Edgar Filing: CORNING INC /NY

q3201610q.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, 2016

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 14, 2016
Corning’s Common Stock, $0.50 par value per share		951,225,180 shares

INDEX

PART I – FINANCIAL INFORMATION
		Page
Item 1. Financial Statements

Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2016 and 2015		3

Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2016 and 2015		4

Consolidated Balance Sheets (Unaudited) at September 30, 2016 and December 31, 2015		5

Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 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

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,
	2016		2015		2016		2015

Net sales	$	2,507	$	2,272	$	6,914	$	6,880
Cost of sales		1,466		1,380		4,158		4,084

Gross margin		1,041		892		2,756		2,796

Operating expenses:
Selling, general and administrative expenses		302		307		1,104		960
Research, development and engineering expenses		187		181		569		561
Amortization of purchased intangibles		17		12		46		40
Restructuring, impairment and other charges						78

Operating income		535		392		959		1,235

Equity in earnings of affiliated companies		19		39		119		195
Interest income		9		6		21		16
Interest expense		(41)		(38)		(122)		(101)
Translated earnings contract (loss) gain, net		(237)		(149)		(2,295)		42
Gain on realignment of equity investment						2,676
Other expense, net		(28)		(32)		(70)		(70)

Income before income taxes		257		218		1,288		1,317
Benefit (provision) for income taxes (Note 5)		27		(6)		835		(202)

Net income attributable to Corning Incorporated	$	284	$	212	$	2,123	$	1,115

Earnings per common share attributable to Corning Incorporated:
Basic (Note 6)	$	0.27	$	0.16	$	1.96	$	0.84
Diluted (Note 6)	$	0.26	$	0.15	$	1.81	$	0.82

Dividends declared per common share (1)	$	0.135	$	0.12	$	0.405	$	0.24

(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,
	2016		2015		2016		2015

Net income attributable to Corning Incorporated	$	284	$	212	$	2,123	$	1,115

Foreign currency translation adjustments and other		245		(181)		869		(477)
Net unrealized (losses) gains on investments						(3)		1
Unamortized (losses) gains and prior service credits (costs) for postretirement benefit plans		(5)		6		260		12
Net unrealized gains (losses) on designated hedges		11		(37)		(30)		(32)
Other comprehensive income (loss), net of tax (Note 15)		251		(212)		1,096		(496)

Comprehensive income attributable to Corning Incorporated	$	535	$	0	$	3,219	$	619

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, 2016		December 31, 2015
Assets

Current assets:
Cash and cash equivalents	$	4,821	$	4,500
Short-term investments, at fair value				100
Trade accounts receivable, net of doubtful accounts and allowances - $62 and $48		1,645		1,372
Inventories, net of inventory reserves - $160 and $146 (Note 8)		1,516		1,385
Other current assets		497		912
Total current assets		8,479		8,269

Investments (Note 9)		352		1,975
Property, plant and equipment, net of accumulated depreciation - $10,206 and $9,188		13,293		12,648
Goodwill, net (Note 10)		1,569		1,380
Other intangible assets, net (Note 10)		797		706
Deferred income taxes (Note 5)		3,110		2,056
Other assets		1,209		1,493

Total Assets	$	28,809	$	28,527

Liabilities and Equity

Current liabilities:
Current portion of long-term debt and short-term borrowings (Note 4)	$	7	$	572
Accounts payable		933		934
Other accrued liabilities (Note 3 and Note 12)		1,354		1,308
Total current liabilities		2,294		2,814

Long-term debt (Note 4)		3,916		3,890
Postretirement benefits other than pensions (Note 11)		708		718
Other liabilities (Note 3 and Note 12)		4,104		2,242
Total liabilities		11,022		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: 1,689 million and 1,681 million		844		840
Additional paid-in capital – common stock		13,340		13,352
Retained earnings		15,460		13,832
Treasury stock, at cost; Shares held: 738 million and 551 million		(13,508)		(9,725)
Accumulated other comprehensive loss		(715)		(1,811)
Total Corning Incorporated shareholders’ equity		17,721		18,788
Noncontrolling interests		66		75
Total equity		17,787		18,863

