q2201610q.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 June 30, 2016

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 July 15, 2016
Corning’s Common Stock, $0.50 par value per share
 
1,036,877,161 shares


© 2016 Corning Incorporated. All Rights Reserved.
 
 
1

 

INDEX

PART I – FINANCIAL INFORMATION
   
Page
Item 1. Financial Statements
   
     
Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2016 and 2015
 
3
     
Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2016 and 2015
 
4
     
Consolidated Balance Sheets (Unaudited) at June 30, 2016 and December 31, 2015
 
5
     
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2016 and 2015
 
6
     
Notes to Consolidated Financial Statements (Unaudited)
 
7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
29
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
58
     
Item 4. Controls and Procedures
 
58
     
PART II – OTHER INFORMATION
   
     
Item 1. Legal Proceedings
 
59
     
Item 1A.  Risk Factors
 
59
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
60
     
Item 6. Exhibits
 
61
     
Signatures
 
62


© 2016 Corning Incorporated. All Rights Reserved.
 
 
2

 

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



 
Three months ended
June 30,
 
Six months ended
June 30,
 
2016
 
2015
 
2016
 
2015
                       
Net sales
$
2,360 
 
$
2,343 
 
$
4,407 
 
$
4,608 
Cost of sales
 
1,409 
   
1,368 
   
2,692 
   
2,704 
                       
Gross margin
 
951 
   
975 
   
1,715 
   
1,904 
                       
Operating expenses:
                     
Selling, general and administrative expenses
 
499 
   
337 
   
802 
   
653 
Research, development and engineering expenses
 
192 
   
191 
   
382 
   
380 
Amortization of purchased intangibles
 
15 
   
16 
   
29 
   
28 
Restructuring, impairment and other charges
 
(2)
         
78 
     
                       
Operating income
 
247 
   
431 
   
424 
   
843 
                       
Equity in earnings of affiliated companies
 
41 
   
62 
   
100 
   
156 
Interest income
 
   
   
12 
   
10 
Interest expense
 
(40)
   
(33)
   
(81)
   
(63)
Translated earnings contract (loss) gain, net
 
(1,201)
   
162 
   
(2,058)
   
191 
Gain on realignment of equity investment
 
2,676 
         
2,676 
     
Other expense, net
 
(26)
   
(21)
   
(42)
   
(38)
                       
Income before income taxes
 
1,703 
   
606 
   
1,031 
   
1,099 
Benefit (provision) for income taxes (Note 5)
 
504 
   
(110)
   
808 
   
(196)
                       
Net income attributable to Corning Incorporated
$
2,207 
 
$
496 
 
$
1,839 
 
$
903 
                       
Earnings per common share attributable to Corning Incorporated:
                     
Basic (Note 6)
$
2.06 
 
$
0.38 
 
$
1.66 
 
$
0.68 
Diluted (Note 6)
$
1.87 
 
$
0.36 
 
$
1.53 
 
$
0.65 
                       
Dividends declared per common share (1)
$
0.135 
 
$
0.12 
 
$
0.27 
 
$
0.12 

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

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





© 2016 Corning Incorporated. All Rights Reserved.
 
 
3

 

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


 
Three months ended
June 30,
 
Six months ended
June 30,
   
 
2016
 
2015
 
2016
 
2015
                       
Net income attributable to Corning Incorporated
$
2,207 
 
$
496 
 
$
1,839 
 
$
903 
                       
Foreign currency translation adjustments and other
 
196 
   
(40)
   
624 
   
(296)
Net unrealized (losses) gains on investments
 
(1)
         
(3)
   
Unamortized gains (losses) and prior service credits (costs) for postretirement benefit plans
 
265 
   
   
265 
   
Net unrealized (losses) gains on designated hedges
 
(22)
         
(41)
   
Other comprehensive income (loss), net of tax (Note 15)
 
438 
   
(35)
   
845 
   
(284)
                       
Comprehensive income attributable to Corning Incorporated
$
2,645 
 
$
461 
 
$
2,684 
 
$
619 

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



© 2016 Corning Incorporated. All Rights Reserved.
 
 
4

 

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

 
June 30,
2016
 
December 31,
2015
Assets
         
           
Current assets:
         
Cash and cash equivalents
$
7,144 
 
$
4,500 
Short-term investments, at fair value
       
100 
Trade accounts receivable, net of doubtful accounts and allowances - $60 and $48
 
1,544 
   
1,372 
Inventories, net of inventory reserves - $157 and $146 (Note 8)
 
1,501 
   
1,385 
Other current assets
 
558 
   
912 
Total current assets
 
10,747 
   
8,269 
           
Investments (Note 9)
 
346 
   
1,975 
Property, plant and equipment, net of accumulated depreciation - $9,974 and $9,188
 
13,048 
   
12,648 
Goodwill, net (Note 10)
 
1,569 
   
1,380 
Other intangible assets, net (Note 10)
 
804 
   
706 
Deferred income taxes (Note 5)
 
2,952 
   
2,056 
Other assets
 
1,187 
   
1,493 
           
Total Assets
$
30,653 
 
$
28,527 
           
Liabilities and Equity
         
           
Current liabilities:
         
Current portion of long-term debt and short-term borrowings (Note 4)
$
279 
 
$
572 
Accounts payable
 
938 
   
934 
Other accrued liabilities (Note 3 and Note 12)
 
1,231 
   
1,308 
Total current liabilities
 
2,448 
   
2,814 
           
Long-term debt (Note 4)
 
3,918 
   
3,890 
Postretirement benefits other than pensions (Note 11)
 
710 
   
718 
Other liabilities (Note 3 and Note 12)
 
3,905 
   
2,242 
Total liabilities
 
10,981 
   
9,664 
           
Commitments, contingencies and guarantees (Note 3)
         
Shareholders’ equity (Note 15):
         
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: 1,685 million and 1,681 million
 
842 
   
840 
Additional paid-in capital – common stock
 
13,668 
   
13,352 
Retained earnings
 
15,331 
   
13,832 
Treasury stock, at cost; Shares held: 648 million and 551 million
 
(11,566)
   
(9,725)
Accumulated other comprehensive loss
 
(966)
   
(1,811)
Total Corning Incorporated shareholders’ equity
 
19,609 
   
18,788 
Noncontrolling interests
 
63 
   
75 
Total equity
 
19,672 
   
18,863 
           
Total Liabilities and Equity
$
30,653 
 
$
28,527 

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

© 2016 Corning Incorporated. All Rights Reserved.
 
