q32013form10q.htm
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 September 30, 2013

 
OR

¨
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
¨
  

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes
x
  
No
¨
  

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
¨
  
 
Non-accelerated filer
¨
  
Smaller reporting company
¨
  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
¨
  
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 October 15, 2013
Corning’s Common Stock, $0.50 par value per share
  
1,447,201,901 shares


 
-1-
 


INDEX

PART I – FINANCIAL INFORMATION
   
Page
Item 1. Financial Statements
    
     
Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2013 and 2012
  
3
     
Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2013 and 2012
  
4
     
Consolidated Balance Sheets (Unaudited) at September 30, 2013 and December 31, 2012
  
5
     
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2013 and 2012
  
6
     
Notes to Consolidated Financial Statements (Unaudited)
  
7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
39
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
69
     
Item 4. Controls and Procedures
  
69
     
PART II – OTHER INFORMATION
    
     
Item 1. Legal Proceedings
  
70
     
Item 1A.  Risk Factors
  
70
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
71
     
Item 6. Exhibits
  
72
     
Signatures
  
73


 
-2-
 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share amounts)


 
Three months ended
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
                       
Net sales
$
2,067 
  
$
2,038 
  
$
5,863 
  
$
5,866 
Cost of sales
  
1,166 
    
1,149 
    
3,309 
    
3,345 
                       
Gross margin
  
901 
    
889 
    
2,554 
    
2,521 
                       
Operating expenses:
                      
Selling, general and administrative expenses
  
265 
    
289 
    
790 
    
848 
Research, development and engineering expenses
  
184 
    
182 
    
541 
    
551 
Amortization of purchased intangibles
  
8 
    
4 
    
23 
    
13 
Asbestos litigation charge
  
5 
    
3 
    
13 
    
9 
                       
Operating income
  
439 
    
411 
    
1,187 
    
1,100 
                       
Equity in earnings of affiliated companies (Note 9)
  
138 
    
240 
    
477 
    
717 
Interest income
  
1 
    
3 
    
5 
    
10 
Interest expense
  
(28)
    
(32)
    
(92)
    
(76)
Other (expense) income, net (Note 1)
  
(1)
    
5 
    
329 
    
42 
                       
Income before income taxes
  
549 
    
627 
    
1,906 
    
1,793 
Provision for income taxes (Note 5)
  
(141)
    
(94)
    
(366)
    
(312)
                       
Net income attributable to Corning Incorporated
$
408 
  
$
533 
  
$
1,540 
  
$
1,481 
                       
Earnings per common share attributable to Corning Incorporated:
                      
Basic (Note 6)
$
0.28 
  
$
0.36 
  
$
1.05 
  
$
0.99 
Diluted (Note 6)
$
0.28 
  
$
0.36 
  
$
1.04 
  
$
0.98 
                       
Dividends declared per common share
$
0.10 
  
$
0.075 
  
$
0.29 
  
$
0.225 

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





 
-3-
 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited; in millions)


 
Three months ended
September 30,
  
Nine months ended
September 30,
   
 
2013
  
2012
  
2013
  
2012
                       
Net income attributable to Corning Incorporated
$
408
  
$
533
  
$
1,540 
  
$
1,481
Other comprehensive income (loss), net of tax (Note 16)
  
313
    
231
    
(431)
    
183
                       
Comprehensive income attributable to Corning Incorporated
$
721
  
$
764
  
$
1,109 
  
$
1,664


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



 
-4-
 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except per share amounts)

 
September 30,
2013
  
December 31,
2012
Assets
          
           
Current assets:
          
Cash and cash equivalents
$
4,560 
  
$
4,988 
Short-term investments, at fair value (Note 7)
  
886 
    
1,156 
Total cash, cash equivalents and short-term investments
  
5,446 
    
6,144 
Trade accounts receivable, net of doubtful accounts and allowances - $30 and $26
  
1,392 
    
1,302 
Inventories (Note 8)
  
1,275 
    
1,051 
Deferred income taxes (Note 5)
  
309 
    
579 
Other current assets
  
706 
    
619 
Total current assets
  
9,128 
    
9,695 
           
Investments (Note 9)
  
5,160 
    
4,915 
Property, net of accumulated depreciation - $7,897 and $7,652 (Note 11)
  
9,977 
    
10,625 
Goodwill and other intangible assets, net (Note 12)
  
1,551 
    
1,496 
Deferred income taxes (Note 5)
  
2,403 
    
2,343 
Other assets
  
495 
    
301 
           
Total Assets
$
28,714 
  
$
29,375 
           
Liabilities and Equity
          
           
Current liabilities:
          
Current portion of long-term debt (Note 4)
$
23 
  
$
76 
Accounts payable
  
640 
    
779 
Other accrued liabilities (Note 3)
  
915 
    
1,101 
Total current liabilities
  
1,578 
    
1,956 
           
Long-term debt (Note 4)
  
2,816 
    
3,382 
Postretirement benefits other than pensions
  
917 
    
930 
Other liabilities (Note 3)
  
1,605 
    
1,574 
Total liabilities
  
6,916 
    
7,842 
           
Commitments and contingencies (Note 3)
          
Shareholders’ equity:
          
Common stock – Par value $0.50 per share; Shares authorized 3.8 billion; Shares issued: 1,658 million and 1,649 million
  
829 
    
825 
Additional paid-in capital
  
13,215 
    
13,146 
Retained earnings
  
11,017 
    
9,932 
Treasury stock, at cost; Shares held: 211 million and 179 million
  
(3,237)
    
(2,773)
Accumulated other comprehensive (loss) income
  
(75)
    
356 
Total Corning Incorporated shareholders’ equity
  
21,749 
    
21,486 
Noncontrolling interests
  
49 
    
47 
Total equity
  
21,798 
    
21,533 
           
Total Liabilities and Equity
$
28,714 
  
$
29,375 

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

 
-5-
 

CORNING INCORPORATED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)

 
Nine months ended
September 30,
 
2013
  
2012
Cash Flows from Operating Activities:
          
Net income
$
1,540 
  
$
1,481 
Adjustments to reconcile net income to net cash provided by operating activities:
          
Depreciation
  
730 
    
717 
Amortization of purchased intangibles
  
23 
    
13 
Stock compensation charges
  
40 
    
56 
Undistributed earnings of affiliated companies in excess of dividends received
  
(256)
    
(140)
Deferred tax provision
  
141 
    
65 
Restructuring payments
  
(30)
    
(3)
Employee benefit payments less than (in excess of) expense
  
34 
    
(57)
Unrealized gains on translated earnings contracts
  
(166)
      
Changes in certain working capital items:
          
Trade accounts receivable
  
(139)
    
(149)
Inventories
  
(238)
    
(31)
Other current assets
  
14 
    
(65)
Accounts payable and other current liabilities
  
(278)
    
(42)
Other, net
  
88 
    
121 
Net cash provided by operating activities
  
1,503 
    
1,966 
           
Cash Flows from Investing Activities:
          
Capital expenditures
  
(682)
    
(1,275)
Acquisitions of business, net of cash received
  
(66)
      
Investment in affiliates
  
(24)
    
(111)
Short-term investments – acquisitions
  
(1,183)
    
(1,859)
Short-term investments – liquidations
  
1,449 
    
1,618 
Premium on purchased collars
  
(107)
      
Realized gains on translated earning contracts
  
33 
      
Other, net
  
 5 
    
6 
Net cash used in investing activities
  
(575)
    
(1,621)
           
Cash Flows from Financing Activities:
          
Retirement of long-term debt
  
(498)
      
Net repayments of short-term borrowings and current portion of long-term debt
  
(69)
    
(24)
Principal payments under capital lease obligations
  
(2)
    
(1)
Proceeds from issuance of long-term debt, net
        
1,030 
Proceeds received for incentives
  
82 
      
Payments to settle interest rate hedges
        
(18)
Payments to acquire noncontrolling interest
  
(47)
      
Proceeds from the exercise of stock options
  
54 
    
26 
Repurchases of common stock for treasury
  
(441)
    
(580)
Dividends paid
  
(426)
    
(339)
Net cash (used in) provided by financing activities
  
(1,347)
    
94 
Effect of exchange rates on cash
  
(9)
    
(148)
Net (decrease) increase in cash and cash equivalents
  
(428)
    
291 
Cash and cash equivalents at beginning of period
  
4,988 
    
4,661 
           
Cash and cash equivalents at end of period
$
4,560 
  
$
4,952 

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 U.S. GAAP for interim financial information.  Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. 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, 2012 (2012 Form 10-K).

