Edgar Filing: CORNING INC /NY

q3201510q.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, 2015

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

For the transition period from

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

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

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

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 16, 2015
Corning’s Common Stock, $0.50 par value per share		1,182,984,475 shares

INDEX

PART I – FINANCIAL INFORMATION
		Page
Item 1. Financial Statements (Unaudited)

Consolidated Statements of Income		3

Consolidated Statements of Comprehensive Income		4

Consolidated Balance Sheets		5

Consolidated Statements of Cash Flows		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3. Quantitative and Qualitative Disclosures About Market Risk		57

Item 4. Controls and Procedures		57

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		58

Item 1A. Risk Factors		58

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		59

Item 6. Exhibits		60

Signatures		61

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,
	2015		2014		2015		2014

Net sales	$	2,272	$	2,540	$	6,880	$	7,311
Cost of sales		1,380		1,451		4,084		4,255

Gross margin		892		1,089		2,796		3,056

Operating expenses:
Selling, general and administrative expenses		307		261		960		980
Research, development and engineering expenses		181		199		561		605
Amortization of purchased intangibles		12		9		40		25
Restructuring, impairment and other charges								51

Operating income		392		620		1,235		1,395

Equity in earnings of affiliated companies		39		95		195		243
Interest income		6		5		16		21
Interest expense		(38)		(31)		(101)		(91)
Transaction-related gain, net								74
Foreign currency hedge (loss) gain, net		(154)		765		52		622
Other expense, net		(27)		(45)		(80)		(33)

Income before income taxes		218		1,409		1,317		2,231
Provision for income taxes (Note 4)		(6)		(395)		(202)		(747)

Net income attributable to Corning Incorporated	$	212	$	1,014	$	1,115	$	1,484

Earnings per common share attributable to Corning Incorporated:
Basic (Note 5)	$	0.16	$	0.77	$	0.84	$	1.08
Diluted (Note 5)	$	0.15	$	0.72	$	0.82	$	1.03

Dividends declared per common share (1)	$	0.12	$	0.10	$	0.24	$	0.30

(1)	The first quarter 2015 dividend was declared on December 3, 2014.

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

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in millions)

	Three months ended September 30,				Nine months ended September 30,
	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014

Net income attributable to Corning Incorporated	$	212	$	1,014	$	1,115	$	1,484

Foreign currency translation adjustments and other		(181)		(676)		(477)		(539)
Net unrealized (losses) gains on investments				(3)		1		1
Unamortized gains and prior service credits for postretirement benefit plans		6				12		3
Net unrealized (losses) gains on designated hedges		(37)		5		(32)		2
Other comprehensive loss, net of tax (Note 14)		(212)		(674)		(496)		(533)

Comprehensive income attributable to Corning Incorporated	$	0	$	340	$	619	$	951

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

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

(Unaudited; in millions, except share and per share amounts)

	September 30, 2015		December 31, 2014
Assets

Current assets:
Cash and cash equivalents	$	4,440	$	5,309
Short-term investments, at fair value (Note 6)		573		759
Total cash, cash equivalents and short-term investments		5,013		6,068
Trade accounts receivable, net of doubtful accounts and allowances - $48 and $47		1,479		1,501
Inventories, net of inventory reserves - $130 and $127 (Note 7)		1,374		1,322
Deferred income taxes (Note 4)		315		248
Other current assets		1,072		1,099
Total current assets		9,253		10,238

Investments (Note 8)		1,826		1,801
Property, plant and equipment, net of accumulated depreciation - $9,027 and $8,332		12,549		12,766
Goodwill, net (Note 10)		1,330		1,150
Other intangible assets, net (Note 10)		678		497
Deferred income taxes (Note 4)		1,711		1,889
Other assets		1,551		1,722

Total Assets	$	28,898	$	30,063

Liabilities and Equity

Current liabilities:
Current portion of long-term debt (Note 3)	$	101	$	36
Accounts payable		909		997
Other accrued liabilities (Note 2)		956		1,291
Total current liabilities		1,966		2,324

Long-term debt (Note 3)		3,915		3,227
Postretirement benefits other than pensions (Note 11)		782		814
Other liabilities (Note 2)		2,165		2,046
Total liabilities		8,828		8,411

Commitments and contingencies (Note 2)
Shareholders’ equity (Note 14):
Convertible preferred stock, Series A – Par value $100 per share; Shares authorized 3,100; Shares issued: 2,300		2,300		2,300
Common stock – Par value $0.50 per share; Shares authorized 3.8 billion; Shares issued: 1,680 million and 1,672 million		840		836
Additional paid-in capital – common stock		13,590		13,456
Retained earnings		13,769		13,021
Treasury stock, at cost; Shares held: 496 million and 398 million		(8,699)		(6,727)
Accumulated other comprehensive loss		(1,803)		(1,307)
Total Corning Incorporated shareholders’ equity		19,997		21,579
Noncontrolling interests		73		73
Total equity		20,070		21,652

Total Liabilities and Equity	$	28,898	$	30,063

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

CORNING INCORPORATED AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in millions)

	Nine months ended September 30,
	2015		2014
Cash Flows from Operating Activities:
Net income	$	1,115	$	1,484
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		842		877
Amortization of purchased intangibles		40		25
Restructuring, impairment and other charges				51
Stock compensation charges		36		47
Equity in earnings of affiliated companies		(195)		(243)
Dividends received from affiliated companies		143		1,673
Deferred tax expense provision		187		414
Restructuring payments		(38)		(30)
Employee benefit payments less than (in excess) of expense		5		(5)
Gains on foreign currency hedges related to translated earnings		(42)		(600)
Unrealized translation losses on transactions		303		239
Contingent consideration for fair value adjustment				(77)
Changes in certain working capital items:
Trade accounts receivable		52		(63)
Inventories		(60)		27
Other current assets		(204)		17
Accounts payable and other current liabilities		(294)		(339)
Other, net		(45)		100
Net cash provided by operating activities		1,845		3,597

Cash Flows from Investing Activities:
Capital expenditures		(939)		(740)
Acquisitions of business, net of cash (paid) received		(531)		66
Investment in unconsolidated entities		(33)		(109)
Proceeds from loan repayments from unconsolidated entities		6		15
Short-term investments – acquisitions		(859)		(1,170)
Short-term investments – liquidations		1,046		954
Realized gains on foreign currency hedges related to translated earnings		489		226
Other, net		(1)		5
Net cash used in investing activities		(822)		(753)

