered two calculations of their claim amount: $54 million and $93 million, plus minimum interest of $67 million and $116 million, respectively. These estimates were explicitly characterized as preliminary and subject to change. Litigation regarding this claim is in the discovery stage. Dow Corning disputes the claim and is unable to reasonably estimate any potential liability. There are a number of other claims in the bankruptcy proceedings against Dow Corning awaiting resolution by the U.S. District Court, and it is reasonably possible that Dow Corning may record bankruptcy-related charges in the future. There are no remaining tort claims against Corning, other than those that will be channeled by the Plan into facilities established by the Plan or otherwise defended by the Litigation Facility.

 

In 1995, Corning fully impaired its investment in Dow Corning after it filed for bankruptcy protection. Corning did not recognize net equity earnings from the second quarter of 1995 through the end of 2002. Corning began recognizing equity earnings in the first quarter of 2003 when management concluded that Dow Corning’s emergence from bankruptcy was probable. Corning considers the $249 million difference between the carrying value of its investment in Dow Corning and its 50% share of Dow Corning’s equity to be permanent.

 

Pittsburgh Corning Corporation (PCC)

Corning and PPG Industries, Inc. (PPG) each own 50% of the capital stock of Pittsburgh Corning Corporation (PCC). Over a period of more than two decades, PCC and several other defendants have been named in numerous lawsuits involving claims alleging personal injury from exposure to asbestos. Corning also has an equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian Corporation which is a component of the Company’s proposed settlement for asbestos litigation. At June 30, 2009 and December 31, 2008, the fair value of PCE significantly exceeded its carrying value of $114 million and $112 million, respectively. There have been no impairment indicators for our investment in PCE and we continue to recognize equity earnings of this affiliate. PCC filed for Chapter 11 reorganization in the U.S. Bankruptcy Court for the Western District of Pennsylvania on April 16, 2000. At that time, Corning determined that it lacked the ability to recover the carrying amount of its investment in PCC and its investment was other-than-temporarily impaired. As a result, we reduced our investment in PCC to zero. Refer to Note 3 (Commitments and Contingencies) for additional information about PCC and PCE.

 

Variable Interest Entities

Corning leases certain transportation equipment from three Trusts that qualify as variable interest entities under FASB Interpretation 46R, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (FIN 46R). The sole purpose of these entities is to lease transportation equipment to Corning.

 

- 20 -

 


For variable interest entities, we assess the terms of our interest in each entity to determine if we are the primary beneficiary as prescribed by FIN 46R. Corning has performed the required FIN 46R assessments and has identified three entities as being variable interest entities. None of these entities are considered significant to Corning’s consolidated financial statements.

 

Corning does not have retained interests in assets transferred to an unconsolidated entity that serve as credit, liquidity or market risk support to that entity.

 

10.

Property, Net of Accumulated Depreciation

 

Property, net follows (in millions):

 

June 30,
2009

 

December 31,
2008

 

 

Land

$

93 

 

$

71 

Buildings

 

3,302 

 

 

2,906 

Equipment

 

8,448 

 

 

8,364 

Construction in progress

 

1,353 

 

 

1,928 

 

 

13,196 

 

 

13,269 

Accumulated depreciation

 

(5,311)

 

 

(5,070)

Total

$

7,885 

 

$

8,199 

 

In the three months ended June 30, 2009 and 2008, interest costs capitalized as part of property, net, were $7 million. In the six months ended June 30, 2009 and 2008, interest costs capitalized as part of property, net, were $18 million and $13 million, respectively.

 

Manufacturing equipment includes certain components of production equipment that are coated with or constructed of precious metals which have an indefinite useful life. At June 30, 2009 and December 31, 2008, precious metals totaled $1.7 billion and $1.8 billion, respectively.

 

11.

Goodwill and Other Intangible Assets

 

There were no changes in the carrying amount of goodwill for the six months ended June 30, 2009. Balances by segment are as follows (in millions):

 

Telecom-
munications

 

Display
Technologies

 

Specialty
Materials

 

Total

 

 

 

 

 

 

 

 

Balance at June 30, 2009

$ 118

 

$ 9

 

$ 150

 

$ 277

 

Other intangible assets follow (in millions):

 

June 30, 2009

 

December 31, 2008

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Patents and trademarks

$

128

 

$

117

 

$

11

 

$

129

 

$

112

 

$

17

Non-competition agreements

 

98

 

 

91

 

 

7

 

 

98

 

 

90

 

 

8

Other

 

5

 

 

2

 

 

3

 

 

5

 

 

2

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

231

 

$

210

 

$

21

 

$

232

 

$

204

 

$

28

 

Amortized intangible assets are primarily related to the Telecommunications segment.

 

Estimated amortization expense related to these intangible assets is $10 million for 2009 and insignificant thereafter.

 

- 21 -

 


12.