 
5

 

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

 
Six months ended
June 30,
 
2016
 
2015
Cash Flows from Operating Activities:
         
Net income
$
1,839 
 
$
903 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation
 
561 
   
562 
Amortization of purchased intangibles
 
29 
   
28 
Restructuring, impairment and other charges
 
78 
     
Stock compensation charges
 
23 
   
25 
Equity in earnings of affiliated companies
 
(100)
   
(156)
Dividends received from affiliated companies
 
20 
   
95 
Deferred tax (benefit) provision
 
(898)
   
31 
Restructuring payments
 
(7)
   
(23)
Employee benefit payments less than (in excess of) expense
 
15 
   
(8)
Losses (gains) on foreign currency hedges related to translated earnings
 
2,058 
   
(191)
Unrealized translation (gains) losses on transactions
 
(124)
   
236 
Gain on realignment of equity investment
 
(2,676)
     
Changes in certain working capital items:
         
Trade accounts receivable
 
(103)
   
(25)
Inventories
 
(66)
   
(54)
Other current assets
 
(71)
   
(100)
Accounts payable and other current liabilities
 
(115)
   
(191)
Other, net
 
(20)
   
16 
Net cash provided by operating activities
 
443 
   
1,148 
           
Cash Flows from Investing Activities:
         
Capital expenditures
 
(533)
   
(641)
Acquisitions of business, net of cash acquired
 
(279)
   
(531)
Investment in unconsolidated entities
 
(14)
   
(33)
Cash received on realignment of equity investment
 
4,818 
     
(Payments) proceeds from loan repayments from unconsolidated entities
 
(3)
   
Short-term investments – acquisitions
 
(20)
   
(570)
Short-term investments – liquidations
 
121 
   
825 
Realized gains on foreign currency hedges related to translated earnings
 
145 
   
321
Other, net
 
     
Net cash provided by (used in) investing activities
 
4,238 
   
(623)
           
Cash Flows from Financing Activities:
         
Net repayments of short-term borrowings and current portion of long-term debt
 
(64)
     
Principal payments under capital lease obligations
 
(1)
   
(1)
Proceeds from issuance of short-term debt
       
Proceeds from issuance of long-term debt
       
745 
Payments from issuance of commercial paper
 
(230)
     
Payments from settlement of interest rate swap arrangements
       
(10)
Proceeds from the exercise of stock options
 
27 
   
98 
Repurchases of common stock for treasury
 
(1,515)
   
(1,093)
Dividends paid
 
(340)
   
(350)
Net cash used in financing activities
 
(2,123)
   
(609)
Effect of exchange rates on cash
 
86 
   
(257)
Net increase (decrease) in cash and cash equivalents
 
2,644 
   
(341)
Cash and cash equivalents at beginning of period
 
4,500 
   
5,309 
           
Cash and cash equivalents at end of period
$
7,144 
 
$
4,968 


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

© 2016 Corning Incorporated. All Rights Reserved.
 
 
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. 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, 2015 (“2015 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 originally was effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period.  This ASU 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.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840.  ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet.  ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted.  ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients.  We are currently assessing the adoption date and the potential impact of adopting ASU 2016-02 on our financial statements and related disclosures.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
7

 


In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  ASU 2016-09 changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods.  If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period and the entity must adopt all of the amendments from ASU 2016-09 in the same period.  We are currently assessing the potential impact of adopting ASU 2016-09 on our financial statements and related disclosures.

2.      Restructuring, Impairment and Other Charges

2016 Activity

In the first half of 2016, we recorded charges of $78 million, pre-tax, for employee related costs, asset disposals, and exit costs associated with some minor restructuring activities in all of the segments, with total cash expenditures estimated to be $15 million.

The following table summarizes the restructuring, impairment and other charges for the six months ended June 30, 2016 (in millions):
 
Reserve at
January 1,
2016
 
Net
Charges/
Reversals
 
Non-cash
adjustments
 
Cash
payments
 
Reserve at
June 30,
2016
Restructuring:
                           
Employee related costs
$
3
 
$
15
 
$
(1)
 
$
(6)
 
$
11
Other charges
       
1
         
(1)
     
Total restructuring activity
$
3
 
$
16
 
$
(1)
 
$
(7)
 
$
11
                             
Disposal of long-lived assets
     
$
62
                 
                             
Total restructuring, impairment and other charges
     
$
78
                 

Cash payments for employee-related and exit activity related to the 2016 restructuring activities are expected to be substantially completed in 2016.

The year-to-date cost of these plans for each of our reportable segments was as follows (in millions):
Operating segment
Employee-
related
and other
charges
Display Technologies
$
4
Optical Communications
 
6
Environmental Technologies
 
5
Specialty Materials
 
12
Life Sciences
 
3
All Other
 
40
Corporate
 
8
Total restructuring, impairment and other charges
$
78

© 2016 Corning Incorporated. All Rights Reserved.
 