Cash Flows from Financing Activities:
Net repayments of short-term borrowings and current portion of long-term debt				(50)
Principal payments under capital lease obligations		(1)		(1)
Proceeds from issuance of short-term debt		2		22
Proceeds from issuance of long-term debt		745
Proceeds from issuance of commercial paper				424
Proceeds from issuance of preferred stock (1)				400
Payments from settlement of interest rate swap arrangements		(10)
Proceeds from the exercise of stock options		99		98
Repurchases of common stock for treasury		(1,905)		(2,300)
Dividends paid		(519)		(439)
Net cash used in financing activities		(1,589)		(1,846)
Effect of exchange rates on cash		(303)		(349)
Net (decrease) increase in cash and cash equivalents		(869)		649
Cash and cash equivalents at beginning of period		5,309		4,704

Cash and cash equivalents at end of period	$	4,440	$	5,353

(1)

In the first quarter of 2014, Corning issued 1,900 shares of Preferred Stock to Samsung Display Co., Ltd. in connection with the acquisition of their equity interests in Samsung Corning Precision Materials Co., Ltd. (“Samsung Corning Precision Materials”). Corning also issued to Samsung Display an additional 400 shares of Preferred Stock at closing, for an issue price of $400 million in cash.

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

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. Generally Accepted Accounting Principles (“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, 2014 (“2014 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.

Certain prior year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no impact on our results of operations, financial position, or changes in shareholders’ equity.

New Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. (“ASU”) 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (“ASC”) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period, and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), deferring the effective date of ASU 2014-09 by one year. We can elect to adopt the provisions of ASU 2014-09 for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. We are currently assessing the adoption date and potential impact of adopting ASU 2014-09 on our financial statements and related disclosures.

2. Commitments, Contingencies and Guarantees

Pittsburgh Corning Corporation and Asbestos Litigation. 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 were 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.

PCC Plan of Reorganization

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 courts and parties. On November 12, 2013, the Bankruptcy Court issued a decision finally confirming an Amended PCC Plan of Reorganization (the “Amended PCC Plan” or the “Plan”). On September 30, 2014, the United States District Court for the Western District of Pennsylvania (the “District Court”) affirmed the Bankruptcy Court’s decision confirming the Amended PCC Plan. On October 30, 2014, one of the objectors to the Plan appealed the District Court’s affirmation of the Plan to the United States Court of Appeals for the Third Circuit (the “Third Circuit Court of Appeals”). It will likely take many months for the Third Circuit Court of Appeals to render its decision.

Under the Plan as affirmed by the Bankruptcy Court and affirmed by the District Court, Corning is required to contribute its equity interests in PCC and Pittsburgh Corning Europe N.V. (“PCE”), a Belgian corporation, and to contribute $290 million in a fixed series of payments, recorded at present value. Corning has 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 Plan requires Corning to make: (1) one payment of $70 million one year from the date the Plan becomes effective and certain conditions are met; and (2) five additional payments of $35 million, $50 million, $35 million, $50 million, and $50 million, respectively, on each of the five subsequent anniversaries of the first payment, the final payment of which is subject to reduction based on the application of credits under certain circumstances.

Non-PCC Asbestos Litigation

In addition to the claims against Corning related to its ownership interest in PCC, Corning is also the defendant in approximately 9,700 other cases (approximately 37,300 claims) alleging injuries from asbestos related to its Corhart business and similar amounts of monetary damages per case. When PCC filed for bankruptcy protection, the Court granted a preliminary injunction to suspend all asbestos cases against PCC, PPG and Corning – including these non-PCC asbestos cases (the “stay”). The stay remains in place as of the date of this filing. Under the Bankruptcy Court’s order confirming the Amended PCC Plan, the stay will remain in place until the Amended PCC Plan is finally affirmed by the District Court and the Third Circuit Court of Appeals. These non-PCC asbestos cases have been covered by insurance without material impact to Corning to date. As of September 30, 2015, Corning had received for these cases approximately $19 million in insurance payments related to those claims. If and when the Bankruptcy Court’s confirmation of the Amended PCC Plan is finally affirmed, these non-PCC asbestos claims would be allowed to proceed against Corning. In prior periods, Corning recorded in its estimated asbestos litigation liability an additional $150 million for these and any future non-PCC asbestos cases.

Total Estimated Liability for the Amended PCC Plan and the Non-PCC Asbestos Claims

The liability for the Amended PCC Plan and the non-PCC asbestos claims was estimated to be $687 million at September 30, 2015, compared with an estimate of liability of $681 million at December 31, 2014. The $687 million liability is comprised of $247 million of the fair value of PCE, $290 million for the fixed series of payments, and $150 million for the non-PCC asbestos litigation, all referenced in the preceding paragraphs. With respect to the PCE liability, at September 30, 2015 and December 31, 2014, the fair value of $247 million and $241 million of our interest in PCE significantly exceeded its carrying value of $155 million and $162 million, respectively. There have been no impairment indicators for our investment in PCE and we continue to recognize equity earnings of this affiliate. At the time Corning recorded this liability, it determined 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. As the fair value in PCE is significantly higher than book value, management believes that the risk of an additional loss in an amount materially higher than the fair value of the liability is remote. With respect to the liability for other asbestos litigation, 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 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 data becomes available; however, we cannot estimate any additional losses at this time. 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).

Non-PCC Asbestos Cases Insurance Litigation

Several of Corning’s insurers have commenced litigation in state courts for a declaration of the rights and obligations of the parties under insurance policies affecting the non-PCC asbestos cases, including rights that may be affected by the potential resolutions described above. Corning has resolved these issues with a majority of its relevant insurers, and is vigorously contesting these cases with the remaining relevant insurers. Management is unable to predict the outcome of the litigation with these remaining insurers.

Other Commitments and Contingencies

We are required, at the time a guarantee is issued, to recognize a liability for the fair value or market value of the obligation it assumes. 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.

As of September 30, 2015 and December 31, 2014, contingent guarantees totaled a notional value of $179 million and $150 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 $313 million and $287 million, at September 30, 2015 and December 31, 2014, respectively.

Product warranty liability accruals were considered insignificant at September 30, 2015 and December 31, 2014.

Corning is a defendant in various lawsuits, including environmental, product-related suits, the Dow Corning and PCC matters, and is subject to various claims that 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. Other than certain asbestos related claims, there are no other material loss contingencies related to litigation.

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 18 active 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. 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 September 30, 2015 and December 31, 2014, Corning had accrued approximately $38 million (undiscounted) and $43 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.