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.  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.

Employee Retirement Plans

In the first quarter of 2013, we elected to change our method of recognizing actuarial gains and losses for our defined benefit pension plans.  Previously, we recognized the actuarial gains and losses as a component of Stockholders’ Equity on our consolidated balance sheets on an annual basis.  These amounts were amortized into our operating results over the average remaining service period of employees expected to receive benefits under the plan, to the extent such gains and losses were outside of the corridor, where the corridor is equal to 10% of the greater of the benefit obligation or the market-related value of plan assets at the beginning of the year.  In addition, we used a calculated market-related value of plan assets for purposes of calculating the expected return on plan assets that spread asset gains and losses over a 3-year period.  We have elected to recognize the change in the fair value of plan assets in full and net actuarial gains and losses outside of the corridor annually in the fourth quarter of each year and whenever the plan is remeasured or valuation estimates are finalized.  The remaining components of pension expense will be recorded on a quarterly basis.  While the historical policy of recognizing pension expense was considered acceptable, we believe that the new policy is preferable as it recognizes the change in the fair value of plan assets in full and eliminates the delay in recognition of net actuarial gains and losses outside of the corridor.  We have applied these changes retrospectively, adjusting all prior periods, as if the new accounting methodology was in effect during those periods.

 
-7-
 


Following are the changes to financial statement line items as a result of the accounting methodology change for the periods presented in the accompanying unaudited consolidated financial statements:

Consolidated Statements of Income
 
Three months ended September 30, 2013
 
Previous
accounting
method
  
Reported
  
Effect of
accounting
change
Cost of sales
$
1,179 
  
$
1,166 
  
$
(13)
Gross margin
  
888 
    
901 
    
13 
Selling, general and administrative expenses
  
272 
    
265 
    
(7)
Research, development and engineering expenses
  
188 
    
184 
    
(4)
Operating income
  
415 
    
439 
    
24 
Income before income taxes
  
525 
    
549 
    
24 
Provision for income taxes
  
(132)
    
(141)
    
(9)
Net income attributable to Corning Incorporated
$
393 
  
$
408 
  
$
15 
Earnings per common share attributable to Corning Incorporated – Basic
$
0.27 
  
$
0.28 
  
$
0.01 
Earnings per common share attributable to Corning Incorporated – Diluted
$
0.27 
  
$
0.28 
  
$
0.01 

 
Three months ended September 30, 2012
 
Previously
reported
(before
accounting
change)
  
Revised
(after
accounting
change)
  
Effect of
accounting
change
Cost of sales
$
1,159 
  
$
1,149 
  
$
(10)
Gross margin
  
879 
    
889 
    
10 
Selling, general and administrative expenses
  
295 
    
289 
    
(6)
Research, development and engineering expenses
  
185 
    
182 
    
(3)
Operating income
  
392 
    
411 
    
19 
Income before income taxes
  
608 
    
627 
    
19 
Provision for income taxes
  
(87)
    
(94)
    
(7)
Net income attributable to Corning Incorporated
$
521 
  
$
533 
  
$
12 
Earnings per common share attributable to Corning Incorporated – Basic
$
0.35 
  
$
0.36 
  
$
0.01 
Earnings per common share attributable to Corning Incorporated – Diluted
$
0.35 
  
$
0.36 
  
$
0.01 


 
-8-
 


 
Nine months ended September 30, 2013
 
Previous
accounting
method
  
Reported
  
Effect of
accounting
change
Cost of sales
$
3,349 
  
$
3,309 
  
$
(40)
Gross margin
  
2,514 
    
2,554 
    
40 
Selling, general and administrative expenses
  
810 
    
790 
    
(20)
Research, development and engineering expenses
  
553 
    
541 
    
(12)
Operating income
  
1,115 
    
1,187 
    
72 
Income before income taxes
  
1,834 
    
1,906 
    
72 
Provision for income taxes
  
(340)
    
(366)
    
(26)
Net income attributable to Corning Incorporated
$
1,494 
  
$
1,540 
  
$
46 
Earnings per common share attributable to Corning Incorporated – Basic
$
1.02 
  
$
1.05 
  
$
0.03 
Earnings per common share attributable to Corning Incorporated – Diluted
$
1.01 
  
$
1.04 
  
$
0.03 

 
Nine months ended September 30, 2012
 
Previously
reported
(before
accounting
change)
  
Revised
(after
accounting
change)
  
Effect of
accounting
change
Cost of sales
$
3,376 
  
$
3,345 
  
$
(31)
Gross margin
  
2,490 
    
2,521 
    
31 
Selling, general and administrative expenses
  
865 
    
848 
    
(17)
Research, development and engineering expenses
  
560 
    
551 
    
(9)
Operating income
  
1,043 
    
1,100 
    
57 
Income before income taxes
  
1,736 
    
1,793 
    
57 
Provision for income taxes
  
(291)
    
(312)
    
(21)
Net income attributable to Corning Incorporated
$
1,445 
  
$
1,481 
  
$
36 
Earnings per common share attributable to Corning Incorporated – Basic
$
0.96 
  
$
0.99 
  
$
0.03 
Earnings per common share attributable to Corning Incorporated – Diluted
$
0.95 
  
$
0.98 
  
$
0.03 


 
-9-
 


Consolidated Statements of Comprehensive Income
 
Three months ended September 30, 2013
 
Previous
accounting
method
  
Reported
  
Effect of
accounting
change
Net income attributable to Corning Incorporated
$
393
  
$
408
  
$
15 
Other comprehensive income, net of tax
  
326
    
313
    
(13)
Comprehensive income attributable to Corning Incorporated
$
719
  
$
721
  
$
2 

 
Three months ended September 30, 2012
 
Previously
reported
(before
accounting
change)
  
Revised
(after
accounting
change)
  
Effect of
accounting
change
Net income attributable to Corning Incorporated
$
521
  
$
533
  
$
12 
Other comprehensive income, net of tax
  
241
    
231
    
(10)
Comprehensive income attributable to Corning Incorporated
$
762
  
$
764
  
$
2 

 
Nine months ended September 30, 2013
 
Previous
accounting
method
  
Reported
  
Effect of
accounting
change
Net income attributable to Corning Incorporated
$
1,494 
  
$
1,540 
  
$
46 
Other comprehensive loss, net of tax
  
(390)
    
(431)
    
(41)
Comprehensive income attributable to Corning Incorporated
$
1,104 
  
$
1,109 
  
$
5 

 
Nine months ended September 30, 2012
 
Previously
reported
(before
accounting
change)
  
Revised
(after
accounting
change)
  
Effect of
accounting
change
Net income attributable to Corning Incorporated
$
1,445
  