 
8

 


3.      Commitments, Contingencies and Guarantees

Pittsburgh Corning Corporation and Asbestos Litigation.  Corning and PPG Industries, Inc. (“PPG”) each owned 50% of the capital stock of Pittsburgh Corning Corporation (“PCC”).  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.  On April 27, 2016, the Modified Third Amended Plan of Reorganization for Pittsburgh Corning Corporation (the “Plan”) became effective.
 
As required by the Plan, Corning contributed its equity interests in PCC and Pittsburgh Corning Europe N.V. (“PCE”), a Belgian corporation, on April 27, 2016 and June 9, 2016, respectively, and recognized a gain of $56 million in the selling, general and administrative expenses line of the Company’s Consolidated Statements of Income for the difference between the fair value of the asbestos litigation liability and carrying value of the investment.  Corning must also contribute $290 million in a fixed series of payments.  Corning has the option to use its common stock rather than cash to make these payments, but the liability is fixed by dollar value and not the number of shares.  Assuming certain conditions are met, the Plan requires Corning to make: (1) one payment of $70 million on June 9, 2017; 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, at the time PCC filed for bankruptcy, Corning was a defendant in other cases alleging injuries from asbestos related to its Corhart business and seeking similar amounts of monetary damages per case (the “non-PCC asbestos claims”).  The Bankruptcy Court then granted a preliminary injunction (the “Stay”), which suspended all asbestos cases against PCC, PPG and Corning – including these non-PCC asbestos claims.  Approximately 9,700 such non-PCC asbestos claims (with approximately 37,300 claimants) may still be pending.  The Stay will be lifted on August 25, 2016.  The non-PCC asbestos claims against Corning have been covered, in part, by insurance without material impact to Corning to date.  As of June 30, 2016, Corning had received approximately $19 million in insurance payments for non-PCC asbestos claims that were subject to the Stay.  When the Stay is lifted, the non-PCC asbestos claims will be allowed to proceed against Corning.  Corning believes that the $150 million reserve for estimated asbestos litigation liabilities that was established in prior periods continues to be reasonable.  The liability for non-PCC asbestos claims was estimated based upon industry data for asbestos claims since Corning does not have recent claim history due to the Stay 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 lesser or greater liabilities at this time.

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 $440 million at June 30, 2016, compared with an estimate of liability of $678 million at December 31, 2015.  The decline in the liability is due to the contribution of the equity interests of PCC and PCE in the total amount of $238 million, as required by the Plan.  The $440 million liability is comprised of $290 million for the fixed series of payments for the remaining PCC asbestos liability, and $150 million for the non-PCC asbestos claims, all referenced in the preceding paragraphs. At June 30, 2016, $370 million of the obligation, consisting of the $220 million for the fixed series of payments due in the years 2018 through 2022 and $150 million for the non-PCC asbestos claims, is classified as a non-current liability.  The amount of the obligation related to the fixed payment of $70 million due in the second quarter of 2017 is classified as a current liability because the contribution of those assets is expected to be made within the next twelve months.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
9

 


The amount of the asbestos litigation liability for the periods ended June 30, 2016 and December 31, 2015 is as follows (in millions):
 
Amended PCC Plan
 
Non-PCC
Total Asbestos
Litigation Liability
 
Equity
Interests
 
Fixed Series
of Payments
 
Fair Value of Asbestos Litigation Liability as of Dec. 31, 2015
$
238
 
$
290
 
$
150
 
$
678
                       
Less: Contribution of PCC & PCE Equity Interests - Carrying Value
 
182
   
-
   
-
   
182
Gain on Contribution of Equity Interests
 
56
   
-
   
-
   
56
Asbestos Litigation Liability as of June 30, 2016
$
-
 
$
290
 
$
150
 
$
440

Non-PCC Asbestos Claims 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, 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 June 30, 2016 and December 31, 2015, contingent guarantees totaled a notional value of $190 million and $184 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 $220 million at June 30, 2016 and December 31, 2015.

Product warranty liability accruals were considered insignificant at June 30, 2016 and December 31, 2015.

Corning is a defendant in various lawsuits, including environmental, product-related suits, 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.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
10

 


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 17 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 June 30, 2016 and December 31, 2015, Corning had accrued approximately $47 million (undiscounted) and $37 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 June 30, 2016, 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.

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 $4.3 billion at June 30, 2016 and $4.1 billion at December 31, 2015, compared to recorded book values of $3.9 billion at June 30, 2016 and December 31, 2015.  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.

On July 20, 2016, Corning’s Board of Directors approved a $1 billion increase to our commercial paper program, raising it to $2 billion.  If needed, this program is supported by our $2 billion revolving credit facility that expires in 2019.  At June 30, 2016, Corning had $252 million in outstanding commercial paper as part of the Company’s commercial paper program established in the second quarter of 2013.  The estimated fair value of this commercial paper approximates its carrying value due to the short-term maturities.

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.  We can redeem these debentures at any time, subject to certain stipulations.

5.      Income Taxes

Our provision for income taxes and the related effective income tax rates were as follows (in millions):
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2016
 
2015
 
2016
 
2015
                       
Benefit (provision) for income taxes
$
504
 
$
(110)
 
$
808
 
$
(196)
Effective tax rate 
 
(29.6%)
   
18.2%
   
(78.4%)
   
17.8%


© 2016 Corning Incorporated. All Rights Reserved.
 
 
11

 


For the three and six months ended June 30, 2016, 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 foreign earnings in U.S. income;
·  
The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax; and
·  
The tax-free nature of the realignment of our equity interests in Dow Corning during the period, as well as the release of the deferred tax liability related to Corning’s tax on Dow Corning’s undistributed earnings as of the date of the transaction.