Customer Deposits

 

In 2005 and 2004, several of Corning’s customers entered into long-term purchase and supply agreements in which Corning’s Display Technologies segment would supply large-size glass substrates to these customers over periods of up to six years. As part of the agreements, these customers agreed to advance cash deposits to Corning for a portion of the contracted glass to be purchased. Between 2004 and 2007, we received a total of $937 million for customer deposit agreements. We received our last deposit of $105 million in 2007 and do not expect to receive additional deposits related to these agreements.

 

Upon receipt of the cash deposits made by customers, we recorded a customer deposit liability. This liability is reduced at the time of future product sales over the life of the agreements. As product is shipped to a customer, Corning recognizes revenue at the selling price and issues credit memoranda for an agreed amount of the customer deposit liability. The credit memoranda are applied against customer receivables resulting from the sale of product, thus reducing operating cash flows in later periods as these credits are applied for cash deposits received in earlier periods.

 

During the three and six months ended June 30, 2009, we issued $62 million and $165 million, respectively, in credit memoranda. During the three and six months ended June 30, 2008, we issued $71 million and $137 million, respectively, in credit memoranda.

 

Customer deposit liabilities were $182 million and $369 million at June 30, 2009 and December 31, 2008, respectively, of which $147 million and $320 million, respectively, were recorded in the current portion of other accrued liabilities in our consolidated balance sheets. Because these liabilities are denominated in Japanese yen, changes in the balances include the impact of movements in the Japanese yen–U.S. dollar exchange rate.

 

In the event customers do not purchase the agreed upon quantities of product, subject to specific conditions outlined in the agreements, Corning may retain certain amounts of the customer deposits. If Corning does not deliver agreed upon product quantities, subject to specific conditions outlined in the agreements, Corning may be required to return certain amounts of customer deposits.

 

13.

Employee Retirement Plans

 

The following table summarizes the components of net periodic benefit cost for Corning’s defined benefit pension and postretirement health care and life insurance plans (in millions):

 

Pension benefits

 

Postretirement benefits

 

Three months ended
June 30,

 

Six months ended
June 30,

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

 

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

10 

 

$

13 

 

$

23 

 

$

26 

 

$

2

 

$

 

$

 

$

Interest cost

 

40 

 

 

38 

 

 

78 

 

 

75 

 

 

13

 

 

12 

 

 

25 

 

 

24 

Expected return on plan assets

 

(44)

 

 

(50)

 

 

(89)

 

 

(99)

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of net loss

 

 

 

 

 

15 

 

 

 

 

2

 

 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

 

(1)

 

 

(2)

Total pension and postretirement benefit expense

$

16 

 

$

 

$

31 

 

$

15 

 

$

17

 

$

16 

 

$

35 

 

$

32 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Curtailment charge

 

 

 

 

 

 

 

22 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expense

$

16 

 

$

 

$

53 

 

$

15 

 

$

17

 

$

16 

 

$

43 

 

$

32 

 

 

- 22 -

 


Corning and certain of its domestic subsidiaries offer postretirement plans that provide health care and life insurance benefits for retirees and eligible dependents. Certain employees may become eligible for such postretirement benefits upon reaching retirement age and service requirements. In response to rising health care costs, we changed our cost-sharing approach for retiree medical coverage. For current retirees (including surviving spouses) and active employees eligible for the salaried retiree medical program, we placed a “cap” on the amount we will contribute toward retiree medical coverage in the future. The cap equals 120% of our 2005 contributions toward retiree medical benefits. Once our contributions toward salaried retiree medical costs reach this cap, impacted retirees will have to pay the excess amount in addition to their regular contributions for coverage. This cap was attained for post-65 retirees in 2008 and has impacted their contribution rate in 2009. The pre-65 retirees are expected to trigger the cap in 2011. Further, employees hired or rehired on or after January 1, 2007 will be eligible for Corning retiree medical upon retirement; however, these employees will pay 100% of the cost.

 

In the first quarter of 2009, Corning recorded restructuring charges of $44 million for pension and postretirement benefit plans. This included a curtailment charge of $30 million for the domestic qualified defined benefit plan (U.S. pension plan) and the domestic postretirement benefit plan. Accordingly, we remeasured the U.S. pension and postretirement benefit plans as of March 31, 2009. The remeasurement resulted in an increase of $115 million to the Company’s U.S. pension liability and a decrease of $12 million to the domestic postretirement benefit plan liability. As part of the remeasurement, we updated the assumed discount rate for both plans to 6.25%, which reflected a 25 basis point increase from December 31, 2008.

 

14.

Hedging Activities

 

Effective January 1, 2009, Corning adopted SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (SFAS 161) which provides guidance for enhanced disclosures about derivatives. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk related contingent features in derivative agreements. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated results of operation or financial condition.

 

Corning operates and conducts business in many foreign countries and as a result is exposed to movements in foreign currency exchange rates. Our exposure to exchange rate effects includes:

 

Exchange rate movements on financial instruments and transactions denominated in foreign currencies which impact earnings; and

Exchange rate movements upon translation of net assets in foreign subsidiaries for which the functional currency is not the U.S. dollar, which impact our net equity.