Total Liabilities and Equity	$	28,809	$	28,527

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,
	2016		2015
Cash Flows from Operating Activities:
Net income	$	2,123	$	1,115
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		844		842
Amortization of purchased intangibles		46		40
Restructuring, impairment and other charges		78
Stock compensation charges		33		36
Equity in earnings of affiliated companies		(119)		(195)
Dividends received from affiliated companies		20		143
Deferred tax (benefit) provision		(1,047)		187
Restructuring payments		(10)		(38)
Employee benefit payments less than expense				5
Losses (gains) on foreign currency hedges related to translated earnings		2,295		(42)
Unrealized translation (gains) losses on transactions		(177)		303
Contingent consideration fair value adjustment		(40)
Gain on realignment of equity investment		(2,676)
Changes in certain working capital items:
Trade accounts receivable		(184)		52
Inventories		(69)		(60)
Other current assets		(42)		(204)
Accounts payable and other current liabilities		14		(294)
Other, net		6		(45)
Net cash provided by operating activities		1,095		1,845

Cash Flows from Investing Activities:
Capital expenditures		(815)		(939)
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		(10)		6
Short-term investments – acquisitions		(20)		(859)
Short-term investments – liquidations		121		1,046
Realized gains on foreign currency hedges related to translated earnings		146		489
Other, net		9		(1)
Net cash provided by (used in) investing activities		3,956		(822)

Cash Flows from Financing Activities:
Net repayments of short-term borrowings and current portion of long-term debt		(85)
Principal payments under capital lease obligations		(1)		(1)
Proceeds from issuance of short-term debt				2
Proceeds from issuance of long-term debt				745
Payments from issuance of commercial paper		(481)
Payments from settlement of interest rate swap arrangements				(10)
Proceeds from the exercise of stock options		86		99
Repurchases of common stock for treasury		(3,884)		(1,905)
Dividends paid		(493)		(519)
Net cash used in financing activities		(4,858)		(1,589)
Effect of exchange rates on cash		128		(303)
Net increase (decrease) in cash and cash equivalents		321		(869)
Cash and cash equivalents at beginning of period		4,500		5,309

Cash and cash equivalents at end of period	$	4,821	$	4,440

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 its 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.

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. Corning does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 refines how companies classify certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent consideration payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the adoption date and the potential impact of adopting ASU 2016-15 on our financial statements and related disclosures.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party. This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. We are currently evaluating the impact of ASU 2016-16 on our consolidated financial statements and related disclosures.

2. Restructuring, Impairment and Other Charges

2016 Activity

In the first three quarters 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 nine months ended September 30, 2016 (in millions):

	Reserve at January 1, 2016		Net Charges/ Reversals		Non-cash adjustments		Cash payments		Reserve at September 30, 2016
Restructuring:
Employee related costs	$	3	$	15	$	(1)	$	(9)	$	8
Other charges				1				(1)
Total restructuring activity	$	3	$	16	$	(1)	$	(10)	$	8

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

3. Commitments, Contingencies and Guarantees

Asbestos Claims

Corning and PPG Industries, Inc. each owned 50% of the capital stock of Pittsburgh Corning Corporation (“PCC”). PCC filed for Chapter 11 reorganization in 2000 and the Modified Third Amended Plan of Reorganization for PCC (the “Plan”) became effective in April 2016. At December 31, 2015, the Company’s liability under the Plan was estimated to be $528 million. At September 30, 2016, this estimated liability was $290 million, due to the Company’s contribution, in the second quarter of 2016, of its equity interests in PCC and Pittsburgh Corning Europe N.V. in the total amount of $238 million, as required by the Plan. Corning recognized a gain of $56 million in the second quarter of 2016 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. The remaining $290 million liability is for the fixed series of payments required by the Plan. At September 30, 2016, the total amount of the payments due in years 2018 through 2022 is $220 million and is classified as a non-current liability. The remaining $70 million payment due in the second quarter of 2017 is classified as a current liability as it is expected to be made within the next twelve months. Additionally, Corning is a defendant in other cases alleging injuries from asbestos unrelated to PCC (the “non-PCC asbestos claims”) which had been stayed pending the confirmation of the Plan. The stay was lifted on August 25, 2016. Corning previously established a $150 million reserve for these non-PCC asbestos claims. The estimated reserve 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.