For the three and six months ended June 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 foreign earnings in U.S. income; and
·  
The impact of equity in earnings of nonconsolidated affiliates reported in the financials, net of tax.

Corning continues to indefinitely reinvest substantially all of its foreign earnings, with the exception of an immaterial amount of current earnings that have very low or no tax cost 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.  Significant 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, derivative contract settlements or the development of tax planning ideas that allow us to repatriate earnings at minimal or no tax cost, 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.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
12

 


6.      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
June 30,
 
Six months ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income attributable to Corning Incorporated
$
2,207 
 
$
496 
 
$
1,839 
 
$
903 
Less:  Series A convertible preferred stock dividend
 
24 
   
24 
   
49 
   
49 
Net income available to common stockholders - basic
 
2,183 
   
472 
   
1,790 
   
854 
Plus:  Series A convertible preferred stock dividend
 
24 
   
24 
   
49 
   
49 
Net income available to common stockholders - diluted
$
2,207 
 
$
496 
 
$
1,839 
 
$
903 
                       
Weighted-average common shares outstanding - basic
 
1,059 
   
1,246 
   
1,081 
   
1,257 
Effect of dilutive securities:
                     
Stock options and other dilutive securities
 
   
10 
   
   
11 
Series A convertible preferred stock
 
115 
   
115 
   
115 
   
115 
Weighted-average common shares outstanding - diluted
 
1,182 
   
1,371 
   
1,204 
   
1,383 
Basic earnings per common share
$
2.06 
 
$
0.38 
 
$
1.66 
 
$
0.68 
Diluted earnings per common share
$
1.87 
 
$
0.36 
 
$
1.53 
 
$
0.65 
                       
Antidilutive potential shares excluded from diluted earnings per common share:
                     
Employee stock options and awards
 
20 
   
20 
   
21 
   
17 
Total
 
20 
   
20 
   
21 
   
17 
 
7.      Available-for-Sale Investments

The following is a summary of the fair value of available-for-sale investments (in millions):
 
Amortized cost
 
Fair value
 
June 30,
2016
 
December 31,
2015
 
June 30,
2016
 
December 31,
2015
Bonds, notes and other securities:
                     
U.S. government and agencies
     
$
100
       
$
100
Total short-term investments
     
$
100
       
$
100
Asset-backed securities (1)
$
34
 
$
37
 
$
30
 
$
33
Total long-term investments
$
34
 
$
37
 
$
30
 
$
33

1)
Due after 10 years and are being reported at their final maturity dates.

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.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
13

 


For the six months ended June 30, 2016 and 2015, proceeds from sales and maturities of short-term investments totaled approximately $121 million and $0.8 billion, respectively.

8.      Inventories, Net of Inventory Reserves

Inventories, net of inventory reserves comprise the following (in millions):
 
June 30,
2016
 
December 31,
2015
Finished goods
$
633
 
$
633
Work in process
 
293
   
264
Raw materials and accessories
 
274
   
200
Supplies and packing materials
 
301
   
288
Total inventories, net of inventory reserves
$
1,501
 
$
1,385

9.      Investments

On May 31, 2016, Corning completed the strategic realignment of its equity investment in Dow Corning Corporation (”Dow Corning”) pursuant to the Transaction Agreement announced in December 2015.  Under the terms of the Transaction Agreement, Corning exchanged with Dow Corning its 50% stock interest in Dow Corning for 100% of the stock of a newly formed entity, which holds an equity interest in Hemlock Semiconductor Group (“HSG”) and approximately $4.8 billion in cash.

Prior to realignment, HSG, a wholly owned and consolidated subsidiary of Dow Corning, was an indirect equity investment of Corning.  Upon completion of the exchange, Corning now has a direct equity investment in HSG.  Because our ownership percentage in HSG did not change as a result of the realignment, the investment in HSG is recorded at its carrying value, which had a negative carrying value of $383 million at the transaction date.  The negative carrying value resulted from a one-time charge to this entity in 2014 for the permanent abandonment of certain assets.  Excluding this charge, the entity is profitable and is expected to recover its equity in the near term.

Corning’s financial statements as of June 30, 2016 include the positive impact of the release of a deferred tax liability of $105 million related to Corning’s tax on Dow Corning’s earnings that were not distributed as of the date of the transaction and a non-taxable gain of $2,676 million on the realignment.  Details of the gain are illustrated below (in millions):
Cash
$
4,818 
Carrying Value of Dow Corning Equity Investment
 
(1,560)
Carrying Value of HSG Equity Investment
 
(383)
Other (1)
 
(199)
Gain
$
2,676 

(1)  
Primarily consists of the release of accumulated other comprehensive income items related to unamortized actuarial losses related to Dow Corning’s pension plan and foreign currency translation gains in the amounts of $260 million and $45 million, respectively.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
14

 


Investments comprise the following (in millions):
 
Ownership
interest
 
June 30,
2016
 
December 31,
2015
Affiliated companies accounted for by the equity method
                 
Dow Corning (1)
 
50%
         
$
1,483
All other (1)
20%
to
50%
 
$
279
   
422
           
279
   
1,905
Other investments
         
67
   
70
Subtotal Investment Assets
       
$
346
 
$
1,975
                   
Affiliated companies accounted for by the equity method
                 
HSG (2)(3)
 
50%
   
$
361
     
Subtotal Investment Liabilities
       
$
361
     

(1)  
Amounts reflect Corning’s direct ownership interests in the respective affiliated companies at June 30, 2016 and December 31, 2015.  Corning does not control any of such entities.
(2)  
The negative carrying value of the investment in HSG, recorded in Other Liabilities, was reduced by $22 million due to equity earnings recognized for the month of June, 2016.
(3)  
HSG indirectly holds an 80.5% interest in a HSG operating partnership.