$
1,481
  
$
36 
Other comprehensive income, net of tax
  
194
    
183
    
(11)
Comprehensive income attributable to Corning Incorporated
$
1,639
  
$
1,664
  
$
25 


 
-10-
 


Consolidated Balance Sheets
 
September 30, 2013
 
Previous
accounting
method
  
Reported
  
Effect of
accounting
change
Retained earnings
$
11,632 
  
$
11,017 
  
$
(615)
Accumulated other comprehensive loss
$
(690)
  
$
(75)
  
$
615 

 
December 31, 2012
 
Previously
reported
(before
accounting
change)
  
Revised
(after
accounting
change)
  
Effect of
accounting
change
Retained earnings
$
10,588 
  
$
9,932
  
$
(656)
Accumulated other comprehensive (loss) income
$
(300)
  
$
356
  
$
656 

Consolidated Statements of Cash Flows
 
Nine months ended September 30, 2013
 
Previous
accounting
method
  
Reported
  
Effect of
accounting
change
Cash flows from operating activities:
                
Net income
$
1,494
  
$
1,540
  
$
46 
Deferred tax provision
$
115
  
$
141
  
$
26 
Employee benefit payments less than expense
$
106
  
$
34
  
$
(72)

 
Nine months ended September 30, 2012
 
Previously
reported
(before
accounting
change)
  
Revised
(after
accounting
change)
  
Effect of
accounting
change
Cash flows from operating activities:
                
Net income
$
1,445
  
$
1,481 
  
$
36 
Deferred tax provision
$
44
  
$
65 
  
$
21 
Employee benefit payments in excess of expense
      
$
(57)
  
$
(57)

Other (Expense) Income, Net

“Other (expense) income, net” in Corning’s consolidated statements of income includes the following (in millions):
 
Three months ended
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
Royalty income from Samsung Corning Precision
$
14 
  
$
20 
  
$
43
  
$
63 
Foreign currency exchange and hedge (losses) gains, net
  
(33)
    
(1)
    
248
    
4 
Net loss attributable to noncontrolling interests
        
1 
    
1
    
4 
Other, net
  
18 
    
(15)
    
37
    
(29)
Total
$
(1)
  
$
5 
  
$
329
  
$
42 


 
-11-
 


New Accounting Standards

In July 2013, the FASB issued Accounting Standards Update No. 2013-11 Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists.  With certain exceptions, ASU 2013-11 requires entities to present an unrecognized tax benefit, or portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward.  The guidance is effective for interim and annual periods beginning after December 15, 2013 on either a prospective or retrospective basis with early adoption permitted.  Corning does not expect adoption of this guidance to have a material impact on its consolidated results of operations and financial condition.

In July 2013, the FASB issued Accounting Standards Update No. 2013-10 Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate.  ASU 2013-10 permits the use of the Fed Funds Effective Swap Rate as a benchmark interest rate for hedge accounting in addition to interest rates on direct Treasury obligation of the United States government and the LIBOR.  In addition, the guidance removes the restriction on using different benchmark rates for similar hedges.  The guidance became effective on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  We are evaluating the potential impact of this guidance on our future hedge transactions.

In March 2013, the FASB issued Accounting Standards Update No. 2013-05 Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.  ASU 2013-05 clarifies when to release the cumulative translation adjustment into net income for transactions involving the disposition of some or all of an investment or a business combination achieved in stages (step acquisitions).  The amendments are effective prospectively for interim and annual periods beginning on or after December 15, 2013.  Corning does not expect adoption of this guidance to have a material impact on its consolidated results of operations and financial condition.

In February 2013, the FASB issued Accounting Standards Update No. 2013-04 Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.  ASU 2013-04 requires an entity to measure such obligations as the sum of the amount that the reporting entity agreed to pay on the basis of its arrangement with co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors.  The guidance is effective for interim and annual periods beginning after December 15, 2013.  Retrospective presentation for all comparative period presented is required with early adoption permitted.  Corning does not expect adoption of this guidance to have a material impact on its consolidated results of operations and financial condition.

2.      Restructuring, Impairment and Other Charges (Credits)

2013 Activity

The following table summarizes the restructuring reserve activity for the nine months ended September 30, 2013 (in millions):
 
Reserve at
January 1,
2013
  
Net
charges/
(reversals)
  
Cash
payments
  
Reserve at
September 30,
2013
Restructuring:
                      
Employee-related costs
$
38
  
$
(1)
  
$
(27)
  
$
10
Other charges
  
4
          
(3)
    
1
Total restructuring activity
$
42
  
$
(1)
  
$
(30)
  
$
11

Cash payments for employee-related costs related to the 2012 corporate-wide restructuring plan are expected to be completed in 2013.  Cash payments for exit activities were substantially completed in 2012.

 
-12-
 


2012 Activity

For the first nine months of 2012, there was no significant restructuring activity.

3.      Commitments, Contingencies, and Guarantees

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.  Corning, with other relevant parties, has been involved in ongoing efforts to develop a Plan of Reorganization that would resolve the concerns and objections of the relevant parties.  A proposed PCC plan of reorganization (Amended PCC Plan) filed in the U.S. Bankruptcy Court for the Western District of Pennsylvania was confirmed by a final order in May 2013; however, a motion for reconsideration has been filed.  Corning also has an equity interest in Pittsburgh Corning Europe N.V. (PCE), a Belgian corporation, that is a component of the Company’s proposed resolution of the PCC asbestos litigation.  At September 30, 2013 and December 31, 2012, the fair value of PCE exceeded its carrying value of $160 million and $149 million, respectively.

The Amended PCC Plan does not include certain other non-PCC asbestos claims that may be or have been raised against Corning.  Corning has recorded in its estimated asbestos litigation liability an additional $150 million for the approximately 9,800 current non-PCC cases alleging injuries from asbestos, and for any future non-PCC cases.  The liability for the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $684 million at September 30, 2013, compared with an estimate of the liability of $671 million at December 31, 2012.  In the three and nine months ended September 30, 2013, Corning recorded asbestos litigation expense of $5 million and $13 million, respectively.  In the three and nine months ended September 30, 2012, Corning recorded asbestos litigation expense of $3 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).

On May 16, 2013, the Bankruptcy Court issued an opinion and order confirming, on an interim basis, the Amended PCC Plan.  On May 23, 2013, the Bankruptcy Court held a hearing to review motions for reconsideration of its interim order and, on May 24, 2013, it issued a revised opinion and final order confirming the Amended PCC Plan.  On June 6, 2013, one party filed a motion for reconsideration of that final order which was scheduled for hearing on September 9, 2013.  A different party, on June 7, 2013, filed a notice of an appeal of that final order to the U.S. District Court for the Western District of Pennsylvania, and this appeal has been stayed pending resolution of the other party’s motion for reconsideration.  On July 23, 2013, the Bankruptcy Court issued an order deeming that appeal a nullity and indicating that interested parties shall have the right to file a notice of appeal within 14 days after the Court’s decision on the pending motion for reconsideration.  By an order dated September 25, 2013, the Bankruptcy Court directed the parties to provide further information about a point on which the Court requires clarification before it can render a decision on the motion for reconsideration.  The parties filed the requested information on October 9, 2013 and await a decision from the Court.

Other Commitments and Contingencies

In the normal course of our business, we do not routinely provide significant third-party guarantees.  Generally, any 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.  When provided, these guarantees have various terms, and none of these guarantees are individually significant.

 
-13-
 


We have agreed to provide a credit facility to Dow Corning Corporation (Dow Corning).  The funding of the Dow Corning credit facility will be required only if Dow Corning is not otherwise able to meet its scheduled funding obligations in its confirmed Bankruptcy Plan.  We believe a significant majority of these guarantees and contingent liabilities will expire without being funded.