A summary of changes of the estimated asbestos litigation liability is as follows (in millions):

	Amended PCC Plan				Non-PCC		Total Asbestos Litigation Liability
	Equity Interests		Fixed Series of Payments		Non-PCC		Total Asbestos Litigation Liability
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 September 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 September 30, 2016 and December 31, 2015, contingent guarantees totaled a notional value of $201 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 $255 million and $220 million, at September 30, 2016 and December 31, 2015, respectively.

Product warranty liability accruals were considered insignificant at September 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.

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 September 30, 2016 and December 31, 2015, Corning had accrued approximately $45 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 September 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 September 30, 2016 and $4.1 billion at December 31, 2015, compared to recorded book values of $3.9 billion at September 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. Corning did not have outstanding commercial paper at September 30, 2016.

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 benefit (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,
	2016		2015		2016		2015

Benefit (provision) for income taxes	$	27	$	(6)	$	835	$	(202)
Effective tax rate		(10.5%)		2.8%		(64.8%)		15.3%

For the three months ended September 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.

For the nine months ended September 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 interest 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 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.

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.

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 September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Net income attributable to Corning Incorporated	$	284	$	212	$	2,123	$	1,115
Less: Series A convertible preferred stock dividend		24		24		73		73
Net income available to common stockholders – basic		260		188		2,050		1,042
Plus: Series A convertible preferred stock dividend (1)		24				73		73
Net income available to common stockholders – diluted	$	284	$	188	$	2,123	$	1,115

Weighted-average common shares outstanding – basic		978		1,210		1,046		1,241
Effect of dilutive securities:
Stock options and other dilutive securities		9		8		9		10
Series A convertible preferred stock (1)		115				115		115
Weighted-average common shares outstanding – diluted		1,102		1,218		1,170		1,366
Basic earnings per common share	$	0.27	$	0.16	$	1.96	$	0.84
Diluted earnings per common share	$	0.26	$	0.15	$	1.81	$	0.82

Antidilutive potential shares excluded from diluted earnings per common share:
Series A convertible preferred stock (1)				115
Employee stock options and awards		13		29		18		22
Accelerated share repurchase forward contract		14				14
Total		27		144		32		22

(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.

7. Available-for-Sale Investments

At September 30, 2016 and December 31, 2015, the Company held $0 million and $100 million of short-term investments (U.S. government and agency securities), respectively. At September 30, 2016 and December 31, 2015, the Company held long-term investments of $30 million and $33 million in asset-backed securities, respectively. The Company’s investments in available-for-sale securities are held at fair value with amortized cost of $33 million and $37 million at September 30, 2016 and December 31, 2015, respectively.

We have no plans 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.

For the nine months ended September 30, 2016 and 2015, proceeds from sales and maturities of short-term investments totaled approximately $121 million and $1.0 billion, respectively.

8. Inventories, Net of Inventory Reserves

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

	September 30, 2016		December 31, 2015
Finished goods	$	636	$	633
Work in process		301		264
Raw materials and accessories		278		200
Supplies and packing materials		301		288
Total inventories, net of inventory reserves	$	1,516	$	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 September 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.

Investments comprise the following (in millions):

	Ownership interest			September 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%	$	285		422
					285		1,905
Other investments					67		70
Subtotal Investment Assets				$	352	$	1,975

Affiliated companies accounted for by the equity method
HSG (2)(3)		50%		$	343
Subtotal Investment Liabilities				$	343

(1)	Amounts reflect Corning’s direct ownership interests in the respective affiliated companies at September 30, 2016 and December 31, 2015. Corning does not control any of such entities.

(2)	HSG indirectly holds an 80.5% interest in a HSG operating partnership.

(3)	The negative carrying value of the investment in HSG is recorded in Other Liabilities.

10. Goodwill and Other Intangible Assets

The carrying amount of goodwill by segment for the periods ended September 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
Measurement period adjustment (2)		(6)										(6)
Foreign currency translation adjustment		7		5				6		2		20
Balance at September 30, 2016	$	615	$	133	$	150	$	568	$	103	$	1,569

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

(2)	In the third quarter of 2016, minor adjustments were made to the preliminary allocation of the total purchase consideration related to a second quarter acquisition. The allocation is expected to be finalized in the fourth quarter of 2016, and any adjustments are not expected to be material.