Dow Corning Corporation
For the period ended June 30, 2016, Corning reported Dow Corning equity earnings and dividends through May 31, 2016, the transaction date.  Dow Corning information presented below is shown for the two and five months ended May 31, 2016 (in millions):
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2016
 
2015
 
2016
 
2015
Statement of Operations:
                     
Net sales
$
898
 
$
1,424
 
$
2,215
 
$
2,788
Gross profit (1)
$
238
 
$
364
 
$
588
 
$
722
Net income attributable to Dow Corning (2)
$
52
 
$
113
 
$
163
 
$
298
Corning’s equity in earnings of Dow Corning
$
26
 
$
57
 
$
82
 
$
149

(1)  
Gross profit for the three and six months ended June 30, 2016 includes research and development costs of $43 million and $100 million (2015: $63 million and $125 million).
(2)  
In the first half of 2015 Dow Corning’s net income included a pre-tax gain of $178 million on the settlement of long-term sales agreements.


© 2016 Corning Incorporated. All Rights Reserved.
 
 
15

 


10.      Goodwill and Other Intangible Assets

The carrying amount of goodwill by segment for the periods ended June 30, 2016 and December 31, 2015 is as follows (in millions):
 
Optical
Communications
 
Display
Technologies
 
Specialty
Materials
 
Life
Sciences
 
All
Other
 
Total
                                 
Balance at December 31, 2015
$
439
 
$
128
 
$
150
 
$
562
 
$
101
 
$
1,380
Acquired goodwill (1)
 
175
                           
175
Foreign currency translation adjustment
 
8
   
1
         
4
   
1
   
14
Balance at June 30, 2016
$
622
 
$
129
 
$
150
 
$
566
 
$
102
 
$
1,569

(1)
The Company completed an acquisition in the Optical Communications segment during the first half of 2016 with a purchase price of $296 million.

Corning’s gross goodwill balances for the periods ended June 30, 2016 and December 31, 2015 were $8.1 billion and $7.9 billion, respectively.  Accumulated impairment losses were $6.5 billion for the periods ended June 30, 2016 and December 31, 2015, and were generated primarily through goodwill impairments related to the Optical Communications segment.

Other intangible assets are as follows (in millions):
 
June 30, 2016
 
December 31, 2015
 
Gross
 
Accumulated
amortization
 
Net
 
Gross
 
Accumulated
amortization
 
Net
Amortized intangible assets:
                                 
Patents, trademarks, and trade names 
$
367
 
$
171
 
$
196
 
$
350
 
$
162
 
$
188
Customer lists and other 
 
733
   
125
   
608
   
621
   
103
   
518
Total
$
1,100
 
$
296
 
$
804
 
$
971
 
$
265
 
$
706

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 six months of 2016, primarily due to acquisitions of $117 million of other intangible assets and foreign currency translation adjustments of $10 million, offset by amortization of $29 million.

Amortization expense related to these intangible assets is estimated to be $67 million for 2016, $72 million annually from 2017 to 2019, and $67 million annually from 2020 to 2021.


© 2016 Corning Incorporated. All Rights Reserved.
 
 
16

 


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
June 30,
 
Six months ended
June 30,
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
                                               
Service cost
$
21 
 
$
22 
 
$
43 
 
$
45 
 
$
 
$
 
$
 
$
Interest cost
 
31 
   
37 
   
62 
   
73 
   
   
   
13 
   
16 
Expected return on plan assets 
 
(41)
   
(44)
   
(83)
   
(89)
                       
Amortization of net loss 
                               
         
Amortization of prior service cost (credit)
 
   
   
   
   
(1)
   
(2)
   
(2)
   
(3)
Recognition of actuarial loss
 
28 
   
   
35 
   
                       
Total pension and postretirement benefit expense
$
41 
 
$
24 
 
$
60 
 
$
40 
 
$
 
$
11 
 
$
15 
 
$
22 

12.
Other Liabilities

Other liabilities follow (in millions):
 
June 30,
2016
 
December 31,
2015
Current liabilities:
         
Wages and employee benefits
$
386
 
$
491
Income taxes
 
82
   
53
Asbestos and other litigation reserves
 
76
   
238
Derivative instruments
 
211
   
55
Other current liabilities
 
476
   
471
Other accrued liabilities
$
1,231
 
$
1,308
           
Non-current liabilities:
         
Asbestos and other litigation reserves
$
394
 
$
440
Derivative instruments
 
1,400
   
88
Investment in Hemlock Semiconductor Group (1)
 
361
     
Defined benefit pension plan liabilities
 
740
   
672
Other non-current liabilities
 
1,010
   
1,042
Other liabilities
$
3,905
 
$
2,242

(1)  
The negative carrying value resulted from a one-time charge to this entity in 2014 for the permanent abandonment of certain assets.

Asbestos Litigation

Corning and PPG each owned 50% of the capital stock of 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.  Refer to Note 3 (Commitments, Contingencies and Guarantees) to the consolidated financial statements for additional information on the asbestos litigation.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
17

 


13.      Hedging Activities

Undesignated Hedges
The table below includes a total gross notional value for translated earnings contracts of $19.1 billion at June 30, 2016 (at December 31, 2015: $12.0 billion), including purchased and zero-cost collars of $3.7 billion (at December 31, 2015: $5.6 billion) and average rate forwards of $15.4 billion (at December 31, 2015: $6.4 billion).  With respect to the purchased and zero-cost collars, the gross notional amount includes the value of both the put and call options.  However, due to the nature of the purchased and zero-cost collars, either the put or the call option can be exercised at maturity.  As of June 30, 2016, the total net notional value of the purchased and zero-cost collars was $1.9 billion (at December 31, 2015: $2.9 billion).