The ability of certain subsidiaries and affiliated companies to transfer funds is limited by provisions of foreign government regulations, affiliate agreements and certain loan agreements. At September 30, 2015, the amount of equity subject to such restrictions for consolidated subsidiaries and affiliated companies was not significant. While this amount is legally restricted, it does not result in operational difficulties since we have generally permitted subsidiaries to retain a majority of equity to support their growth programs.

3. Debt

Based on borrowing rates currently available to us for loans with similar terms and maturities, the fair value of long-term debt was $4.2 billion at September 30, 2015 and $3.6 billion at December 31, 2014, compared to recorded book values of $3.9 billion at September 30, 2015 and $3.2 billion at December 31, 2014. 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.

Debt Issuances

2015

In the second quarter of 2015, we issued $375 million of 1.50% senior unsecured notes that mature on May 8, 2018 and $375 million of 2.90% senior unsecured notes that mature on May 15, 2022. The net proceeds of $745 million will be used for general corporate purposes. We can redeem these debentures at any time, subject to certain stipulations.

2014

In the third quarter of 2014, we amended and restated our existing revolving credit facility. The amended facility provides a $2 billion unsecured multi-currency line of credit and expires on September 30, 2019. At September 30, 2015, there were no outstanding amounts on this credit facility. The facility includes affirmative and negative covenants that Corning must comply with, including a leverage (debt to capital ratio) financial covenant. As of September 30, 2015, we were in compliance with all of the covenants.

4. 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,
	2015		2014		2015		2014

Provision for income taxes	$	(6)	$	(395)	$	(202)	$	(747)
Effective tax rate		2.8%		28.0%		15.3%		33.5%

For the three and nine months ended September 30, 2015, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following benefits:

·	Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of high-taxed foreign earnings in U.S. income; and

·	The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax.

For the three and nine months ended September 30, 2014, the effective income tax rate differed from the U.S. statutory rate of 35% primarily due to the following benefits:

·	Rate differences on income (loss) of consolidated foreign companies, including the benefit of excess foreign tax credits resulting from the inclusion of high-taxed foreign earnings in U.S. income;

·	The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax; and

·	Tax incentives in foreign jurisdictions, primarily Taiwan.

These benefits were more than offset by discrete tax charges of: 1) $102 million related to South Korean withholding tax on a dividend paid by Samsung Corning Precision Materials to Corning wholly owned foreign subsidiaries for the nine months ended September 30, 2014; and 2) $163 million attributable to a change in judgment on the realizability of certain foreign deferred tax assets for the nine months ended September 30, 2014.

Corning continues to indefinitely reinvest substantially all of its foreign earnings, with the exception of approximately $6 million of current earnings in 2015 that have a net tax benefit associated with their repatriation. 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 or the development of tax planning ideas that allow us to repatriate earnings at little or no tax cost or with a tax benefit, 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.

5. Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per common share (in millions, except per share amounts):

	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Net income attributable to Corning Incorporated	$	212	$	1,014	$	1,115	$	1,484
Less: Series A convertible preferred stock dividend		24		24		73		70
Net income available to common stockholders - basic		188		990		1,042		1,414
Plus: Series A convertible preferred stock dividend (1)				24		73		70
Net income available to common stockholders - diluted	$	188	$	1,014	$	1,115	$	1,484

Weighted-average common shares outstanding - basic		1,210		1,284		1,241		1,315
Effect of dilutive securities:
Stock options and other dilutive securities		8		12		10		12
Series A convertible preferred stock (1)				115		115		109
Weighted-average common shares outstanding - diluted		1,218		1,411		1,366		1,436
Basic earnings per common share	$	0.16	$	0.77	$	0.84	$	1.08
Diluted earnings per common share	$	0.15	$	0.72	$	0.82	$	1.03

Antidilutive potential shares excluded from diluted earnings per common share:
Series A convertible preferred stock (1)		115
Employee stock options and awards		29		23		22		24
Accelerated share repurchase forward contract								4
Total		144		23		22		28

(1)	In the three months ended September 30, 2015, the Series A convertible preferred stock was anti-dilutive and therefore excluded from the calculation of diluted earnings per share.

6. 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, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Bonds, notes and other securities:
U.S. government and agencies	$	573	$	759	$	573	$	759
Total short-term investments	$	573	$	759	$	573	$	759
Asset-backed securities	$	39	$	42	$	35	$	38
Total long-term investments	$	39	$	42	$	35	$	38

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 contractual maturities of available-for-sale securities at September 30, 2015 (in millions):

Less than one year	$545
Due in 1-5 years	28
Due in 5-10 years
Due after 10 years (1)	35
Total	$608

(1)	Includes $35 million of asset-based securities that mature over time and are being reported at their final maturity dates.

For the nine months ended September 30, 2015 and 2014, proceeds from sales and maturities of short-term investments each totaled approximately $1.0 billion.

7. Inventories, Net of Inventory Reserves

Inventories, net of inventory reserves comprise the following (in millions):

	September 30, 2015		December 31, 2014
Finished goods	$	583	$	486
Work in process		257		255
Raw materials and accessories		246		302
Supplies and packing materials		288		279
Total inventories, net of inventory reserves	$	1,374	$	1,322

8. Investments

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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Statement of Operations:
Net sales	$	1,389	$	1,520	$	4,177	$	4,545
Gross profit (1)	$	336	$	351	$	1,058	$	1,071
Net income attributable to Dow Corning	$	72	$	176	$	370	$	476
Corning’s equity in earnings of Dow Corning	$	36	$	88	$	185	$	234

(1)	Gross profit for the three and nine months ended September 30, 2015 includes research and development costs of $54 million and $179 million (2014: $70 million and $207 million).

Dow Corning’s net income in the three and nine months ended September 30, 2015 includes a pre-tax loss of $56 million and $98 million, respectively, on a derivative instrument. Additionally, in the first quarter of 2015, Dow Corning recorded a pre-tax gain of $178 million on the settlement of long-term sales agreements.

Dow Corning’s net income in the three and nine months ended September 30, 2014 includes a pre-tax (loss) gain of $(24) million and $90 million, respectively, on a derivative instrument. Additionally, for the three months ended September 30, 2014 Dow Corning’s net income includes a foreign tax credit of $82 million.