Corning’s gross goodwill balances for the periods ended September 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 September 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):

	September 30, 2016						December 31, 2015
	Gross		Accumulated amortization		Net		Gross		Accumulated amortization		Net
Amortized intangible assets:
Patents, trademarks, and trade names	$	367	$	176	$	191	$	350	$	162	$	188
Customer lists and other		744		138		606		621		103		518
Total	$	1,111	$	314	$	797	$	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 nine months of 2016, primarily due to acquisitions of $127 million of other intangible assets and foreign currency translation adjustments of $11 million, offset by amortization of $46 million.

Amortization expense related to these intangible assets is estimated to be $67 million for 2016, $72 million annually from 2017 to 2018, $71 million for 2019, and $66 million annually from 2020 to 2021.

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,
	2016		2015		2016		2015		2016		2015		2016		2015

Service cost	$	22	$	22	$	65	$	67	$	3	$	3	$	7	$	10
Interest cost		31		36		93		109		6		8		19		24
Expected return on plan assets		(41)		(44)		(124)		(133)
Amortization of net loss												1		(1)		3
Amortization of prior service cost (credit)		1		2		4		5		(1)		(2)		(3)		(5)
Recognition of actuarial loss		26				60		8
Total pension and postretirement benefit expense	$	39	$	16	$	98	$	56	$	8	$	10	$	22	$	32

The recognition of actuarial loss in the three months ended September 30, 2016 resulted from small settlements in several of our benefit plans which triggered plan remeasurements. In addition to the settlements occurring in the third quarter of 2016, results in the nine months ended September 30, 2016 also included the impact of the finalization of our 2015 benefit plan valuations.

12.	Other Liabilities

Other liabilities follow (in millions):

	September 30, 2016		December 31, 2015
Current liabilities:
Wages and employee benefits	$	472	$	491
Income taxes		149		53
Asbestos and other litigation reserves		73		238
Derivative instruments		204		55
Other current liabilities		456		471
Other accrued liabilities	$	1,354	$	1,308

Non-current liabilities:
Asbestos and other litigation reserves	$	394	$	440
Derivative instruments		1,543		88
Investment in Hemlock Semiconductor Group (1)		343
Defined benefit pension plan liabilities		762		672
Other non-current liabilities		1,062		1,042
Other liabilities	$	4,104	$	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.

13. Hedging Activities

Undesignated Hedges

The table below includes a total gross notional value for translated earnings contracts of $17.6 billion and $12.0 billion at September 30, 2016 and December 31, 2015, respectively. The translated earnings contracts include purchased and zero-cost collars of $2.8 billion and $5.6 billion and average rate forwards of $14.8 billion and $6.4 billion at September 30, 2016 and December 31, 2015, respectively. 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. The total net notional value of the purchased and zero-cost collars was $1.4 billion and $2.9 billion at September 30, 2016 and December 31, 2015, respectively.

The following tables summarize the notional amounts and respective fair values of Corning’s derivative financial instruments on a gross basis for September 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
	Sept. 30, 2016	Dec. 31, 2015	Balance sheet location	Sept. 30, 2016	Dec. 31, 2015	Balance sheet location	Sept. 30, 2016	Dec. 31, 2015

Derivatives designated as hedging instruments

Foreign exchange contracts (1)	$ 527	$ 782	Other current assets	$ 1	$ 5	Other accrued liabilities	$ (54)	$ (10)
			Other assets		1	Other liabilities	(12)	(23)

Interest rate contracts	550	550	Other assets	7		Other liabilities		(4)

Derivatives not designated as hedging instruments

Foreign exchange contracts, other	759	1,095	Other current assets	2	6	Other accrued liabilities	(36)	(12)

Translated earnings contracts	17,595	11,972	Other current assets	66	511	Other accrued liabilities	(114)	(33)
			Other assets	27	472	Other liabilities	(1,531)	(61)

Total derivatives	$19,431	$14,399		$103	$995		$(1,747)	$(143)

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

The following tables summarize the effect of derivative financial instruments on Corning’s consolidated financial statements for the three months ended September 30, 2016 and 2015 (in millions):

	Effect of designated 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/(loss) reclassified from accumulated OCI into income (effective) (1)
Derivatives in hedging relationships	2016		2015			2016		2015

Interest rate hedges					Sales	$	1	$	4
					Cost of sales		(13)		1
Foreign exchange contracts	$	26	$	(58)