As of September 30, 2013 and December 31, 2012, contingent guarantees totaled a notional value of $150 million and $142 million, respectively.  We believe a significant majority of these contingent guarantees will expire without being funded.  We also were contingently liable for purchase obligations of $129 million and $89 million, at September 30, 2013 and December 31, 2012, respectively.

Product warranty liability accruals were considered insignificant at September 30, 2013 and December 31, 2012.

Corning is a defendant in various lawsuits, including environmental litigation, product-related suits, and the Dow Corning and PCC matters, 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.

In March of 2012, Corning received a grand jury subpoena issued in the United States District Court for the Eastern District of Michigan from the U.S. Department of Justice in connection with an investigation into conduct relating to possible antitrust law violations involving certain automotive products, including catalytic converters, diesel particulate filters, substrates and monoliths.  Antitrust investigations can result in significant penalties being imposed by the antitrust authorities.  Currently, Corning cannot estimate the ultimate financial impact, if any, resulting from the investigation, which is ongoing.  Such potential impact, if an antitrust violation by Corning is found, could however, be material to the results of operations of Corning in a particular period.

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 16 hazardous waste sites.  Under the Superfund Act, all parties who may have contributed any waste to a hazardous waste site, identified by the Agency, are jointly and severally liable for the cost of cleanup unless the Agency agrees otherwise.  Corning accrues 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 September 30, 2013, and December 31, 2012, Corning had accrued approximately $16 million (undiscounted) and $21 million (undiscounted), 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

Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $3.0 billion at September 30, 2013 and $3.7 billion at December 31, 2012.  The Company measures the fair value of its long-term debt using Level 2 inputs based primarily on current market yields for its existing debt traded in the secondary market.

2013
In the second quarter of 2013, the Company established a commercial paper program on a private placement basis, pursuant to which we may issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding at any time of $1 billion.  Under this program, the Company may issue the notes from time to time and will use the proceeds for general corporate purposes.  The maturities of the notes will vary, but may not exceed 390 days from the date of issue.  The interest rates will vary based on market conditions and the ratings assigned to the notes by credit rating agencies at the time of issuance.  The Company’s $1 billion revolving credit facility is available to support obligations under the commercial paper program, if needed.  As of September 30, 2013, we did not have any outstanding commercial paper.

 
-14-
 


In the first quarter of 2013, we amended and restated our existing revolving credit facility.  The amended facility provides a $1.0 billion unsecured multi-currency line of credit that expires in March 2018.  The facility includes a leverage test (debt to capital ratio) financial covenant.  As of September 30, 2013, we were in compliance with this covenant.  The proceeds of this credit facility may be used for general corporate purposes, including support for our commercial paper program.

In the first quarter of 2013, Corning repaid the aggregate principal amount and accrued interest outstanding on the credit facility entered into in the second quarter of 2011 that allowed Corning to borrow up to Chinese Renminbi (RMB) 4.0 billion.  The total amount repaid was approximately $500 million.  Upon repayment, this facility was terminated.

2012
In the first quarter of 2012, we issued $250 million of 4.70% senior unsecured notes and $500 million of 4.75% senior unsecured notes for net proceeds of approximately $247 million and $495 million, respectively.  The 4.70% notes mature on March 15, 2037 and the 4.75% notes mature on March 15, 2042.

5.      Income Taxes

Our provision for income taxes and the related effective income tax rates were as follows (in millions):
 
Three months ended
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
                       
Provision for income taxes (1)
$
(141)
  
$
(94)
  
$
(366)
  
$
(312)
Effective tax rate (1)
  
25.7%
    
15.0%
    
19.2%
    
17.4%

(1)
Results for 2012 include the impact of defined benefit pension plan methodology change implemented in the first quarter of 2013 and retrospectively applied to prior periods.  See Note 1 of Notes to Consolidated Financial Statements for a discussion of the change and the impacts of the change for the three and nine months ended September 30, 2012.

For the three and nine months ended September 30, 2013, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

·  
Rate differences on income (loss) of consolidated foreign companies;
·  
The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax; and
·  
The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.

In addition to the items noted above, the tax provision for the three months ended September 30, 2013 reflected the U.S. tax expense associated with the realized and unrealized gains on the translated earnings contracts.  Refer to Note 14 (Hedging Activities) for further information.  The provision also includes tax charges attributable to a change in judgment about the realizability of certain foreign and state deferred tax assets in the amounts of $28 million and $20 million, respectively, and the restatement for law changes enacted in the quarter.  The tax provision for the nine months ended September 30, 2013, reflects a $54 million tax benefit to record the impact of the American Taxpayer Relief Act enacted on January 3, 2013 and made retroactive to 2012.

For the three and nine months ended September 30, 2012, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following items:

·  
Rate differences on income (loss) of consolidated foreign companies;
·  
The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax;
·  
The expiration of favorable U.S. tax provisions; and
·  
The benefit of tax incentives in foreign jurisdictions, primarily Taiwan.

 
-15-
 


Corning’s subsidiary in Taiwan is operating under tax holiday arrangements.  The benefit of the arrangement phases out through 2018.  The impact of the tax holiday on our effective tax rate is a reduction in the rate of 1.7 and 1.6 percentage points for the three months ended September 30, 2013 and 2012, respectively.  The impact of the tax holiday on our effective tax rate is a reduction in the rate of 1.3 and 1.5 percentage points for the nine months ended September 30, 2013 and 2012, respectively.

Corning continues to indefinitely reinvest substantially all of its foreign earnings.  Our current analysis indicates that we have sufficient U.S. liquidity, including borrowing capacity, to fund foreseeable U.S. cash needs without requiring the repatriation of foreign cash.  One time or unusual items that may impact our ability or intent to keep our foreign earnings and cash indefinitely reinvested include significant U.S. acquisitions, stock repurchases, shareholder dividends, changes in tax laws and/or a change in our circumstances or economic conditions that negatively impact our ability to borrow or otherwise fund U.S. needs from existing U.S. sources.  While it remains impracticable to calculate the tax cost of repatriating our total unremitted foreign earnings, such cost could be material to the results of operations of Corning in a particular period.

While we expect the amount of unrecognized tax benefits to change in the next 12 months, we do not expect the change to have a significant impact on the results of operations or our financial position.

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 September 30,
 
2013
  
2012
 
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
$408
  
1,454
  
$0.28
  
$533
  
1,483
  
$0.36
                       
Effect of dilutive securities:
                      
Stock options and other dilutive securities
    
      9
          
     11
    
                       
Diluted earnings per common share
$408
  
1,463
  
$0.28
  
$533
  
1,494
  
$0.36

 
Nine months ended September 30,
 
2013
  
2012
 
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
$1,540
  
1,465
  
$1.05
  
$1,481
  
1,502
  
$0.99
                       
Effect of dilutive securities:
                      
Stock options and other dilutive securities
    
      9
          
     12
    
                       
Diluted earnings per common share
$1,540
  
1,474
  
$1.04
  
$1,481
  
1,514
  
$0.98


 
-16-
 


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 millions):
 
Three months ended
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
Stock options and other dilutive securities excluded from the calculation of diluted earnings per common share
36
  
44
  
40
  
43

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
 
September 30,
2013
  
December 31,
2012
  
September 30,
2013
  
December 31,
2012
Bonds, notes and other securities:
                      
U.S. government and agencies
$
884
  
$
1,153
  
$
886
  
$
1,156
Total short-term investments
$
884
  
$
1,153
  
$
886
  
$
1,156
Asset-backed securities
$
47
  
$
51
  
$
39
  
$
40
Total long-term investments
$
47
  
$
51
  
$
39
  
$
40

We do not intend to sell, nor do we believe it is more likely than not that we would be required to sell, the long-term investment asset-backed securities (which are collateralized by mortgages) 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 summarizes the maturities at market value of available-for-sale securities at September 30, 2013 (in millions):
Less than one year
$634
Due in 1-5 years
252
Due in 5-10 years
  
Due after 10 years (1)
39
Total
$925

(1)
Includes $39 million of asset-backed securities that mature over time and are being reported at their final maturity dates.