9. Acquisitions

Corning completed four acquisitions during the first quarter of 2015. During the period ending September 30, 2015, minor adjustments were made to the preliminary allocation of the total purchase consideration related to working capital adjustments and true-up of the fair value of assets acquired for the four acquisitions. Corning has not completed its accounting for the acquisitions; therefore, amounts are subject to change. A summary of the preliminary allocation of the total purchase consideration for the four acquisitions is as follows (in millions):

Cash and cash equivalents	$	2
Trade receivables		49
Inventory		28
Property, plant and equipment		37
Other intangible assets		242
Other current and non-current assets		22
Current and non-current liabilities		(59)
Total identified net assets		321
Purchase consideration		(534)
Goodwill (1)	$	213

(1)	The goodwill was allocated to the Optical Communications segment.

The total consideration related to the acquisitions primarily consisted of cash and, in two of the acquisitions, contingent consideration. The contingent consideration arrangements may require additional amounts to be paid in 2016 and 2017 based on projections of future revenues. The combined potential additional consideration is capped at $28 million. The total fair value of the contingent consideration for the two acquisitions was fair valued at $13 million as of the acquisition date and $10 million as of September 30, 2015. The change in fair value of contingent consideration of $3 million was recorded as an adjustment to selling, general and administrative expenses.

The goodwill generated from these acquisitions is primarily related to the value of the product portfolio and customer/distribution networks acquired, combined with Corning’s existing business segments, as well as market participant synergies and other intangibles that do not qualify for separate recognition. The goodwill is partially deductible for income tax purposes.

The acquired amortizable intangible assets have a weighted-average useful life of approximately 10 years.

Acquisition-related costs of $9 million included in selling, general and administrative expense in the Consolidated Statements of Income for the nine months ended September 30, 2015 included costs for legal, accounting, valuation and other professional services. The Consolidated Financial Statements include the operating results of each business combination from the date of acquisition. Pro forma results of operations have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to Corning’s financial results.

10. Goodwill and Other Intangible Assets

The carrying amount of goodwill by segment for the periods ended September 30, 2015 and December 31, 2014 is as follows (in millions):

	Optical Communications		Display Technologies		Specialty Materials		Life Sciences		Total

Balance at December 31, 2014	$	238	$	134	$	198	$	580	$	1,150
Acquired goodwill (1)		220								220
Measurement period adjustments		(7)								(7)
Foreign currency translation adjustment		(10)		(7)		(3)		(13)		(33)
Balance at September 30, 2015	$	441	$	127	$	195	$	567	$	1,330

(1)	The Company completed several acquisitions in the Optical Communications segment during the first quarter of 2015. Refer to Note 9 (Acquisitions) to the Consolidated Financial Statements for additional information on these acquisitions.

Corning’s gross goodwill balances for the periods ended September 30, 2015 and December 31, 2014 were $7.8 billion and $7.6 billion, respectively. Accumulated impairment losses were $6.5 billion for the periods ended September 30, 2015 and December 31, 2014, and were generated entirely through goodwill impairments related to the Optical Communications segment recorded primarily in 2001.

Other intangible assets are as follows (in millions):

	September 30, 2015						December 31, 2014
	Gross		Accumulated amortization		Net		Gross		Accumulated amortization		Net
Amortized intangible assets:
Patents, trademarks, and trade names	$	353	$	159	$	194	$	302	$	149	$	153
Customer lists and other		579		95		484		411		67		344
Total	$	932	$	254	$	678	$	713	$	216	$	497

Corning’s amortized intangible assets are primarily related to the Optical Communications and Life Sciences segments. The net carrying amount of intangible assets increased during the first nine months of 2015, primarily due to acquisitions of $242 million in other intangible assets offset by amortization of $40 million and foreign currency translation adjustments of $20 million.

Amortization expense related to these intangible assets is estimated to be $57 million for 2015, $56 million annually from 2016 to 2019, and $51 million for 2020.

11. 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 September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014		2015		2014		2015		2014

Service cost	$	22	$	30	$	67	$	62	$	3	$	4	$	10	$	9
Interest cost		36		42		109		118		8		10		24		28
Expected return on plan assets		(44)		(45)		(133)		(131)
Amortization of net loss										1				3
Amortization of prior service cost (credit)		2		1		5		4		(2)		(3)		(5)		(5)
Recognition of actuarial loss						8
Total pension and postretirement benefit expense	$	16	$	28	$	56	$	53	$	10	$	11	$	32	$	32

12. Hedging Activities

Undesignated Hedges

The table below includes a total gross notional value for the foreign currency hedges related to translated earnings of $12.7 billion at September 30, 2015 (at December 31, 2014: $12.1 billion), including zero-cost collars of $5.7 billion (at December 31, 2014: $2.3 billion) and average rate forwards of $7.0 billion (at December 31, 2014: $9.8 billion). With respect to the zero-cost collars, the gross notional amount includes the value of both the put and call options. However, due to the nature of the zero-cost collars, either the put or the call option can be exercised at maturity. As of September 30, 2015, the total net notional value of the zero-cost collars was $3.0 billion (at December 31, 2014: $1.2 billion).

The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for September 30, 2015 and December 31, 2014 (in millions):

	U.S. Dollar		Asset derivatives			Liability derivatives
	Gross notional amount		Balance sheet location	Fair value		Balance sheet location	Fair value
	Sept. 30, 2015	Dec. 31, 2014	Balance sheet location	Sept. 30, 2015	Dec. 31, 2014	Balance sheet location	Sept. 30, 2015	Dec. 31, 2014

Derivatives designated as hedging instruments

Foreign exchange contracts	$ 803	$ 487	Other current assets	$ 7	$ 22	Other accrued liabilities	$ (10)	$ (6)
			Other assets	1		Other liabilities	(28)

Interest rate contracts	550	1,300	Other assets	2	1	Other liabilities		(15)

Derivatives not designated as hedging instruments

Foreign exchange contracts, other	592	1,285	Other current assets	2	17	Other accrued liabilities	(5)	(5)

Foreign currency hedges related to translated earnings	12,678	12,126	Other current assets	540	649	Other accrued liabilities	(59)	(33)
			Other assets	605	846	Other liabilities	(72)

Total derivatives	$14,623	$15,198		$1,157	$1,535		$(174)	$(59)

The following tables summarize the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended September 30, 2015 and 2014 (in millions):

	Effect of derivative instruments on the consolidated financial statements for the three months ended September 30
Derivatives in hedging relationships	Gain/(loss) recognized in other comprehensive income (OCI)		Location of gain/(loss) reclassified from accumulated OCI into income (effective)	Gain reclassified from accumulated OCI into income (effective) (1)
Derivatives in hedging relationships	2015	2014		2015	2014

Interest rate hedges			Sales	$4	$1
Foreign exchange contracts	$(58)	$11	Cost of sales	1	2

Total cash flow hedges	$(58)	$11		$5	$3

(1)	The amount of hedge ineffectiveness at September 30, 2015 and 2014 was insignificant.