Total cash flow hedges	$	26	$	(58)		$	(12)	$	5

(1)	The amount of hedge ineffectiveness at September 30, 2016 and 2015 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, 2016 and 2015 (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/(loss) reclassified from accumulated OCI into income (effective) (1)
Derivatives in hedging relationships	2016		2015			2016		2015

Interest rate hedges			$	(7)	Sales	$	2	$	14
					Cost of sales		(27)		7
Foreign exchange contracts	$	(37)		(24)

Total cash flow hedges	$	(37)	$	(31)		$	(25)	$	21

(1)	The amount of hedge ineffectiveness at September 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 September 30,				Nine months ended September 30,
		2016		2015		2016		2015

Foreign exchange contracts – balance sheet	Foreign currency hedge gain (loss), net	$	1	$	(6)	$	(27)	$	7
Foreign exchange contracts – loans	Foreign currency hedge gain (loss), net		(4)		1		(48)		3
Foreign currency hedges related to translated earnings	Foreign currency hedge gain (loss), net		(237)		(149)		(2,295)		42

Total undesignated		$	(240)	$	(154)	$	(2,370)	$	52

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
	September 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)	$	68		$	68
Non-current assets:
Other assets (1)(2)	$	350		$	64	$	286

Current liabilities:
Other accrued liabilities (1)	$	204		$	204
Non-current liabilities:
Other liabilities (1)	$	1,543		$	1,543

(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.

			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)	$	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 September 30, 2016 and December 31, 2015, the fair value of the potential receipt of the contingent consideration in 2018 was $286 million and $246 million, respectively.

There were no significant financial assets and liabilities measured on a nonrecurring basis during the nine months ended September 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 September 30, 2016, the Preferred Stock has not been converted, and none of the anti-dilution provisions have been triggered.

Share Repurchases

On July 28, 2016, Corning entered into an accelerated share repurchase transaction (“ASR”) with Morgan Stanley & Co. LLC (“Morgan Stanley”) to repurchase $2 billion of Corning’s common stock in two tranches of $1.5 billion and $500 million, respectively, each with its own scheduled termination date. The ASR was executed under the $4 billion share repurchase program authorized on October 26, 2015 (the “2015 Repurchase Program”). Under the ASR, Corning made a $2 billion aggregate payment to Morgan Stanley on July 28, 2016 and received an initial aggregate delivery of 74.4 million shares of Corning common stock from Morgan Stanley on the same day. Each tranche is subject to acceleration at Morgan Stanley’s option during an acceleration period prior to its scheduled termination date. The total number of shares Corning will repurchase under each tranche of the ASR will be based generally upon the average daily volume weighted average price of Corning’s common stock during the repurchase period for such tranche, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR. Depending on the circumstances at settlement of each tranche, Morgan Stanley may be required to deliver additional shares of common stock to Corning or Corning may be required either to deliver shares of common stock or to make a cash payment to Morgan Stanley. Final settlement of both tranches of the ASR is scheduled to occur in the fourth quarter of 2016.

In addition to the ASR, during the three and nine months ended September 30, 2016, the Company repurchased 15.3 million and 96 million shares of common stock on the open market for approximately $340 million and $1,901 million, respectively, as part of its 2015 Repurchase Program.

Accumulated Other Comprehensive Income

In the three and nine months ended September 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 September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Beginning balance	$	(547)	$	(877)	$	(1,171)	$	(581)
Other comprehensive income (loss)		235		(163)		860		(399)
Equity method affiliates		10		(18)		9		(78)
Net current-period other comprehensive income (loss)		245		(181)		869		(477)
Ending balance	$	(302)	$	(1,058)	$	(302)	$	(1,058)

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 for the three months ended September 30, 2016 and 2015, and for the nine months ended September 30, 2015. In the nine months ended September 30, 2016, Corning recorded a tax impact of $45 million 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 September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Beginning balance	$	(323)	$	(703)	$	(588)	$	(709)
Other comprehensive (loss) income before reclassifications (2)		(31)		(1)		(64)		5
Amounts reclassified from accumulated other comprehensive income (2)		26		1		60		11
Equity method affiliates (3)				6		264		(4)
Net current-period other comprehensive income		(5)		6		260		12
Ending balance	$	(328)	$	(697)	$	(328)	$	(697)

(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 months ended September 30, 2016, tax effects are not significant. For the nine months ended September 30, 2016, amounts are net of total tax expense of $19 million. For the three and nine months ended September 30, 2015, tax effects are not significant.