The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for June 30, 2016 and December 31, 2015 (in millions):
 
U.S. Dollar
 
Asset derivatives
 
Liability derivatives
 
Gross notional amount
 
Balance
sheet
location
 
Fair value
 
Balance
sheet
location
 
Fair value
 
June 30,
2016
 
Dec. 31,
2015
   
June 30,
2016
 
Dec. 31,
2015
   
June 30,
2016
 
Dec. 31,
2015
                               
Derivatives designated as hedging instruments
                             
                               
Foreign exchange contracts (1)
$     584
 
$    782
 
Other current assets
 
$   2
 
$     5
 
Other accrued liabilities
 
$    (55)
 
$  (10)
         
Other assets
     
1
 
Other liabilities
 
(25)
 
(23)
                               
Interest rate contracts
550
 
550
 
Other assets
 
10
     
Other liabilities
     
(4)
                               
Derivatives not designated as hedging instruments
                             
                               
Foreign exchange contracts, other
717
 
1,095
 
Other current assets
 
3
 
6
 
Other accrued liabilities
 
(53)
 
(12)
                               
Translated earnings contracts
19,128
 
11,972
 
Other current assets
 
98
 
511
 
Other accrued liabilities
 
(103)
 
(33)
         
Other assets
 
67
 
472
 
Other liabilities
 
(1,375)
 
(61)
                               
Total derivatives
$20,979
 
$14,399
     
$180
 
$995
     
$(1,611)
 
$(143)

(1)
Cash flow hedges with a typical duration of 24 months or less.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
18

 


The following tables summarize the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended June 30, 2016 and 2015 (in millions):
 
Effect of designated derivative instruments on the consolidated financial statements
for the three months ended June 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/(loss) reclassified from
accumulated OCI into
income (effective) (1)
2016
 
2015
   
2016
 
2015
                           
Interest rate hedges
     
$
6
 
Sales
       
$
5
             
Cost of sales
 
$
(9)
   
4
Foreign exchange contracts
$
(35)
   
7
               
                           
Total cash flow hedges
$
(35)
 
$
13
     
$
(9)
 
$
9

(1)
The amount of hedge ineffectiveness at June 30, 2016 and 2015 was insignificant.

The following tables summarize the effect of derivative financial instruments on Corning’s consolidated financial statements for the six months ended June 30, 2016 and 2015 (in millions):
 
Effect of  derivative instruments on the consolidated financial statements
for the six months ended June 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/(loss) reclassified from
accumulated OCI into
income (effective) (1)
2016
 
2015
   
2016
 
2015
                           
Interest rate hedges
     
$
(7)
 
Sales
 
$
 
$
10
             
Cost of sales
   
(14)
   
6
Foreign exchange contracts
$
(63)
   
34 
               
                           
Total cash flow hedges
$
(63)
 
$
27 
     
$
(13)
 
$
16

(1)
The amount of hedge ineffectiveness at June 30, 2016 and 2015 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
June 30,
 
Six months ended
June 30,
2016
 
2015
 
2016
 
2015
                           
Foreign exchange contracts – balance sheet
Foreign currency hedge gain (loss), net
 
$
(13)
 
$
2
 
$
(28)
 
$
13
Foreign exchange contracts – loans
Foreign currency hedge gain (loss), net
   
(22)
         
(44)
   
2
Foreign currency hedges related to translated earnings
Foreign currency hedge gain (loss), net
   
(1,201)
   
162
   
(2,058)
   
191
                           
Total undesignated
   
$
(1,236)
 
$
164
 
$
(2,130)
 
$
206


© 2016 Corning Incorporated. All Rights Reserved.
 
 
19

 


14.      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
 
June 30,
2016
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
                       
Current assets:
                     
Other current assets (1)
$
103
       
$
103
     
Non-current assets:
                     
Other assets (1)(2)
$
344
       
$
107
 
$
237
                       
Current liabilities:
                     
Other accrued liabilities (1)
$
211
       
$
211
     
Non-current liabilities:
                     
Other liabilities (1)(2)
$
1,408
       
$
1,400
 
$
8

(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 or liabilities which are measured by applying an option pricing model using projected future revenue and forecasted foreign exchange rates.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
20

 


     
Fair value measurements at reporting date using
 
December 31,
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
$
100
 
$
100
           
Other current assets (1)
$
522
       
$
522
     
Non-current assets:
                     
Other assets (1)(2)
$
752
       
$
506
 
$
246
                       
Current liabilities:
                     
Other accrued liabilities (1)
$
55
       
$
55
     
Non-current liabilities:
                     
Other liabilities (1)(2)
$
98
       
$
88
 
$
10

(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 and contingent consideration assets or liabilities which are measured by applying an option pricing model using projected future revenues.

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 June 30, 2016 and December 31, 2015, the fair value of the potential receipt of the contingent consideration in 2018 was $237 million and $246 million, respectively.

As a result of the acquisitions of the fiber-optics business of Samsung Electronics Co., Ltd., the Company has contingent consideration that was measured using unobservable (Level 3) inputs.  As of June 30, 2016, the fair value of the contingent consideration payable is $8 million.

There were no significant financial assets and liabilities measured on a nonrecurring basis during the six months ended June 30, 2016.

15.      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 June 30, 2016, the Preferred Stock has not been converted, and none of the anti-dilution provisions have been triggered.