The following tables summarize the effect of derivative financial instruments on Corning’s consolidated financial statements for the nine months ended September 30, 2015 and 2014 (in millions):

	Effect of derivative instruments on the consolidated financial statements for the nine months ended September 30
Derivatives in hedging relationships	Gain/(loss) recognized in other comprehensive income (OCI)		Location of gain/(loss) reclassified from accumulated OCI into income (effective)	Gain reclassified from accumulated OCI into income (effective) (1)
Derivatives in hedging relationships	2015	2014		2015	2014

Interest rate hedges	$ (7)		Sales	$14	$1
Foreign exchange contracts	(24)	$6	Cost of sales	7	2

Total cash flow hedges	$(31)	$6		$21	$3

(1)	The amount of hedge ineffectiveness at September 30, 2015 and 2014 was insignificant.

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,
		2015		2014		2015		2014

Foreign exchange contracts – balance sheet	Foreign currency hedge gain (loss), net	$	(6)	$	21	$	7	$	16
Foreign exchange contracts – loans	Foreign currency hedge gain (loss), net		1		5		3		6
Foreign currency hedges related to translated earnings	Foreign currency hedge gain (loss), net		(149)		739		42		600

Total undesignated		$	(154)	$	765	$	52	$	622

13. 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 other accounting pronouncements that require or permit fair value measurement and require the use of observable market data when available.

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, 2015		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	$	573	$	513	$	60
Other current assets (1)	$	549			$	549
Non-current assets:
Other assets (1)(2)	$	1,088			$	643	$	445

Current liabilities:
Other accrued liabilities (1)	$	74			$	74
Non-current liabilities:
Other liabilities (1)(3)	$	110			$	100	$	10

(1)	Derivative assets and liabilities include foreign exchange forward and zero-cost collar contracts, and interest rate swaps 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 and contingent consideration assets which are measured by applying an option pricing model using projected future revenue.

(3)	Other liabilities include Level 3 contingent consideration payables which are measured by applying an option pricing model using projected future revenues.

			Fair value measurements at reporting date using
	December 31, 2014		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	$	759	$	759
Other current assets (1)	$	687			$	687
Non-current assets:
Other assets (1)(2)	$	1,330			$	885	$	445

Current liabilities:
Other accrued liabilities (1)	$	44			$	44
Non-current liabilities:
Other liabilities (1)	$	15			$	15

(1)	Derivative assets and liabilities include foreign exchange forward and zero-cost collar contracts, and interest rate swaps 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 and contingent consideration assets which are measured by applying an option pricing model using projected future revenue.

As a result of the acquisition of Samsung Corning Precision Materials in January 2014, the Company has contingent consideration that was measured using unobservable (Level 3) inputs. Changes in the fair value of the contingent consideration in future periods are valued using an option pricing model and are recorded in Corning’s results in the period of the change. As of September 30, 2015 and December 31, 2014, the fair value of the potential receipt of the contingent consideration in 2018 was $445 million and $445 million, respectively.

As a result of the acquisitions of iBwave Solutions Inc. and the fiber-optics business of Samsung Electronics Co., Ltd., the Company has contingent consideration that was measured using unobservable (Level 3) inputs. As of September 30, 2015, the fair value of the contingent consideration payable is $10 million.

There were no significant financial assets and liabilities measured on a nonrecurring basis during the nine months ended September 30, 2015.

14. Shareholders’ Equity

Fixed Rate Cumulative Convertible Preferred Stock, Series A

On January 15, 2014, Corning designated a new series of its preferred stock as Fixed Rate Cumulative Convertible Preferred Stock, Series A, par value $100 per share, and issued 2,300 shares of Preferred Stock at an issue price of $1 million per share, for an aggregate issue price of $2.3 billion. The Preferred Stock is convertible at the option of the holder and the Company upon certain events, at a conversion rate of 50,000 shares of Corning’s common stock per one share of Preferred Stock, subject to certain anti-dilution provisions. As of September 30, 2015, the Preferred Stock has not been converted, and none of the anti-dilution provisions have been triggered.

Share Repurchases

During the three and nine months ended September 30, 2015, we repurchased 46.5 million and 97.0 million shares of common stock for $827 million and $1,955 million, respectively, as part of a $1.5 billion share repurchase program announced on December 3, 2014 and as part of a $2 billion share repurchase program announced on July 15, 2015. The program announced on December 3, 2014 was completed in the third quarter of 2015.

Accumulated Other Comprehensive Income

In the three and nine months ended September 30, 2015 and 2014, the primary changes in accumulated other comprehensive income (“AOCI”) were related to the foreign currency translation component.

A summary of changes in the foreign currency translation adjustment component of AOCI is as follows (in millions):

	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Beginning balance	$	(877)	$	629	$	(581)	$	492
Other comprehensive loss		(163)		(600)		(399)		(313)
Equity method affiliates		(18)		(76)		(78)		(226)
Net current-period other comprehensive loss		(181)		(676)		(477)		(539)
Ending balance	$	(1,058)	$	(47)	$	(1,058)	$	(47)

In the first quarter of 2014, a $136 million cumulative foreign currency translation gain was released to income as a result of the step acquisition of Corning Precision Materials and included in the gain on previously held equity investment.

There were no material tax effects related to foreign currency translation gains and losses.

15. Share-based Compensation

Stock Compensation Plans

The Company measures and recognizes compensation cost for all share-based payment awards made to employees and directors based on estimated fair values. Fair values for stock options were estimated using a multiple-point Black-Scholes valuation model. Share-based compensation cost was approximately $11 million and $19 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $36 million and $47 million for the nine months ended September 30, 2015 and 2014, respectively. Amounts for all periods presented included compensation expense for employee stock options and time-based restricted stock and restricted stock units.

Stock Options

Corning’s stock option plans provide non-qualified and incentive stock options to purchase authorized but unissued shares, or treasury shares, at the market price on the grant date and generally become exercisable in installments from one to five years from the grant date. The maximum term of non-qualified and incentive stock options is 10 years from the grant date.