 

Our most significant foreign currency exposures relate to the Japanese yen, Korean won, New Taiwan dollar, and the Euro. We selectively enter into foreign exchange forward and option contracts with durations of generally 12 months or less to hedge our exposure to exchange rate risk on foreign source income and purchases. The hedges are scheduled to mature coincident with the timing of the underlying foreign currency commitments and transactions. The objective of these contracts is to neutralize the impact of exchange rate movements on our operating results.

 

We engage in foreign currency hedging activities to reduce the risk that changes in exchange rates will adversely affect the eventual net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers. The hedge contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with gains and losses of the hedge contracts. Because the impact of movements in foreign exchange rates on the value of hedge contracts offsets the related impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from currency exchange rate fluctuations.

 

- 23 -

 


The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments, which mature at varying dates (in millions):

As of June 30, 2009

 

 

Asset derivatives

 

Liability derivatives

 

Notional
amount

 

Balance
sheet
location

 

Fair
value

 

Balance
sheet
location

 

Fair
value

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments under Statement 133

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

$

127

 

Other current assets

 

$

4

 

Other accrued liabilities

 

$

(7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments under Statement 133

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

$

1,454

 

Other current assets

 

$

28

 

Other accrued liabilities

 

$

(19)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

$

1,581

 

 

 

$

32

 

 

 

$

(26)

 

Corning uses derivative instruments (forwards and options) to limit exposures to fluctuations related to certain monetary assets, monetary liabilities, and net earnings in foreign currencies. These derivative instruments are not designated as hedging instruments for accounting purposes and, as such, are referred to as undesignated derivatives. Changes in the fair value of undesignated derivatives are recorded in current period earnings in the other income, net component, along with the foreign currency gains and losses arising from the underlying monetary assets or liabilities in the consolidated statement of operations. The notional amount of the undesignated derivatives at June 30, 2009 and December 31, 2008 was $1.5 billion.

 

- 24 -

 


The following tables summarize the effect on the consolidated financial statements relating to Corning’s derivative financial instruments, which mature at varying dates (in millions):

 

 

 

Effect of derivative instruments on the consolidated financial statements

 

 

 

 

For the three months ended June 30, 2009

 

 

Derivatives in
Statement 133
hedging
relationships

 

Gain/(loss)
recognized
in other
comprehensive
income (OCI)

 

Location of
gain/(loss)
reclassified
from
accumulated
OCI
into income
(effective)

 

Gain/(loss)
reclassified
from
accumulated
OCI
into income
(effective)

 

Location of
gain/(loss)
related to
ineffectiveness
& excluded
from
effectiveness
testing

 

Gain/(loss)
related to
ineffectiveness
& excluded
from
effectiveness
testing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

(3)

 

Cost of sales

 

 

 

 

Other income/ (expense)

 

 

 

Foreign exchange contracts

 

$

 

Royalties (1)

 

$

(17)

 

Other income/ (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash flow hedges

 

$

(1)

 

 

 

$

(17)

 

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign denominated debt

 

$

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net investment hedges

 

$

(2)

 

 

 

 

 

 

 

 

 

 

 


Undesignated
derivatives

 

Location of
gain/(loss)
recognized in
income

 

Gain/(loss) 
recognized
in income

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income/
(expense)

 

$

(15)

 

 

 

 

 

 

 

 

Total undesignated

 

 

 

$

(15)

 

 

(1)

Included in this amount is a loss of $8 million relating to derivatives that were de-designated by the company in the fourth quarter of 2008 for which the amounts recorded in accumulated OCI were determined to still be probable or reasonably possible of occurring as originally forecasted.

 

- 25 -

 


 

 

Effect of derivative instruments on the consolidated financial statements 

 

 

 

 

For the six months ended June 30, 2009

 

 

Derivatives in
Statement 133
hedging
relationships

 

Gain/(loss)
recognized
in other
comprehensive
income (OCI)

 

Location of
gain/(loss)
reclassified
from
accumulated
OCI
into income
(effective)

 

Gain/(loss)
reclassified
from
accumulated
OCI
into income
(effective)

 

Location of
gain/(loss)
related to
ineffectiveness
& excluded
from
effectiveness
testing

 

Gain/(loss)
related to
ineffectiveness
& excluded
from
effectiveness
testing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

3

 

Cost of sales

 

 

 

 

Other income/ (expense)

 

 

 

Foreign exchange contracts

 

$

6

 

Royalties (1)

 

$

(27)

 

Other income/ (expense)

 

$

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash flow hedges

 

$

9

 

 

 

$

(27)

 

 

 

$

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign denominated debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net investment hedges

 

$

0

 

 

 

 

 

 

 

 

 

 

 


Undesignated
derivatives

 

Location of
gain/(loss)
recognized in
income

 

Gain/(loss) 
recognized
in income

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other income/
(expense)

 

$

47