Share Repurchases

On July 15, 2015, Corning’s Board of Directors approved a $2 billion share repurchase program (the “July 2015 Repurchase Program”) and on October 26, 2015 the Board of Directors authorized an additional $4 billion share repurchase program (together with the July 2015 Repurchase Program, the “2015 Repurchase Program”).  The 2015 Repurchase Program permits Corning to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated repurchase agreements and/or other arrangements.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
21

 


On October 28, 2015, Corning entered into an accelerated share repurchase agreement (“ASR”) with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase $1.25 billion of Corning’s common stock (the “2015 ASR agreement”).  The 2015 ASR agreement was executed under the July 2015 Repurchase Program.  On January 19, 2016, the 2015 ASR agreement was completed and Corning received an additional 15.9 million shares on January 22, 2016 to settle the 2015 ASR agreement.

In addition to the shares repurchased through the 2015 ASR agreement, during the three and six months ended June 30, 2016, we repurchased 40.9 million and 80.7 million shares of common stock for $810 million and $1,561 million, respectively, as part of the 2015 Repurchase Program.

Accumulated Other Comprehensive Income

In the three and six months ended June 30, 2016 and 2015, the primary changes in accumulated other comprehensive income (“AOCI”) were related to the foreign currency translation adjustment component and the unamortized actuarial losses component.

A summary of changes in the foreign currency translation adjustment component of AOCI is as follows (in millions):
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
(743)
 
$
(837)
 
$
(1,171)
 
$
(581)
Other comprehensive income (loss)
 
240 
   
(62)
   
625 
   
(236)
Equity method affiliates
 
(44)
   
22 
   
(1)
   
(60)
Net current-period other comprehensive income
 
196 
   
(40)
   
624 
   
(296)
Ending balance
$
(547)
 
$
(877)
 
$
(547)
 
$
(877)

In the second quarter of 2016, $45 million cumulative foreign currency translation gain was released as a result of the realignment of Dow Corning and included in the gain on realignment of equity investment.

In the second quarter of 2016, a $22 million cumulative foreign currency translation loss was released as a result of the contribution of our investment in PCE to the PCC litigation trust and included in selling, general and administrative expenses.

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

A summary of changes in the unamortized actuarial gains (losses) component of AOCI is as follows (in millions) (1):
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
(588)
 
$
(708)
 
$
(588)
 
$
(709)
Other comprehensive income (loss) before reclassifications (2)
 
(29)
   
(9)
   
(35)
     
Amounts reclassified from accumulated other comprehensive income (2)
 
29 
   
   
36 
   
10 
Equity method affiliates (3)
 
265 
   
   
264 
   
(4)
Net current-period other comprehensive income
 
265 
   
   
265 
   
Ending balance
$
(323)
 
$
(703)
 
$
(323)
 
$
(703)

(1)
All amounts are after tax.  Amounts in parentheses indicate debits to accumulated other comprehensive income.
(2)
Tax effects are not significant.
(3)
For the three and six months ended June 30, 2016, amounts are net of total tax expense of $(19) million.  For the three and six months ended June 30, 2015, tax effects are not significant.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
22

 


In the second quarter of 2016, a $260 million cumulative unamortized actuarial loss, net of tax of $19 million, was released as a result of the realignment of Dow Corning and included in the gain on realignment of equity investment.

In the second quarter of 2016, a $2 million cumulative unamortized actuarial loss was released as a result of the contribution of our investment in PCE to the PCC litigation trust and included in selling, general and administrative expenses.

16.      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 $14 million and $15 million for the three months ended June 30, 2016 and 2015, respectively, and approximately $23 million and $25 million for the six months ended June 30, 2016 and 2015, 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 six months ended June 30, 2016:
 
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, 2015
42,738
 
$19.40
       
Granted
  1,624
 
  19.93
       
Exercised
  (2,087)
 
  13.13
       
Forfeited and Expired
  (4,256)
 
  26.08
       
Options Outstanding as of June 30, 2016
38,019
 
  19.02
 
4.06
 
$110,178
Options Expected to Vest as of June 30, 2016
37,968
 
  19.02
 
4.05
 
  110,158
Options Exercisable as of June 30, 2016
33,177
 
  18.78
 
3.36
 
  108,177

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 June 30, 2016, 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 June 30, 2016, 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 1.9 years.  Compensation cost related to stock options was approximately $5 million and $7 million for the three months ended June 30, 2016 and 2015, respectively, and approximately $8 million and $11 million for the six months ended June 30, 2016 and 2015, respectively.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
23

 


Proceeds received from the exercise of stock options were $27 million and $98 million for the six months ended June 30, 2016 and 2015, 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 six months ended June 30, 2016 and 2015 was approximately $15 million and $46 million, respectively.  The income tax benefit realized from share-based compensation was not significant for the three and six months ended June 30, 2016 and 2015, respectively.  Refer to Note 5 (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 June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Expected volatility
40.2%
 
44.5%
 
40.2
-
43.1%
 
44.5
-
44.9%
Weighted-average volatility
40.2%
 
44.5%
 
40.2
-
43.1%
 
44.5
-
44.9%
Expected dividends
2.89%
 
2.24%
 
2.89
-
2.94%
 
1.92
-
2.24%
Risk-free rate
1.6%
 
1.9%
 
1.5
-
1.6%
 
1.9
-
1.9%
Average risk-free rate
1.6%
 
1.9%
 
1.5
-
1.6%
 
1.9
-
1.9%
Expected term (in years)
7.4
 
7.2
 
7.4
-
7.4
 
7.2
-
7.2
Pre-vesting departure rate
0.6%
 
0.6%
 
0.6
-
0.6%
 
0.6
-
0.6%

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.