The following table summarizes information concerning stock options outstanding including the related transactions under the stock option plans for the nine months ended September 30, 2015:

	Number of Shares (in thousands)	Weighted- Average Exercise Price	Weighted- Average Remaining Contractual Term in Years	Aggregate Intrinsic Value (in thousands)
Options Outstanding as of December 31, 2014	48,724	$18.94
Granted	1,578	21.48
Exercised	(6,080)	16.31
Forfeited and Expired	(247)	18.83
Options Outstanding as of September 30, 2015	43,975	19.40	4.10	$67,066
Options Expected to Vest as of September 30, 2015	43,923	19.40	4.09	67,027
Options Exercisable as of September 30, 2015	36,470	19.84	3.26	54,856

The aggregate intrinsic value (market value of stock less option exercise price) in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price on September 30, 2015, which would have been received by the option holders had all option holders exercised their “in-the-money” options as of that date.

As of September 30, 2015, there was approximately $9 million of unrecognized compensation cost related to stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of 1.8 years. Compensation cost related to stock options was approximately $2 million and $9 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $13 million and $20 million for the nine months ended September 30, 2015 and 2014, respectively.

Proceeds received from the exercise of stock options were $99 million and $98 million for the nine months ended September 30, 2015 and 2014, respectively. Proceeds received from the exercise of stock options were included in financing activities on the Company’s Consolidated Statements of Cash Flows. The total intrinsic value of options exercised for the nine months ended September 30, 2015 and 2014 was approximately $46 million and $60 million, respectively. The income tax benefit realized from share-based compensation was not significant for the three and nine months ended September 30, 2015. There was an immaterial amount of income tax benefits realized from share-based compensation for the three and nine months ended September 30, 2014 due to net credit carryforwards available to the Company. Refer to Note 4 (Income Taxes) to the consolidated financial statements.

The following inputs were used for the valuation of option grants under our stock option plans:

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Expected volatility	44.2	-	44.2%	45.7	-	45.7%	44.2	-	44.9%	45.7	-	46.2%
Weighted-average volatility	44.2	-	44.2%	45.7	-	45.7%	44.2	-	44.9%	45.7	-	46.2%
Expected dividends	2.67	-	2.67%	1.98	-	1.98%	1.92	-	2.67%	1.90	-	2.09%
Risk-free rate	2.0	-	2.0%	2.0	-	2.0%	1.9	-	2.0%	2.0	-	2.2%
Average risk-free rate	2.0	-	2.0%	2.0	-	2.0%	1.9	-	2.0%	2.0	-	2.2%
Expected term (in years)	7.2	-	7.2	7.2	-	7.2	7.2	-	7.2	7.2	-	7.2
Pre-vesting departure rate	0.6	-	0.6%	0.5	-	0.5%	0.6	-	0.6%	0.5	-	0.5%

Expected volatility is based on a blended approach defined as the weighted average of the short-term implied volatility, the most recent volatility for the period equal to the expected term, and the most recent 15-year historical volatility. The expected term assumption is the period of time the options are expected to be outstanding, and is calculated using a combination of historical exercise experience adjusted to reflect the current vesting period of options being valued, and partial life cycles of outstanding options. The risk-free rate assumption is the implied rate for a zero-coupon U.S. Treasury bond with a term equal to the option’s expected term. The ranges in the table above reflect results from separate groups of employees exhibiting different exercise behavior.

Incentive Stock Plans

The Corning Incentive Stock Plan permits restricted stock and restricted stock unit grants, either determined by specific performance goals or issued directly, in most instances, subject to the possibility of forfeiture and without cash consideration. Restricted stock and restricted stock units under the Incentive Stock Plan are granted at the closing market price on the grant date, contingently vest over a period of generally one to ten years, and generally have contractual lives of one to ten years. The fair value of each restricted stock grant or restricted stock unit awarded under the Incentive Stock Plan is based on the grant date closing price of the Company’s stock.

Time-Based Restricted Stock and Restricted Stock Units:

Time-based restricted stock and restricted stock units are issued by the Company on a discretionary basis, and are payable in shares of the Company’s common stock upon vesting. The fair value is based on the closing market price of the Company’s stock on the grant date. Compensation cost is recognized over the requisite vesting period and adjusted for actual forfeitures before vesting.

The following table represents a summary of the status of the Company’s non-vested time-based restricted stock and restricted stock units as of December 31, 2014, and changes which occurred during the nine months ended September 30, 2015:

	Shares (000’s)	Weighted Average Grant-Date Fair Value
Non-vested shares and share units at December 31, 2014	5,737	$	15.43
Granted	1,525		22.14
Vested	(1,836)		13.94
Forfeited	(59)		21.21
Non-vested shares and share units at September 30, 2015	5,367	$	17.78

As of September 30, 2015, there was approximately $30 million of unrecognized compensation cost related to non-vested time-based restricted stock and restricted stock units compensation arrangements granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.9 years. Compensation cost related to time-based restricted stock and restricted stock units was approximately $9 million and $10 million for the three months ended September 30, 2015 and 2014, respectively, and approximately $23 million and $27 million for the nine months ended September 30, 2015 and 2014, respectively.

16. Reportable Segments

Our reportable segments are as follows:

·	Display Technologies – manufactures glass substrates primarily for flat panel liquid crystal displays.

·	Optical Communications – manufactures carrier network and enterprise network components for the telecommunications industry.

·	Environmental Technologies – manufactures ceramic substrates and filters for automotive and diesel applications.

·	Specialty Materials – manufactures products that provide more than 150 material formulations for glass, glass ceramics and fluoride crystals to meet demand for unique customer needs.

·	Life Sciences – manufactures glass and plastic labware, equipment, media and reagents to provide workflow solutions for scientific applications.

All other reportable segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This group is primarily comprised of the results of Corning Precision Materials’ non-LCD business and new product lines and development projects that involve the use of various technologies for new products such as advanced flow reactors and adjacency businesses in pursuit of thin, strong glass.

We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We included the earnings of equity affiliates that are closely associated with our reportable segments in the respective segment’s net income. We have allocated certain common expenses among reportable segments differently than we would for stand-alone financial information. Segment net income may not be consistent with measures used by other companies. The accounting policies of our reportable segments are the same as those applied in the consolidated financial statements.