Unrealized gains and losses, net of tax, are computed on a specific identification basis and are reported as a separate component of accumulated other comprehensive (loss) income in shareholders’ equity until realized.

The following tables provide 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 September 30, 2013 and December 31, 2012 (in millions):
     
September 30, 2013
     
12 months or greater
  
Total
 
Number of
securities
in a loss
position
  
Fair
value
  
Unrealized
losses
  
Fair
value
  
Unrealized
losses (1)
Asset-backed securities
20
  
$
38
  
$
(8)
  
$
38
  
$
(8)
Total long-term investments
20
  
$
38
  
$
(8)
  
$
38
  
$
(8)

(1)
Unrealized losses in securities less than 12 months were not significant.

 
-17-
 


     
December 31, 2012
     
12 months or greater
  
Total
 
Number of
securities
in a loss
position
  
Fair
value
  
Unrealized
losses (1)
  
Fair
value
  
Unrealized
losses
Asset-backed securities
22
  
$
40
  
$
(11)
  
$
40
  
$
(11)
Total long-term investments
22
  
$
40
  
$
(11)
  
$
40
  
$
(11)

(1)
Unrealized losses in securities less than 12 months were not significant.

As of September 30, 2013 and December 31, 2012, for securities that have credit losses, an unrealized loss on other than temporary impaired securities of $6M and $9M, respectively, is recognized within accumulated other comprehensive (loss) income.

Proceeds from sales and maturities of short-term investments totaled approximately $1.5 billion and $1.6 billion for the nine months ended September 30, 2013 and 2012, respectively.

8.      Inventories

Inventories comprise the following (in millions):
 
September 30,
2013
  
December 31,
2012
Finished goods
$
487
  
$
392
Work in process
  
225
    
168
Raw materials and accessories
  
329
    
271
Supplies and packing materials
  
234
    
220
Total inventories
$
1,275
  
$
1,051

9.      Investments

Investments comprise the following (in millions):
 
Ownership
interest (1)
  
September 30,
2013
  
December 31,
2012
Affiliated companies accounted for by the equity method
                  
Samsung Corning Precision Materials Co., Ltd.
  
50%
    
$
3,506
  
$
3,346
Dow Corning Corporation
  
50%
      
1,260
    
1,191
All other
20%
to
50%
    
376
    
375
           
5,142
    
4,912
Other investments
          
18
    
3
Total
        
$
5,160
  
$
4,915

(1)
Amounts reflect Corning’s direct ownership interests in the respective affiliated companies.  Corning does not exercise voting control nor control the operations of any of these entities.

 
-18-
 


Related party information for these investments in affiliates follows (in millions):
 
Three months ended
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
Related Party Transactions:
                      
Corning sales to affiliated companies
$
3
  
$
10
  
$
9
  
$
38
Corning purchases from affiliated companies
$
33
  
$
49
  
$
170
  
$
117
Corning transfers of assets, at cost, to affiliated companies
$
12
  
$
11
  
$
25
  
$
36
Dividends received from affiliated companies
$
39
  
$
56
  
$
221
  
$
577
Royalty income from affiliated companies
$
15
  
$
20
  
$
45
  
$
64
Corning services to affiliates
      
$
6
  
$
2
  
$
22

As of September 30, 2013, balances due to and due from affiliates were $20 million and $43 million, respectively.  As of December 31, 2012, balances due to and due from affiliates were $37 million and $61 million, respectively.

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

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

Samsung Corning Precision Materials 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
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
                       
Statement of Operations:
                      
Net sales
$
541
  
$
783
  
$
1,790
  
$
2,352
Gross profit
$
286
  
$
534
  
$
1,034
  
$
1,598
Net income attributable to Samsung Corning Precision
$
154
  
$
367
  
$
650
  
$
1,140
Corning’s equity in earnings of Samsung Corning Precision
$
74
  
$
186
  
$
319
  
$
562
                       
Related Party Transactions:
                      
Corning purchases from Samsung Corning Precision
$
27
  
$
31
  
$
150
  
$
83
Dividends received from Samsung Corning Precision
                  
$
518
Royalty income from Samsung Corning Precision
$
14
  
$
20
  
$
43
  
$
63
Corning transfers of machinery and equipment to Samsung Corning Precision at cost (1)
$
12
  
$
13
  
$
25
  
$
53

(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.

In the three and nine months ended September 30, 2013, Corning’s equity earnings were negatively impacted by $14 million and $41 million, respectively, when compared to the same periods in the prior year, as a result of higher taxes due to the partial expiration of tax holidays in South Korea.

 
-19-
 


As of September 30, 2013, balances due from Samsung Corning Precision were $8 million and balances due to Samsung Corning Precision were $18 million.  As of December 31, 2012, balances due from Samsung Corning Precision were $15 million and balances due to Samsung Corning Precision were $34 million.

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

In April 2011, South Korean tax authorities completed a tax audit of Samsung Corning Precision.  As a result, the tax authorities issued a pre-assessment of approximately $46 million for an asserted underpayment of withholding tax on dividends paid from September 2006 through March 2009.  Our first level of appeal was denied on October 5, 2011 and a formal assessment was issued.  The assessment was paid in full in the fourth quarter of 2011, which will allow us to continue the appeal process.  Samsung Corning Precision and Corning believe we will maintain our position when all available appeal remedies have been exhausted.

Dow Corning Corporation (Dow Corning)
Dow Corning is a U.S.-based manufacturer of silicon products.  Dow Corning’s results of operations follow (in millions):
 
Three months ended
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
                       
Statement of Operations:
                      
Net sales
$
1,427
  
$
1,545
  
$
4,120
  
$
4,638
Gross profit (1)
$
265
  
$
382
  
$
868
  
$
1,114
Net income attributable to Dow Corning
$
117
  
$
97
  
$
267
  
$
288
Corning’s equity in earnings of Dow Corning
$
57
  
$
48
  
$
137
  
$
144
                       
Related Party Transactions:
                      
Corning purchases from Dow Corning
$
5
  
$
6
  
$
16
  
$
18
Dividends received from Dow Corning
$
31
  
$
50
  
$
69
  
$
50

(1)
Gross profit for the three months ended September 30, 2013 includes R&D cost of $59 million (2012: $73 million) and selling expenses of $4 million (2012: $4 million).  Gross profit for the nine months ended September 30, 2013 includes R&D cost of $186 million (2012: $211 million) and selling expenses of $10 million (2012: $11 million).

At September 30, 2013 and December 31, 2012, amounts owed to Dow Corning were not significant.

At September 30, 2013, Dow Corning’s marketable securities included approximately $73 million of auction rate securities, net of a temporary impairment of an insignificant amount.

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.  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 $1.8 billion to the settlement trust.  As of September 30, 2013, Dow Corning had recorded a reserve for breast implant litigation of $1.6 billion.

 
-20-
 


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 September 30, 2013, Dow Corning has estimated the liability to commercial creditors to be within the range of $93 million to $304 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 $93 million, net of applicable tax benefits.