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 $10 million and $11 million for the three months ended September 30, 2016 and 2015, respectively, and approximately $33 million and $36 million for the nine months ended September 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 nine months ended September 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	1,669	19.98
Exercised	(5,838)	15.63
Forfeited and Expired	(4,317)	26.02
Options Outstanding as of September 30, 2016	34,252	19.24	3.96	$164,226
Options Expected to Vest as of September 30, 2016	34,208	19.23	3.95	164,091
Options Exercisable as of September 30, 2016	29,475	18.99	3.21	150,477

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, 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 September 30, 2016, there was approximately $7 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 for the three months ended September 30, 2016 and 2015, respectively, and approximately $10 million and $13 million for the nine months ended September 30, 2016 and 2015, respectively.

Proceeds received from the exercise of stock options were $86 million and $99 million for the nine months ended September 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 nine months ended September 30, 2016 and 2015 was approximately $36 million and $46 million, respectively. The income tax benefit realized from share-based compensation was not significant for the three and nine months ended September 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 September 30,		Nine months ended September 30,
	2016	2015	2016			2015
Expected volatility	38.6%	44.2%	38.6	-	43.1%	44.2	-	44.9%
Weighted-average volatility	38.6%	44.2%	38.6	-	43.1%	44.2	-	44.9%
Expected dividends	2.34%	2.67%	2.34	-	2.94%	1.92	-	2.67%
Risk-free rate	1.4%	2.0%	1.4	-	1.6%	1.9	-	2.0%
Average risk-free rate	1.4%	2.0%	1.4	-	1.6%	1.9	-	2.0%
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.

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 nine months ended September 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	1,415		20.57
Vested	(1,802)		14.48
Forfeited	(75)		20.78
Non-vested shares and share units at September 30, 2016	4,780	$	19.95

As of September 30, 2016, there was approximately $31 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 $8 million and $9 million for the three months ended September 30, 2016 and 2015, respectively, and approximately $23 million for the nine months ended September 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.

Reportable Segments (in millions)

		Display Technologies		Optical Communications		Environmental Technologies		Specialty Materials		Life Sciences		All Other		Total
Three months ended September 30, 2016
	Net sales	$	902	$	795	$	264	$	295	$	214	$	37	$	2,507
	Depreciation (1)	$	152	$	41	$	32	$	26	$	14	$	12	$	277
	Amortization of purchased intangibles			$	10					$	5	$	2	$	17
	Research, development and engineering expenses (2)	$	14	$	37	$	24	$	31	$	6	$	47	$	159
	Equity in earnings of affiliated companies											$	(3)	$	(3)
	Income tax (provision) benefit	$	(98)	$	(49)	$	(17)	$	(21)	$	(8)	$	21	$	(172)
	Net income (loss) (3)	$	279	$	78	$	35	$	42	$	16	$	(47)	$	403

		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
	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
Nine months ended September 30, 2016
	Net sales	$	2,408	$	2,186	$	787	$	788	$	633	$	112	$	6,914
	Depreciation (1)	$	452	$	125	$	97	$	81	$	42	$	34	$	831
	Amortization of purchased intangibles			$	25					$	15	$	6	$	46
	Research, development and engineering expenses (2)	$	49	$	110	$	75	$	96	$	18	$	139	$	487
	Restructuring, impairment and other charges	$	4	$	6	$	5	$	12	$	3	$	40	$	70
	Equity in earnings of affiliated companies											$	(8)	$	(8)
	Income tax (provision) benefit	$	(277)	$	(99)	$	(52)	$	(52)	$	(22)	$	87	$	(415)
	Net income (loss) (3)	$	692	$	172	$	106	$	106	$	45	$	(187)	$	934

		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
	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

(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. Expenses that are not allocated to the segments are included in the reconciliation of reportable net segment net income to consolidated net income below.

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

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Net income of reportable segments	$	450	$	427	$	1,121	$	1,368
Net loss of All Other		(47)		(38)		(187)		(131)
Unallocated amounts:
Net financing costs (1)		(26)		(31)		(84)		(80)
Stock-based compensation expense		(10)		(11)