Reportable Segments (in millions)

		Display Technologies		Optical Communications		Environmental Technologies		Specialty Materials		Life Sciences		All Other		Total
Three months ended September 30, 2015
	Net sales	$	757	$	747	$	257	$	288	$	211	$	12	$	2,272
	Depreciation (1)	$	147	$	41	$	32	$	29	$	15	$	9	$	273
	Amortization of purchased intangibles			$	7					$	5			$	12
	Research, development and engineering expenses (2)	$	28	$	33	$	21	$	27	$	6	$	34	$	149
	Restructuring, impairment and other charges							$	2					$	2
	Equity in earnings of affiliated companies	$	(3)									$	4	$	1
	Income tax (provision) benefit	$	(119)	$	(34)	$	(19)	$	(23)	$	(9)	$	19	$	(185)
	Net income (loss) (3)	$	255	$	70	$	38	$	46	$	18	$	(38)	$	389

		Display Technologies		Optical Communications		Environmental Technologies		Specialty Materials		Life Sciences		All Other		Total
Three months ended September 30, 2014
	Net sales	$	1,009	$	698	$	282	$	327	$	214	$	10	$	2,540
	Depreciation (1)	$	166	$	38	$	29	$	30	$	15	$	9	$	287
	Amortization of purchased intangibles			$	3					$	6			$	9
	Research, development and engineering expenses (2)	$	31	$	35	$	23	$	35	$	6	$	43	$	173
	Restructuring, impairment and other charges	$	3									$	(3)
	Equity in earnings of affiliated companies	$	(3)									$	4	$	1
	Income tax (provision) benefit	$	(136)	$	(35)	$	(28)	$	(25)	$	(9)	$	21	$	(212)
	Net income (loss) (3)	$	387	$	68	$	57	$	43	$	19	$	(41)	$	533

		Display Technologies		Optical Communications		Environmental Technologies		Specialty Materials		Life Sciences		All Other		Total
Nine months ended September 30, 2015
	Net sales	$	2,354	$	2,244	$	799	$	832	$	619	$	32	$	6,880
	Depreciation (1)	$	455	$	122	$	93	$	82	$	45	$	29	$	826
	Amortization of purchased intangibles			$	24					$	15			$	39
	Research, development and engineering expenses (2)	$	78	$	101	$	67	$	87	$	17	$	123	$	473
	Restructuring, impairment and other charges			$	(1)			$	5					$	4
	Equity in earnings of affiliated companies	$	(8)									$	12	$	4
	Income tax (provision) benefit	$	(387)	$	(100)	$	(64)	$	(66)	$	(26)	$	63	$	(580)
	Net income (loss) (3)	$	852	$	204	$	132	$	128	$	52	$	(131)	$	1,237

		Display Technologies		Optical Communications		Environmental Technologies		Specialty Materials		Life Sciences		All Other		Total
Nine months ended September 30, 2014
	Net sales	$	2,925	$	1,977	$	842	$	886	$	647	$	34	$	7,311
	Depreciation (1)	$	510	$	111	$	89	$	86	$	46	$	21	$	863
	Amortization of purchased intangibles			$	7					$	18			$	25
	Research, development and engineering expenses (2)	$	117	$	106	$	65	$	102	$	16	$	119	$	525
	Restructuring, impairment and other charges	$	42	$	12							$	(3)	$	51
	Equity in earnings of affiliated companies	$	(16)			$	2					$	13	$	(1)
	Income tax (provision) benefit	$	(453)	$	(85)	$	(72)	$	(62)	$	(26)	$	59	$	(639)
	Net income (loss) (3)	$	878	$	156	$	147	$	113	$	54	$	(140)	$	1,208

(1)	Depreciation expense for Corning’s reportable segments includes an allocation of depreciation of corporate property not specifically identifiable to a segment.

(2)	Research, development and engineering expenses include direct project spending that is identifiable to a segment.

(3)

Many of Corning’s administrative and staff functions are performed on a centralized basis. Where practicable, Corning charges these expenses to segments based upon the extent to which each business uses a centralized function. Other staff functions, such as corporate finance, human resources and legal, are allocated to segments, primarily as a percentage of sales.

A reconciliation of reportable segment net income to consolidated net income follows (in millions):

	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Net income of reportable segments	$	427	$	574	$	1,368	$	1,348
Non-reportable segments		(38)		(41)		(131)		(140)
Unallocated amounts:
Net financing costs (1)		(31)		(27)		(80)		(86)
Stock-based compensation expense		(11)		(19)		(36)		(47)
Exploratory research		(32)		(24)		(86)		(75)
Corporate contributions		(13)		(19)		(37)		(35)
Equity in earnings of affiliated companies, net of impairments (2)		38		94		191		245
Asbestos settlement		9		(5)		6		(11)
Unrealized (loss) gain on foreign currency hedges related to translated earnings		(200)		431		(282)		282
Other corporate items (3)		63		50		202		3
Net income	$	212	$	1,014	$	1,115	$	1,484

(1)	Net financing costs include interest income, interest expense, and interest costs and investment gains associated with benefit plans.

(2)	Primarily represents the equity earnings of Dow Corning.

(3)	Other corporate items include the tax impact of the unallocated amounts, excluding foreign currency hedges related to translated earnings.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ORGANIZATION OF INFORMATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides a historical and prospective narrative on the Company’s financial condition and results of operations. This interim MD&A should be read in conjunction with the MD&A in our 2014 Form 10-K. The various sections of this MD&A contain a number of forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “plans,” “goals,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “should” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in “Risk Factors” in Part I, Item 1A of our 2014 Form 10-K, and as may be updated in our Forms 10-Q. Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of September 30, 2015.

Our MD&A includes the following sections:

Overview

·	Results of Operations

·	Core Performance Measures

·	Reportable Segments

·	Capital Resources and Liquidity

·	Critical Accounting Estimates

·	New Accounting Standards

·	Environment

·	Forward-Looking Statements

OVERVIEW

Corning’s results in the three and nine months ended September 30, 2015 reflect the macro-economic headwinds facing our businesses in several regions of the world, as well as the negative impact of the strengthening of the U.S. dollar. Net sales decreased by 11% and 6%, respectively, driven by declines in all of our segments except Optical Communications, and net income was down 79% and 25%, respectively, when compared to the same periods in 2014.

Net sales in the third quarter and first nine months of 2015 were $2,272 million and $6,880 million, respectively, a decrease of $268 million and $431 million when compared to the same periods in 2014. Sales in our Optical Communications segment increased by $49 million, or 7%, and $267 million, or 14%, respectively, but were more than offset by declines in our other segments. The increase in sales in the Optical Communications segment was mainly due to the impact of several acquisitions completed in 2015 and an increase in volume in North America in both carrier network and enterprise network products. The decrease in sales of $252 million, or 25%, and $571 million, or 20%, respectively, in the Display Technologies segment was the most significant segment decline, and was driven by the depreciation of the Japanese yen versus the U.S. dollar and price declines in the low-teens in percentage terms.