On July 20, 2012, the Chinese Ministry of Commerce (“MOFCOM”) initiated anti-dumping and countervailing duty investigations of imports of solar-grade polycrystalline silicon products from the U.S. and South Korea, based on a petition filed by Chinese solar-grade polycrystalline silicon producers.  The petition alleges that producers within these countries, including a consolidated subsidiary of Dow Corning, exported solar-grade polycrystalline silicon to China at less than normal value, and that production of solar-grade polycrystalline silicon in the U.S. has been subsidized by the U.S. government.  On July 18, 2013, MOFCOM announced its preliminary determination that China’s solar-grade polycrystalline silicon industry suffered material damage because of dumping by producers in the U.S. and South Korea.  The Chinese authorities imposed provisional antidumping duties on producers in the U.S. and South Korea ranging from 2.4% to 57.0%, including duties of 53.3% on future imports of solar-grade polycrystalline silicon products from Dow Corning and its consolidated subsidiaries into China.  On September 16, 2013, the Chinese authorities imposed provisional countervailing duties of 6.5%.  Although subject to a final review process by MOFCOM, the requirement for customers to pay provisional duties on imports from solar-grade polycrystalline silicon producers became effective on July 24, 2013 for the antidumping duties and on September 20, 2013 for the countervailing duties.  The Company will not be subject to duties for previous sales.  The Company is cooperating with MOFCOM in the investigations and is vigorously contesting the determination.

As discussed in our 2012 Form 10-K, during the fourth quarter of 2012, negative events and circumstances at Dow Corning indicated that assets of Dow Corning’s polycrystalline silicon business might be impaired.  In accordance with accounting guidance for impairment of long-lived assets, Dow Corning compared estimated undiscounted cash flows to the assets’ carrying value and determined that the asset group was recoverable as of December 31, 2012.  Upon receiving the preliminary determination notices from MOFCOM in the third quarter of 2013, Dow Corning again evaluated whether the polycrystalline silicon assets might be impaired.  The estimate of future undiscounted cash flows continued to indicate the assets were expected to be recovered.  However, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write down those assets to fair value.  Dow Corning’s estimate of cash flows might change as a result of continued pricing deterioration, ongoing oversupply in the market, or other adverse market conditions that result in non-performance by customers under long-term contracts.  Corning’s share of the carrying value of this asset group is approximately $800 million, after tax.

10.      Acquisition

On October 31, 2012, Corning acquired all of the shares of Discovery Labware, Inc. and Plasso Technology Limited and certain other assets (collectively referred to as “Purchased Assets”) from Becton Dickinson and Company for approximately $739 million.  The Purchased Assets constitute a business; therefore, the acquisition was accounted for as a business combination.  The business, referred to as Discovery Labware, designs, manufactures, markets and supplies cell culture, other laboratory reagents, core and advanced consumables for basic and applied research for life scientists, clinical researchers, and laboratory professionals globally.

 
-21-
 


The purchase price of the acquisition was allocated to the net tangible and other intangible assets acquired, with the remainder recorded as goodwill on the basis of fair value as follows (in millions):
Inventory and other current assets
$
74
Fixed Assets
  
81
Other intangible assets
  
279
Net tangible and intangible assets
$
434
Purchase price
  
739
Goodwill (1)
$
305

(1)
The goodwill recognized is partly deductible for U.S. income tax purposes.  The goodwill was allocated to the Life Sciences segment.

Goodwill is primarily related to the value of the Discovery Labware product portfolio and distribution network and its combination with Corning’s existing life sciences platform, as well as synergies and other intangibles that do not qualify for separate recognition.  Other intangible assets consist mainly of distributor relationships, trademark and trade names and are amortized over a useful life of 20 years.  Acquisition-related costs of $22 million in the twelve months ended December 31, 2012 included costs for legal, accounting, valuation and other professional services and were included in selling, general and administrative expense in the Consolidated Statements of Income.  Supplemental pro forma information was not provided because the Purchased Assets are not material to Corning’s consolidated financial statements.

11.      Property, Net of Accumulated Depreciation

Property, net follows (in millions):
 
September 30,
2013
  
December 31,
2012
Land
$
115 
  
$
112 
Buildings
  
4,218 
    
4,324 
Equipment
  
12,402 
    
12,571 
Construction in progress
  
1,139 
    
1,270 
   
17,874 
    
18,277 
Accumulated depreciation
  
(7,897)
    
(7,652)
Total
$
9,977 
  
$
10,625 

In the three months ended September 30, 2013 and 2012, interest costs capitalized as part of property, net, were $8 million and $19 million, respectively.  In the nine months ended September 30, 2013 and 2012, interest costs capitalized as part of property, net, were $25 million and $62 million, respectively

Manufacturing equipment includes certain components of production equipment that are constructed of precious metals.  At September 30, 2013 and December 31, 2012, the recorded value of precious metals each totaled $2.3 billion and $2.4 billion, respectively.  Depletion expense for precious metals in the three months ended September 30, 2013 and 2012 each totaled $4 million.  Depletion expense for precious metals in the nine months ended September 30, 2013 and 2012 totaled $15 million and $14 million, respectively.

 
-22-
 


12.      Goodwill and Other Intangible Assets

The carrying amount of goodwill by segment for the periods ended September 30, 2013 and December 31, 2012 is as follows (in millions):
 
Telecom-
munications
  
Display
Technologies
  
Specialty
Materials
  
Life
Sciences
  
Total
                             
Balance at December 31, 2012
$
209 
  
$
9
  
$
150
  
$
606 
  
$
974 
Acquired goodwill (1)
  
32 
                      
32 
Measurement period adjustment (2)
                    
(4)
    
(4)
Foreign currency translation adjustment
  
(1)
                      
(1)
Balance at September 30, 2013
$
240 
  
$
9
  
$
150
  
$
602 
  
$
1,001 

(1)
The company recorded a small acquisition and consolidated an equity company due to a change in control in the second quarter of 2013.
(2)
The Company recorded the acquisition of the Discovery Labware business of Becton Dickinson and Company in the fourth quarter of 2012.  In the second quarter of 2013, Corning recorded measurement period adjustments.

Corning’s gross goodwill balances were $7.5 billion and $7.4 billion for the periods ended September 30, 2013 and December 31, 2012, respectively.  Accumulated impairment losses were $6.5 billion for the periods ended September 30, 2013 and December 31, 2012, and were generated entirely through goodwill impairments related to the Telecommunications segment recorded primarily in 2001.

Other intangible assets are as follows (in millions):
 
September 30, 2013
  
December 31, 2012
 
Gross
  
Accumulated
amortization
  
Net
  
Gross
  
Accumulated
amortization
  
Net
Amortized intangible assets:
                                  
Patents, trademarks, and trade names 
$
290
  
$
(135)
  
$
155
  
$
282
  
$
(128)
  
$
154
Customer lists and other 
  
437
    
(42)
    
395
    
394
    
(26)
    
368
                                   
Total
$
727
  
$
(177)
  
$
550
  
$
676
  
$
(154)
  
$
522

Amortized intangible assets are primarily related to the Telecommunications and Life Sciences segments.  The net carrying amount of intangible assets increased $28 million during the first nine months of 2013, primarily due to a small acquisition completed in the third quarter of 2013.  This was offset by amortization of $24 million and foreign currency translation adjustments of $4 million.

Amortization expense related to these intangible assets is estimated to be $32 million for 2013, and approximately $32 million for 2014 through 2018.

13.      Employee Retirement Plans

As discussed in Note 1 to the financial statements, in the first quarter of 2013, we elected to change our method of recognizing actuarial gains and losses for our defined benefit pension plans.  In the second quarter of 2013, we recorded a pre-tax gain in the amount of $41 million which represented the impact to income for the finalization of the valuation of our defined benefit pension plan obligation dated December 31, 2012.