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.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
24

 


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, 2015, and changes which occurred during the six months ended June 30, 2016:
 
Shares
(000’s)
 
Weighted
Average
Grant-Date
Fair Value
Non-vested shares and share units at December 31, 2015
5,242 
 
$
17.91
Granted
1,279 
   
20.44
Vested
(1,635)
   
14.25
Forfeited
(49)
   
21.00
Non-vested shares and share units at June 30, 2016
4,837 
 
$
19.79

As of June 30, 2016, there was approximately $37 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 $8 million for the three months ended June 30, 2016 and 2015, respectively, and approximately $15 million and $14 million for the six months ended June 30, 2016 and 2015, respectively.

17.      Reportable Segments

Our reportable segments are as follows:

·  
Display Technologies – manufactures glass substrates primarily for flat panel liquid crystal displays.
·  
Optical Communications – manufactures carrier and enterprise network components for the telecommunications industry.
·  
Environmental Technologies – manufactures ceramic substrates and filters for automotive and diesel emission control 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 enabling workflow solutions for scientific applications.

All other 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’s Pharmaceutical Technologies business, which consists of a pharmaceutical glass business and a glass tubing business used in the pharmaceutical packaging industry.  This segment also includes Corning Precision Materials’ non-LCD business and new product lines and development projects, as well as certain corporate investments such as Eurokera and Keraglass equity affiliates.

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.

© 2016 Corning Incorporated. All Rights Reserved.
 
 
25

 


Reportable Segments (in millions)

 
Display
Technologies
 
Optical
Communications
 
Environmental
Technologies
 
Specialty
Materials
 
Life
Sciences
 
All
Other
 
Total
Three months ended
  June 30, 2016
                                       
 
Net sales
$
801 
 
$
782 
 
$
259 
 
$
266 
 
$
215 
 
$
37 
 
$
2,360 
 
Depreciation (1)
$
149 
 
$
43 
 
$
33 
 
$
27 
 
$
13 
 
$
11 
 
$
276 
 
Amortization of purchased intangibles
     
$
             
$
 
$
 
$
15 
 
Research, development and engineering expenses (2)
$
17 
 
$
36 
 
$
26 
 
$
34 
 
$
 
$
45 
 
$
164 
 
Restructuring, impairment and other charges
$
             
$
12 
 
$
 
$
 
$
16 
 
Equity in earnings of affiliated companies
                             
$
(8)
 
$
(8)
 
Income tax (provision) benefit
$
(86)
 
$
(39)
 
$
(19)
 
$
(19)
 
$
(8)
 
$
23 
 
$
(148)
 
Net income (loss) (3)
$
204 
 
$
77 
 
$
37
 
$
38 
 
$
17 
 
$
(55)
 
$
318 

 
Display
Technologies
 
Optical
Communications
 
Environmental
Technologies
 
Specialty
Materials
 
Life
Sciences
 
All
Other
 
Total
Three months ended
  June 30, 2015
                                       
 
Net sales
$
789 
 
$
800 
 
$
260 
 
$
272 
 
$
211 
 
$
11 
 
$
2,343 
 
Depreciation (1)
$
152 
 
$
43 
 
$
32 
 
$
27 
 
$
15 
 
$
11 
 
$
280 
 
Amortization of purchased intangibles
     
$
11 
             
$
       
$
16 
 
Research, development and engineering expenses (2)
$
26 
 
$
35 
 
$
23 
 
$
29 
 
$
 
$
44 
 
$
163 
 
Restructuring, impairment and other charges
                 
$
             
$
 
Equity in earnings of affiliated companies
$
(3)
                         
$
 
$
 
Income tax (provision) benefit
$
(136)
 
$
(37)
 
$
(22)
 
$
(22)
 
$
(9)
 
$
21 
 
$
(205)
 
Net income (loss) (3)
$
303 
 
$
77 
 
$
46 
 
$
44 
 
$
18 
 
$
(45)
 
$
443 


© 2016 Corning Incorporated. All Rights Reserved.
 
 
26

 


 
Display
Technologies
 
Optical
Communications
 
Environmental
Technologies
 
Specialty
Materials
 
Life
Sciences
 
All
Other
 
Total
Six months ended
  June 30, 2016
                                       
 
Net sales
$
1,506 
 
$
1,391 
 
$
523 
 
$
493 
 
$
419 
 
$
75 
 
$
4,407 
 
Depreciation (1)
$
300 
 
$
84 
 
$
65 
 
$
55 
 
$
28 
 
$
22 
 
$
554 
 
Amortization of purchased intangibles
     
$
15 
             
$
10 
 
$
 
$
29 
 
Research, development and engineering expenses (2)
$
35 
 
$
73 
 
$
51 
 
$
65 
 
$
12 
 
$
92 
 
$
328 
 
Restructuring, impairment and other charges
$
16 
 
$
 
$
 
$
24 
 
$
 
$
61 
 
$
117 
 
Equity in earnings of affiliated companies
                             
$
(5)
 
$
(5)
 
Income tax (provision) benefit
$
(179)
 
$
(50)
 
$
(35)
 
$
(31)
 
$
(14)
 
$
66 
 
$
(243)
 
Net income (loss) (3)
$
413 
 
$
94 
 
$
71
 
$
64 
 
$
29 
 
$
(140)
 
$
531 

 
Display
Technologies
 
Optical
Communications
 
Environmental
Technologies
 
Specialty
Materials
 
Life
Sciences
 
All
Other
 
Total
Six months ended
  June 30, 2015
                                       
  
Net sales
$
1,597 
 
$
1,497 
 
$
542 
 
$
544 
 
$
408 
 
$
20 
 
$
4,608 
 
Depreciation (1)
$
308 
 
$
81 
 
$
61 
 
$
53 
 
$
30 
 
$
20 
 
$
553 
 
Amortization of purchased intangibles
     
$
17 
             
$
10 
       
$
27 
 
Research, development and engineering expenses (2)
$
50 
 
$
68 
 
$
46 
 
$
60 
 
$
11 
 
$