In the third quarter of 2015, we generated net income of $212 million or $0.15 per share, compared to net income of $1,014 million or $0.72 per share for the same period in 2014. The decrease in net income was primarily driven by the following items:

·	The decrease in unrealized gains from our foreign currency hedges related to translated earnings in the amount of $631 million;

A decrease of $132 million in the Display Technologies segment, driven by price declines in the low-teens in percentage terms and the impact of the change in the fair value of the contingent consideration resulting from the acquisition of Corning Precision Materials in the amount of $70 million; and

·	A decrease in equity earnings of $56 million.

The translation impact of fluctuations in foreign currency exchange rates negatively affected Corning’s consolidated net income in the three months ended September 30, 2015 in the amount of $88 million when compared to the same period in 2014. This impact was partially offset by the increase in the realized gain from our foreign currency hedges related to translated earnings of $59 million.

In the nine months ended September 30, 2015, we generated net income of $1,115 million or $0.82 per share, compared to net income of $1,484 million or $1.03 per share for the same period in 2014. The decrease in net income was primarily due to the following items:

·	The decrease in the unrealized gains from our foreign currency hedges related to translated earnings in the amount of $564 million;

·	A decrease in equity earnings $48 million; and

·	A decrease of $26 million in the Display Technologies segment, driven by price declines in the low-teens in percentage terms and the impact of the change in the fair value of the contingent consideration resulting from the acquisition of Corning Precision Materials in the amount of $60 million.

The decrease in net income for the nine months ended September 30, 2015 was partially offset by the following items:

·	The absence of several tax-related items recorded in the first half of 2014 in the amount of $180 million, including the establishment of deferred tax valuation allowances in Japan and Germany;

·	The absence of the dividend withholding tax in the amount of $102 million on Corning’s share of the dividend from Samsung Corning Precision Materials distributed in the first quarter of 2014; and

·	An increase of $48 million in the Optical Communications segment, due to higher sales volume for both carrier network and enterprise network products, the favorable impact of several acquisitions completed this year and manufacturing efficiencies gained through cost reductions.

The translation impact of fluctuations in foreign currency exchange rates negatively affected Corning’s consolidated net income in the nine months ended September 30, 2015 in the amount of $262 million when compared to the same period in 2014. This impact was partially offset by the increase in the realized gain from our foreign currency translation hedges related to translated earnings of $183 million.

Protecting Financial Health

Our financial position remains strong, and we generated positive cash flow from operating activities. Significant items in the first nine months of 2015 include the following:

Operating cash flow in the nine months ended September 30, 2015 was $1,845 million, a decrease of $1,752 million when compared to the same period in 2014. Excluding the dividend received in the first quarter of 2014 from Samsung Corning Precision Materials of $1,574 million, cash flow from operations decreased by $178 million;

·	We ended the third quarter of 2015 with $5,013 million of cash, cash equivalents and short-term investments, a decrease from the balance at December 31, 2014 of $6,068 million, but well above our debt balance at September 30, 2015 of $4,016 million; and

·	Our debt to capital ratio increased from 13.1% reported at December 31, 2014 to 16.7% at September 30, 2015, driven by our share repurchase program and the debt issuance in the second quarter of 2015.

Investing In Our Future

Corning is one of the world’s leading innovators in materials science. For more than 160 years, Corning has applied its unparalleled expertise in specialty glass, ceramics, and optical physics to develop products that have created new industries and transformed people’s lives. Our spending level for research, development and engineering remained consistent at 8% of sales in the first nine months of 2015 when compared to the first nine months of 2014. We continue to maintain our innovation strategy focused on growing our existing businesses, developing opportunities adjacent or closely related to our existing technical and manufacturing capabilities, and investing in long-range opportunities in each of our market segments. We continue to work on new products, including glass substrates for high performance displays and LCD applications, precision glass for advanced displays, emissions control products for cars, trucks, and off-road vehicles, products that accelerate drug discovery and manufacturing and the optical fiber, cable and hardware and equipment that enable fiber-to-the-premises, and next generation data centers. In addition, we are focusing on wireless solutions for diverse venue applications, such as distributed antenna systems. We have focused our research, development and engineering spending to support the advancement of new product attributes for our Corning® Gorilla® Glass suite of products. We will continue to focus on adjacent glass opportunities which leverage existing materials or manufacturing processes, including Corning® Willow™ Glass, our ultra-slim flexible glass substrate for use in next-generation consumer electronic technologies.

Capital spending totaled $939 million and $740 million for the nine months ended September 30, 2015 and 2014, respectively. Spending in the first nine months of 2015 was driven primarily by the Display Technologies segment, and focused on finishing line optimization and tank rebuilds. We expect our 2015 capital spending to be approximately $1.3 billion. We expect that approximately $600 million will be directed toward our Display Technologies segment.

2015 Corporate Outlook

We will continue to focus on our strategy to grow our businesses through product innovations and acquisitions. We remain confident that our strategy to grow through global innovation, while preserving our financial stability, will enable our continued long-term success. We anticipate Corning will be negatively impacted in 2015 by the weakening global economy, particularly in China, and the impact of the strengthening of the U.S. dollar versus worldwide currencies. When compared to 2014, we expect sales to decline in all of our segments except Optical Communications, which is benefiting from recent acquisitions. While we expect our Display Technologies segment will be negatively impacted by the softness in the global television market, we are encouraged by longer-term industry trends, including moderate LCD glass price declines and consumer demand for larger flat panel displays. And although we expect sales in the Specialty Materials segment to decline in 2015, we are encouraged by the strong industry acceptance of Corning® Gorilla® Glass 4, driven by consumer demand for handheld electronic devices, particularly new smartphone models.

RESULTS OF OPERATIONS

Selected highlights for the third quarter follow (dollars in millions):

	Three months ended September 30,					% change	Nine months ended September 30,				% change
	2015		2014			15 vs. 14	2015		2014		15 vs. 14

Net sales	$	2,272	$	2,540		(11)%	$	6,880	$	7,311	(6)%

Gross margin	$	892	$	1,089		(18)%	$	2,796	$	3,056	(9)%
(gross margin %)		39%		43%				41%		42%

Selling, general and administrative expenses	$	307	$	261	&