 
-23-
 


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
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
  
2013
  
2012
  
2013
  
2012
                                               
Service cost
$
16 
  
$
16 
  
$
53 
  
$
46 
  
$
3 
  
$
3 
  
$
10 
  
$
9 
Interest cost
  
33 
    
38 
    
99 
    
114 
    
10 
    
11 
    
29 
    
33 
Expected return on plan assets (1)
  
(42)
    
(41)
    
(126)
    
(123)
                        
Amortization of net loss (1)
                          
3 
    
4 
    
11 
    
12 
Amortization of prior service cost
  
1 
    
1 
    
3 
    
3 
    
(1)
    
(1)
    
(4)
    
(3)
Recognition of actuarial gain 
              
(41)
                              
Total pension and postretirement benefit expense (1)
$
8 
  
$
14 
  
$
(12)
  
$
40 
  
$
15 
  
$
17 
  
$
46 
  
$
51 

(1)
Amounts for 2012 were revised for the change in our method of recognizing pension expense.  See Note 1 of Notes to Consolidated Financial Statements for a discussion of the change and the impacts of the change for the three and nine months ended September 30, 2012.

Corning offers 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.  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 is equal to 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 and going forward.  The pre-65 retirees triggered the cap in 2010, which has impacted their contribution rate in 2011 and going forward.  Furthermore, 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.

14.      Hedging Activities

Corning is exposed to interest rate and foreign currency risks due to the movement of these rates.

The areas in which exchange rate fluctuations affect us include:

·  
Financial instruments and transactions denominated in foreign currencies, which impact earnings; and
·  
The translation of net assets in foreign subsidiaries for which the functional currency is not the U.S. dollar, which impacts our net equity.

Our most significant foreign currency exposures relate to the Japanese yen, South Korean won, New Taiwan dollar, Chinese Renminbi, and the Euro.  We seek to mitigate the impact of exchange rate movements on our operating results by using over-the-counter (OTC) derivative instruments including foreign exchange forward and option contracts typically with durations of 36 months or less.  In general, these hedges expire coincident with the timing of the underlying foreign currency commitments and transactions.

 
-24-
 


We are exposed to potential losses in the event of non-performance by our counterparties to these derivative contracts.  However, we minimize this risk by limiting the counterparties to a diverse group of highly-rated major international financial institutions with which we have other financial relationships.  We do not expect to record any losses as a result of such counterparty default.  Neither we nor our counterparties are required to post collateral for these financial instruments.  In July 2013, the Finance Committee of the Board of Directors approved the Company’s qualification for and election of the end-user exception to the mandatory swap clearing requirement of the Dodd-Frank Act.

Cash Flow Hedges
Our cash flow hedging activities utilize OTC foreign exchange forward contracts to reduce the risk that movements in exchange rates will adversely affect the net cash flows resulting from the sale of products to foreign customers and purchases from foreign suppliers.  Our cash flow hedging activity also uses interest rate swaps to reduce the risk of increases in benchmark interest rates on the probable issuance of debt and associated interest payments.  Corning uses a regression analysis to monitor the effectiveness of its cash flow hedges both prospectively and retrospectively.  Through September 30, 2013, the hedge ineffectiveness related to these instruments is not material.  Corning defers net gains and losses related to effective portion of cash flow hedges into accumulated other comprehensive (loss) income on the consolidated balance sheet until such time as the hedged item impacts earnings.  At September 30, 2013, the amount of net gain expected to be reclassified into earnings within the next 12 months is $26 million.

Fair Value Hedges
In October of 2012, we entered into two interest rate swaps that are designated as fair value hedges and economically exchange a notional amount of $550 million of previously issued fixed rate long-term debt to floating rate debt.  Under the terms of the swap agreements, we pay the counterparty a floating rate that is indexed to the one-month LIBOR rate.

Corning utilizes the long haul method for effectiveness analysis, both retrospectively and prospectively.  The analysis excludes the impact of credit risk from the assessment of hedge effectiveness.  The amount recorded in current period earnings in the other income, net component, relative to ineffectiveness, is nominal for the three and nine months ended September 30, 2013.  There were no outstanding fair value hedges in the three and nine months ended September 30, 2012.

Net gains and losses from fair value hedges and the effects of the corresponding hedged item are recorded on the same line item of the consolidated statement of operations.

Undesignated Hedges
Corning also uses OTC foreign exchange forward and option contracts that are not designated as hedging instruments for accounting purposes.  The undesignated hedges limit exposures to foreign functional currency fluctuations related to certain subsidiaries’ monetary assets, monetary liabilities and net earnings in foreign currencies.

A significant portion of the Company’s non-U.S. revenues are denominated in Japanese yen.  When these revenues are translated back to U.S. dollars, the Company is exposed to foreign exchange rate movements in the Japanese yen.  To protect translated earnings against movements in the Japanese yen, the Company has entered into a series of purchased collars and average rate forwards.

 
-25-
 


The Company also uses these types of contracts to reduce the potential for unfavorable changes in foreign exchange rates to decrease the U.S. dollar value of translated earnings.  With a purchased collar structure, the Company writes a local currency call option and purchases a local currency put option.  The purchased collars offset the impact of translated earnings above the put price and below the call strike price and that offset is reported in other income, net.  The Company entered into a series of purchased collars, settling quarterly, to hedge the effect of translation impact for each respective quarter, and span up to the fourth quarter of 2014.  Due to the nature of the instruments, only either the put option or the call option can be exercised at maturity.  As of September 30, 2013, the U.S. dollar net notional value of the purchased collars is $3.7 billion.  The Company entered into a series of average rate forwards with no associated premium, which will partially hedge the impact of Japanese yen translation on the Company’s projected 2015 net income.  These forwards settle net without obligation to deliver Japanese yen.

The Company benefits from the increase in the U.S. dollar equivalent value of its foreign currency earnings in translation.  The purchased collar, within other income, would cap the benefit at the strike price of the written call or offset the decline from translation above the strike price of the purchased put.

The fair value of these derivative contracts are recorded as either assets (gain position) or liabilities (loss position) on the Consolidated Balance Sheet.  Changes in the fair value of the derivative contracts are recorded currently in earnings in the other income line of the Consolidated Statement of operations.

The following table summarizes the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for September 30, 2013 and December 31, 2012 (in millions):
 
U.S. Dollar
  
Asset derivatives
  
Liability derivatives
 
Gross notional amount
  
Balance
sheet location
  
Fair value
  
Balance
sheet location
  
Fair value
 
Sept. 30,
2013
  
Dec. 31,
2012
    
Sept. 30,
2013
  
Dec. 31,
2012
    
Sept. 30,
2013
  
Dec. 31,
2012
                               
Derivatives designated as hedging instruments
                              
                               
Foreign exchange contracts
$    308
  
$  719
  
Other current assets
  
$  28
  
$  57
  
Other accrued liabilities
  
$  (2)
  
$  (3)
Interest rate contracts
$ 1,300
  
$  550
  
Other assets
  
$  40
      
Other liabilities
  
$(22)
    
                               
Derivatives not designated as hedging instruments
                              
                               
Foreign exchange contracts
$    591
  
$1,939
  
Other current assets
  
$    8
  
$109
  
Other accrued liabilities
  
$  (8)
  
$(10)
Translated earnings contracts
$ 8,174
      
Other current assets
  
$172
      
Other accrued liabilities
  
$(13)
    
         
Other assets
  
$  95
      
Other liabilities
  
$  (9)
    
                               
Total derivatives
$10,373
  
$3,208
      
$343
  
$166
      
$(54)
  
$(13)


 
-26-
 


The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended September 30, 2013 and 2012 (in millions):
 
Effect of derivative instruments on the consolidated financial statements
for the three months ended September 30 (2)
Derivatives in hedging relationships
Gain/(loss)
recognized in other
comprehensive income
(OCI)
  
Location of gain
reclassified from
accumulated OCI into
income (effective)
  
Gain reclassified from
accumulated OCI into
income (effective) (1)
2013
  
2012
    
2013
  
2012
                   
-
        
Sales
      
$1
Interest rate contracts
$3
      
Cost of sales
  
$  9
  
  3
Foreign exchange contracts
  (3)
  
$(3)
  
Royalties
  
  17
  
  
                   
Total cash flow hedges
$0
  
$(3)
      
$26
  
$4

(1)
The amount of hedge ineffectiveness for the three months ended September 30, 2013 and 2012 was insignificant.
(2)
Certain amounts for prior periods were reclassified to conform to the current year presentation.

The following table summarizes the effect of derivative financial instruments on Corning’s consolidated financial statements for the nine months ended September 30, 2013 and 2012 (in millions):
 
Effect of derivative instruments on the consolidated financial statements
for the nine months ended September 30 (2)
Derivatives in hedging relationships
Gain recognized in other
comprehensive income
(OCI)
  
Location of gain
reclassified from
accumulated OCI into
income (effective)
  
Gain reclassified from
accumulated OCI into
income (effective) (1)
2013
  
2012
    
2013
  
2012
                   
-
        
Sales
      
$  1
Interest rate contracts
$40
  
$15
  
Cost of sales
  
$28
  
    9
Foreign exchange contracts
  48
  
  29
  
Royalties
  
  48
  
     6 
                   
Total cash flow hedges
$88
  
$44
      
$76
  
$16

(1)
The amount of hedge ineffectiveness for the nine months ended September 30, 2013 and 2012 was insignificant.
(2)
Certain amounts for prior periods were reclassified to conform to the current year presentation.

The following table summarizes the effect on the consolidated financial statements relating to Corning’s derivative financial instruments (in millions):
Undesignated derivatives
Location of gain/(loss)
recognized in income
  
Gain/(loss) recognized in income
 
Three months ended
September 30,
  
Nine months ended
September 30,
 
2013
  
2012
  
2013
  
2012
                   
Foreign exchange contracts
Other income, net
  
$ 14
  
$(61)
  
$219
  
$73
Translated earnings contracts
Other income, net
  
  (46)
      
  205
    
                   
Total undesignated
    
$(32)
  
$(61)
  
$424
  
$73


 
-27-
 


15.      Fair Value Measurements

Fair value standards under U.S. GAAP define fair value, establish a framework for measuring fair value in applying generally accepted accounting principles, and require disclosures about fair value measurements.  The standards also identify two kinds of inputs that are used to determine the fair value of assets and liabilities: observable and unobservable.  Observable inputs are based on market data or independent sources while unobservable inputs are based on the Company’s own market assumptions.  Once inputs have been characterized, the inputs are prioritized into one of three broad levels (provided in the table below) used to measure fair value.

Fair value standards apply whenever an entity is measuring fair value under accounting pronouncements that require or permit fair value measurement and require the use of observable market data when available.  As of September 30, 2013 and December 31, 2012, the Company did not have any financial assets or liabilities that were measured on a recurring basis using unobservable (or Level 3) inputs.

The following tables provide fair value measurement information for the Company’s major categories of financial assets and liabilities measured on a recurring basis (in millions):
     
Fair value measurements at reporting date using
 
September 30,
2013
  
Quoted prices in
active markets for
identical assets
(Level 1)
  
Significant other
observable
inputs
(Level 2)
  
Significant
unobservable
inputs
(Level 3)
                     
Current assets:
                    
Short-term investments
$
886
  
$
886
          
Other current assets (1)
$
208
        
$
208
    
Non-current assets:
                    
Other assets (1)(2)
$
174
        
$
174
    
                     
Current liabilities:
                    
Other accrued liabilities (1)
$
23
        
$
23
    
Non-current liabilities:
                    
Other liabilities (1)
$
31
        
$
31
    

(1)
Derivative assets and liabilities include foreign exchange contracts, interest rate contracts, and translated earnings contracts which are measured using observable quoted prices for similar assets and liabilities.
(2)
Other assets include asset-backed securities which are measured using observable quoted prices for similar assets.

     
Fair value measurements at reporting date using
 
December 31,
2012
  
Quoted prices in
active markets for
identical assets
(Level 1)
  
Significant other
observable
inputs
(Level 2)
  
Significant
unobservable
inputs
(Level 3)
                     
Current assets:
                    
Short-term investments
$
1,156
  
$
1,156
          
Other current assets (1)
$
166
        
$
166
    
Non-current assets:
                    
Other assets (2)
$
40
        
$
40
    
                     
Current liabilities:
                    
Other accrued liabilities (1)
$
13
        
$
13
    

(1)
Derivative assets and liabilities include foreign exchange contracts which are measured using observable quoted prices for similar assets and liabilities.
(2)
Other assets include asset-backed securities which are measured using observable quoted prices for similar assets.

 
-28-
 

16.      Accumulated Other Comprehensive Income

A summary of changes in the components of accumulated other comprehensive income (loss), including our proportionate share of equity method investee’s accumulated other comprehensive income (loss), is as follows (in millions):
 
Changes in Accumulated Other Comprehensive (Loss) Income by Component (1)
for the three months ended September 30, 2013
 
Foreign
currency
translation
adjustment
and other
  
Unamortized
actuarial
losses and
prior service
costs
  
Net
unrealized
gains
(losses) on
investments
  
Net
unrealized
gains
(losses) on
designated
hedges
  
Accumulated
other
comprehensive
income (loss)
                             
Balance at June 30, 2013
$
373
  
$
(790)
  
$
(14)
  
$
43 
  
$
(388)
Other comprehensive income before reclassifications (2)
  
76
    
1 
                
77 
Amounts reclassified from accumulated other comprehensive income (3)
        
1 
          
(17)
    
(16)
Equity method affiliates (4)
  
241
    
12 
    
(1)
          
252 
Net current-period other comprehensive income (loss)
  
317
    
14 
    
(1)
    
(17)
    
313 
Balance at September 30, 2013
$
690
  
$
(776)
  
$
(15)
  
$
26 
  
$
(75)

(1)
All amounts are after tax.  Amounts in parentheses indicate debits to accumulated other comprehensive income.
(2)
Amounts are net of total tax benefit of $2 million, including $1 million related to the hedges component and $1 million related to the investments component.
(3)
Amounts are net of total tax benefit of $7 million, including $9 million related to the hedges component and $(2) million related to the retirement plans component.
(4)
Tax effects related to equity method affiliates are not significant.

 
Changes in Accumulated Other Comprehensive (Loss) Income by Component (1)
for the nine months ended September 30, 2013
 
Foreign
currency
translation
adjustment
and other
  
Unamortized
actuarial
losses and
prior service
costs
  
Net
unrealized
gains
(losses) on
investments
  
Net
unrealized
gains
(losses) on
designated
hedges
  
Accumulated
other
comprehensive
income (loss)
                             
Balance at December 31, 2012
$
1,174 
  
$
(820)
  
$
(16)
  
$
18 
  
$
356 
Other comprehensive income before reclassifications (2)
  
(477)
    
15 
          
56 
    
(406)
Amounts reclassified from accumulated other comprehensive income (3)
        
6 
          
(49)
    
(43)
Equity method affiliates (4)
  
(7)
    
23 
    
1 
    
1 
    
18 
Net current-period other comprehensive (loss) income
  
(484)
    
44 
    
1 
    
8 
    
(431)
Balance at September 30, 2013
$
690 
  
$
(776)
  
$
(15)
  
$
26 
  
$
(75)

(1)
All amounts are after tax.  Amounts in parentheses indicate debits to accumulated other comprehensive income.
(2)
Amounts are net of total tax expense of $(40) million, including $(32) million related to the hedges component and $(8) million related to the retirement plans component.